In late October, the Federal Regulatory Energy Commission (“FERC”) issued its Order No. 755 on compensation for frequency regulation services. This is significant for energy storage technology companies and providers because independent system operators (“ISOs”) and regional transmission organizations (“RTOs”) are now required to compensate frequency regulation providers for, among other things, the speed and accuracy with which they can provide frequency regulation services, rather than just the cost of the electricity.
In general, a transmission system must provide power (or frequency) within an acceptable range. When the range is exceeded, transmission operators react by signaling generators or other sources of power to add or remove power from the system. This is called frequency regulation. Prior to Order No. 755, ISOs and RTOs paid the same rate per kilowatt for electricity used for frequency regulation purposes regardless of how quickly or accurately the vendor was able to supply it to the grid. This compensation system effectively foreclosed energy storage providers from participating in the frequency regulation market because their cost of electricity is higher than that of traditional generators, even though power from energy storage providers can be placed on the grid much more quickly.
In Order No. 755, FERC stated that the current system for compensating providers of frequency regulation service is unjust and unreasonable because it “fail[s] to acknowledge the inherently greater amount of frequency regulation service being provided by faster-ramping resources,” and also because existing practices can result in economically inefficient dispatch of frequency regulation resources.
The new compensation system is a market-driven system and operates in two parts. Part one is a uniform clearing price that is based on market bids for providing the foregoing regulation. The second part is performance based and will take into account accuracy (speed) of responding to the operator’s need as well as the amount of power provided.
This is a significant resource and step forward for energy storage technology companies and providers. With Order No. 755, ISOs and RTOs will be able to pay more for the quick-response frequency regulation that comes from energy storage systems. This should provide an incentive that will facilitate producers of energy storage systems and demand response resources to be able to finance, construct and operate facilities more profitably by placing value on the speed of response.
Order No. 755 becomes effective on or about January 1, 2012. The Order requires each ISO and RTO to work with its respective stakeholders to develop proposals to comply with the requirements of the final rule and to make any compliance filings with FERC. Thereafter, the ISOs and RTOs will have 180 days to implement these compensation methods.