FERC’s new rule on compensation for demand resources tips the market balance toward negawatts. Arguably the commission’s economic analysis is flawed, and the rule represents a covert policy...
The Efficiency Mandate: Storage Goes Mainstream
New business models make energy storage attractive.
As policymakers and business leaders assign a higher priority to efficiency goals, companies are finding that the low-hanging fruit already has been picked in many areas. Reaching the next level might require some fundamental changes in regulatory policy and market models. Increasingly, regulators are focusing on the conflict between efficiency investments and volume-based ratemaking (see “ Stimulating Efficiency ”). But decoupling and negawatt rates won’t remove some of the most important barriers to system-wide efficiency improvements.
For example, distributed energy storage offers a host of efficiency benefits, including deferring or eliminating T&D investments; reducing the need for fuel-hogging spinning reserve; and increasing the reliability of variable generation sources, including wind and solar. But today, most utilities aren’t investing in grid-scale storage—not necessarily because of its capital cost, but because regulatory and market structures discourage it.
Transmission owners with assets managed by independent system operators (ISO) can’t put storage assets in their rate base, because those assets also provide generation services. Similarly, distribution utilities frequently can’t justify the cost of energy storage only on the basis of its distribution-system benefits. And generation companies struggle to make energy storage pay off, because the market hasn’t yet developed bilateral contracts that value the full range of energy storage services.
“That’s the key impediment to moving storage forward,” says Edward Cazalet, vice president with MegaWatt Storage Farms, and former member of the California Independent System Operator (CAISO) board of governors. “We need a mechanism to put some of the cost in the rate base, and to recover the remainder from the power market,” he says.
Even as end-use technologies have become more efficient, the U.S. electricity grid actually has remained relatively inefficient—largely because utilities must maintain enough reserve capacity to meet critical peak loads that might occur only a few hours a year. While base-load nuclear plants operate with capacity factors averaging greater than 90 percent, many gas-fired peaking plants operate at capacity factors in the 5 percent range.
The result is an inefficient system, both in terms of resource utilization and fuel consumption. And ironically, it might get worse as end users reduce their overall consumption but not necessarily their peak demand.
“When people talk about energy efficiency, usually they think in terms of site efficiency,” says Chris Hickman, senior vice president at energy service company Ice Energy. “Unfortunately things like CFLs [compact fluorescent light bulbs] and Energy Star appliances tend to reduce the base load, not necessarily the peak. The unintended consequence for the grid is that the thermally driven component—air conditioning—becomes a more significant problem for peak load.”
In principle, energy storage offers a tidy solution to this problem. Distributed storage in particular—in the form of deep-cycle batteries and thermal storage like Ice Energy’s technology—can reduce peak demands in a targeted, intelligent way with minimal impact on end users. By installing storage capacity downstream of grid constraints, storage can improve efficiency both in terms of T&D infrastructure and energy consumption.