ON NOTICE OF PROPOSED POLICY STATEMENT CONCERNING ESTABLISHMENT OF INCENTIVES TO PROMOTE EFFICIENT OPERATION AND EXPANSION OF THE ELECTRIC TRANSMISSION GRID

The Energy Storage Council (“ESC”)[1] welcomes the opportunity to comment on the Federal Energy Regulatory Commission’s Proposed Pricing Policy for Efficient Operation and Expansion of the Transmission Grid issued on January 15, 2003, 68 Fed. Reg. 3846 (“Proposed Pricing Policy”). By these comments, the ESC identifies ways in which electric energy storage technologies (such as pumped storage hydroelectric facilities, compressed air energy storage facilities, fuel cells and, to a more limited degree, batteries and flywheels) can augment existing electric transmission infrastructure and can promote efficient operation and expansion of the electric transmission grid, the objectives of the Proposed Pricing Policy.

In the comments that follow the ESC shows that the Commission’s Proposed Pricing Policy should make specific provision for the application of energy storage technologies as part of, or even in lieu of, investment in traditional electric transmission infrastructure additions. The ESC further shows that the planning processes through which transmission infrastructure investment decisions are made must be broadened to incorporate participants advancing energy storage technology solutions, so that the additional efficiencies energy storage technologies can yield are appropriately considered, implemented and rewarded.

The Commission needs as soon as possible to adopt policies that affirmatively encourage intelligent, efficient investment in measures that enhance the capabilities of our nation’s electric transmission infrastructure. The Commission’s notice seeking comments on a Proposed Pricing Policy that would encourage efficient operation and expansion of the transmission grid is a welcome sign that FERC recognizes that the processes by which electric transmission system planning is conducted and electric transmission system investments undertaken are not working well and must be reformed.

The ESC, whose purpose is to promote technologies that can be part of the solution to our electric transmission system problems, urges the Commission to move quickly to put in place a series of incentives, as well as measures relating to transmission system planning, that will encourage investment in both traditional transmission system expansion and innovative technologies, such as energy storage solutions, that can augment, reduce the need for, or even eliminate the need for, major transmission upgrades that have become increasingly difficult, costly and time-consuming to implement. The incentives that the Commission adopts, and the guidance concerning the transmission planning process the Commission provides, will be critically important in guiding transmission system investment decisions. These incentives and related planning guidance must be crafted so that transmission and transmission related-investment decisions are made intelligently, taking into account the full range of available technology and operational alternatives.

Electric energy storage technologies can have important applications in unbundled wholesale electric markets and, significantly for purposes of this proceeding, in supplementing or even substituting for electric transmission grid expansion. Energy storage technologies can best be thought of as “enabling technologies” – with their main focus being to assist existing capital assets already in place in the electric transmission system in functioning more efficiently. Energy storage technologies promise to extend the capability of the transmission grid – by some measures both the most expensive component of the electric power industry and the component that has the lowest average utilization rate. By supplying power when and where needed, energy storage technologies can help to create a more reliable, secure and responsive electric transmission grid, and can thereby enhance the performance of wholesale electric markets.

Energy storage can provide a variety of benefits, each of which is consistent with the transmission pricing policy goals the Commission has identified in the Proposed Pricing Policy. These include: enhancing competition and RTO performance; reducing volatility in wholesale markets; optimizing use of existing generation and transmission infrastructure; reducing or deferring capital investment costs as compared with options involving expansions of generation or transmission alone; and better integrating renewable energy sources into the system. Energy storage facilities can also help maintain transmission grid stability by providing ancillary services, including black-start capability, spinning reserves and reactive power. Smaller scale energy storage technologies can support power conditioning services at the distribution stage. In effect, energy storage functions as a “shock absorber” for the nation’s electric infrastructure, enhancing its efficiency, reliability and security. The ESC submits that the Commission’s transmission pricing policies should encourage incumbent transmission owners, integrated utilities and new market participants alike to pursue energy storage solutions that can make the electric transmission grid more robust and can enhance transmission system capabilities where such solutions are viable, whether as alternatives to or efficiency-enhancing supplements to traditional transmission system investments.

The Proposed Pricing Policy is intended to promote competitive wholesale electric markets, reduce wholesale electric costs and improve system reliability (Proposed Pricing Policy notice, ¶1). If adopted, it would establish rate incentives for transmission owners who join a Regional Transmission Organization (“RTO”) and turn operational control of their assets over to the RTO; form an Independent Transmission Company (“ITC”) or take other measures to make their transmission facilities operationally independent from other market participants; or pursue additional measures to operate and expand the transmission grid efficiently by addressing RTO-identified needs through either classic transmission investments or innovative technologies (id.). The Commission has indicated a particular interest in new technologies that could expand grid capacity, relieve congestion or improve reliability that can be installed quickly and are environmentally benign (id., ¶ 31).

The ESC supports the Commission’s efforts to address the critical need to encourage investment that enhances our nation’s electric transmission infrastructure. The ESC notes the Commission’s recognition of the critical role that innovative technology must play if the industry is to address the state of the national electric transmission grid in a constructive way (id., ¶¶ 31 and 32). There are energy storage technologies available today that satisfy these criteria but need to be encouraged and need to be recognized as deserving of a place at the transmission planning table. The purpose of these comments is to highlight the important roles energy storage technologies can play in enhancing the performance and security of the electric transmission grid, and to encourage the Commission to refine its Proposed Pricing Policy so that it includes incentives that appropriately reward investment in energy storage technology applications that benefit the transmission grid.

As we discuss in detail in these comments, FERC can take a number of steps that will encourage the pursuit of energy storage solutions to transmission grid problems (or will at least not discourage such actions). They include:

· Treating energy storage facilities and energy storage services on a basis that is comparable to treatment accorded traditional transmission facilities expansion where energy storage substitutes for, or reduces the need for, traditional transmission facilities upgrades, for purposes of qualifying for transmission pricing incentives and for purposes of participation in transmission planning processes.

· Articulating the principle that developers of energy storage facilities that can be used to supplement or substitute for transmission grid investment will have an opportunity equivalent to that afforded existing or would-be transmission owners to construct, operate and be compensated for investment in transmission infrastructure or its equivalent, including standing to participate in RTO or other applicable transmission planning processes.

· Establishing a “safe harbor” for transmission owner passthrough of costs associated with (i) contracting for services – such as energy storage services – that enhance transmission system capacity, reliability and security, and (ii) investing in energy storage services that enhance constrained transmission systems or substitute for investment in upgrading them. FERC should also explicitly provide that such contracts and investment qualify as “investment in new transmission facilities” for purposes of determining eligibility for generic ROE-based incentives established under the Proposed Pricing Policy.

· Awarding firm transmission rights, congestion revenue rights or their equivalent to parties that contract with energy storage service providers for services that substitute for or augment transmission capacity or to parties that invest directly in energy storage systems that reduce congestion, or otherwise produce transmission system benefits or permit the deferral of transmission system investment.

· Pricing radial transmission facilities linking new, large scale energy storage facilities with the transmission grid on a “rolled-in” basis to recognize the grid-wide benefits a strategically-placed energy storage facility can provide.

· Relaxing criteria for approval of negotiated rates for incremental transmission capacity and ancillary services that can be supplied from energy storage facilities to promote the siting and construction of energy storage projects capable of providing services that contribute to transmission grid capacity, stability and security.

· Continuing to be responsive to, and being flexible in responding to, innovative technology proponents’ requests for certainty and supportive regulation under the Federal Power Act.

II. Introduction to the Roles Energy Storage Can Play in Supporting and Supplementing the Electric Transmission Grid

Electricity markets are unique among major commodity markets in their almost complete dependence on a moment-by-moment matching of supply (i.e., generation of energy) with demand for the commodity itself. Other commodity markets to a greater or lesser degree incorporate storage mechanisms that permit some de-coupling of supply and demand.

Traditionally, the electricity grid has compensated for the inability to store electricity, at least in large quantities, by maintaining large reserve margins in electricity generation and transmission. In essence, the electricity grid functions as one huge “just in time” inventory system, and this is a major reason (from a technical viewpoint) why it is most difficult to create stable and predictable electricity markets. Electricity can, however, be stored in other energy forms (chemical energy, mechanical energy, etc.), and energy storage technologies are emerging as a crucial factor in creating efficient electricity markets.

The development of natural gas storage serving the wholesale gas market following deregulation of the natural gas industry in the late 1980s demonstrates the positive role energy storage technologies can play in promoting reliability and security in the electric energy sector. In fact, energy storage could have an even larger impact on electric energy markets than it has had in natural gas markets. The electric industry is three times the size of the gas industry and operates on a much faster and more dynamic basis—what happens in the gas market on a seasonal or monthly basis happens daily in the electricity business. So, for example, the availability of the capability to “store” and rapidly “withdraw” electric energy provided by large scale energy storage technologies (like compressed air energy storage and hydroelectric pumped storage) permits energy storage service providers and their customers to provide critically important services such as voltage support and black-start capability. Such ancillary services can enhance electric transmission system reliability much as gas storage has enhanced gas transmission system reliability. In this respect, large-scale energy storage technologies can provide beneficial impacts on the electric transmission grid similar to those realized through high performance natural gas storage technology employed in salt cavern storage and conventional reservoir-based gas storage employing new horizontal well completion technologies.

The important contributions energy storage technologies can make in expanding and improving the transmission grid and promoting competitive energy markets may not be realized without the implementation of policies that (i) encourage investments in energy storage to benefit the transmission grid and (ii) give energy storage developers a role in the planning of transmission infrastructure investments. Today, the value of energy storage technologies is being overlooked; as vertically-integrated electric utilities are being disaggregated into generation, transmission, and distribution companies, electricity storage has not received the attention it deserves as a “bridge” between electric generation and transmission. In fact, electric industry disaggregation is having at least one unintended consequence insofar as energy storage is concerned: neither generation companies nor transmission entities have incentives today that drive them to invest in the potential of energy storage technologies. In fact, and perversely, some incumbent utilities and independent generators can benefit from transmission congestion and therefore have incentives in some circumstances to “go slow” where transmission system enhancements are concerned.[2] Obviously, this needs to change, as the Commission’s Proposed Pricing Policy appears to recognize.

The Commission is correct in observing that the most effective and efficient ways of meeting needs for additional transmission grid capability will not always be construction of additional transmission facilities of the traditional sort, and that alternatives to traditional transmission system investment are not always considered in transmission system planning processes (Proposed Pricing Policy notice, ¶¶ 31 and 32). The Commission, having acknowledged these realities, needs to adopt policies that encourage (and ensure that incumbents do not discourage) the deployment of non-traditional solutions to transmission grid problems, including energy storage technologies. In doing this, the Commission will be taking an essential step toward circumventing some of the hurdles that impede and often outright prevent the siting of traditional transmission facilities, in a way that is more environmentally and politically palatable than other ways around the transmission siting conundrum may be.

The ESC respectfully submits that through transmission pricing policies and other measures the Commission can, and should, attempt to ensure that the benefits of well-developed energy storage capabilities do not go unrealized. FERC can do this by explicitly acknowledging in the pricing policy it adopts the important roles energy storage can play in promoting efficient operation and expansion of the transmission grid. In particular, FERC should provide mechanisms through which investments in energy storage solutions can be proposed, incorporated in the transmission planning process, and rewarded through appropriate incentives once implemented.

A. There is an Urgent Need for Incentives that Encourage Investments in Transmission Infrastructure and Facilities that Support Transmission Infrastructure

One major obstacle to expansion of the transmission grid is a lack of capital available to the U.S. electric power industry. The energy sector is suffering from a “crisis in confidence.” In 2000, reports of projected construction expenditures showed transmission investment had been declining in real terms at an average rate of $115 million per year, for almost 25 years.[3] Transmission investment has declined by 15 percent since 1990.[4] In the face of such uncertainty, it is crucial that incentives direct available capital to projects where it will be utilized most effectively. The Proposed Policy Statement is entirely correct – though inappropriately narrow in its focus – in suggesting that FERC should reward transmission owners for pursuing measures (including innovative technologies) that “expand grid capacity, reduce congestion, improve reliability and enhance wholesale competition without great cost or delay” (Proposed Pricing Policy notice, ¶ 31). As we discuss in more detail below, entities other than existing transmission owners must be in a position to benefit from the rewards the Commission would offer to spur investment in measures that enhance transmission system capability.

The Commission is likewise correct – for reasons beyond those it notes in the Proposed Pricing Policy notice – that “the most timely and cost-effective ways to meet demand for additional grid capacity will not always be additional transmission facilities” (id., ¶ 32). This is demonstrably true in many applications in which energy storage technologies can be used to supplement, and sometimes even supplant, transmission grid expansion projects. The ESC submits that one of the most valuable things the Commission can do in adopting a pricing policy intended to encourage transmission grid enhancements is to give technologies other than those traditionally employed in transmission system upgrades an opportunity equal to that enjoyed by the traditional approaches (and the incumbent facilities owners promoting them) to offer solutions to transmission problems.

Energy storage technologies are uniquely adapted to fulfilling the challenge of enhancing the transmission grid’s capabilities where traditional transmission line construction is made difficult by cost or environmental constraints. Energy storage can improve the economic efficiency and utilization of the existing electric transmission system, often at far lower costs (in terms of both capital and environmental impacts) than are involved in traditional transmission system upgrade projects. In some circumstances, energy storage can minimize, avoid altogether or at least defer the need for investment in additional transmission infrastructure. In addition, energy storage facilities can often be put into service significantly faster than transmission line assets, making the benefits of transmission congestion relief available to the market on the shortest possible timeline. Thus, energy storage technologies can directly address one of the most daunting obstacles facing the U.S. electric power industry today – the difficulties faced in siting, building and even upgrading traditional transmission facilities.

The Commission needs to recognize that no system of incentives it can fashion will enable transmission owners and developers promoting traditional transmission system expansions to overcome transmission facilities siting obstacles in many cases. For this reason, the Commission must ensure that the incentives it adopts can actually produce results. In the ESC’s view, this means that the incentives must be made available not only for traditional transmission infrastructure investment, but also with respect to innovative ways of enhancing transmission grid capability – such as energy storage – that in some instances may be the only means by which a particular transmission constraint can realistically be alleviated.

A number of economically viable energy storage technologies exist today that can augment or even be substituted for traditional transmission facilities upgrades. These technologies represent a wide spectrum of capabilities, and have a number of applications. They include:

1. Pumped Hydro Storage (“PHS”). PHS facilities exist in sizes up to 1000 MW and generally consist of two large reservoirs. Water is pumped from the lower to the upper reservoir during off-peak hours, using off-peak electric energy, and later released back down to the lower reservoir, passing through hydraulic turbines and generating electrical power. PHS represents by far the largest mechanism (in terms of capacity as well as sheer size) for “storing” electric energy in use today in North America (at a total installed base of 19 GW, PHS by the early 1990s represented nearly 3% of all U.S. summer peaking capability).

2. Compressed Air Energy Storage (“CAES”). CAES systems use off-peak power to pressurize air into an underground reservoir (salt cavern, abandoned hard rock mine, or aquifer) which is later released, generally during peak daytime hours, to power a gas turbine/generator for power production. Compressed air energy storage is the only commercially available technology other than PHS that is able to provide very large energy storage deliverability (above 100 MW in single unit sizes). CAES facilities permit energy produced off-peak by low-cost baseload generating units to be “shifted” to peak periods, when transmission capacity is becoming increasingly constrained. Because CAES facilities allow power inexpensively produced by baseload units in off-peak periods to be sold during peak periods when electric power is more valuable, they can provide the benefits of what might be considered “time-delayed exchanges” of electric energy. CAES facilities are also particularly efficient sources of ancillary services such as voltage support, energy imbalance and spinning and supplemental reserve services. CAES technology separates the process of compressing air (a process required in all combustion turbines) from the flow of fuel consumed in combustion within a combustion turbine. This separation permits CAES facilities to produce substantially greater levels of ancillary services per unit of output than do conventional gas turbines or steam generating facilities.

3. Regenerative Fuel Cells. Also known as redox flow-cell batteries, fuel cells can store and release electrical energy through a reversible electrochemical reaction between two electrolytes. The scale of fuel cell facilities is a function of the size of the electrolytic tanks employed, and large fuel cell installations are practical. Large-scale (12 MW to as much as 20 MW) regenerative fuel cell installations are currently under construction in the U.S. (in the Tennessee Valley Authority’s service territory) and the U.K. These installations can compensate for transmission system constraints in specific areas.

4. Batteries. A number of battery technologies exist for use as utility-scale energy storage facilities. Many of the large-scale battery installations have used lead-acid battery technology, but other battery technologies such as sodium-sulfur and Lithium ion are quickly becoming commercially available. These facilities have a number of applications in the generation, transmission and energy service sectors.

5. Flywheels. A flywheel energy storage system stores energy through accelerating a rotor up to a very high rate of speed and maintaining the energy in the system as inertial energy. The flywheel releases the energy by reversing the process and using the motor as a generator. These systems have increasingly been targeted for power delivery capabilities in the 500 kW range, with the main focus for development of the technology in the power quality and reliability market.

The various energy storage technologies are suited to different functions throughout the electricity supply chain, with most able to perform multiple roles. Siting energy storage facilities to function as sources of energy at or near load centers can substitute for transmission capacity, when load is separated from generation by constrained transmission paths. Energy storage technologies enable “time-shifting” and the de-coupling of production and consumption of electric energy, thus reducing the criticality of transmission facilities that link production and consumption centers. Some storage assets, such as CAES facilities, are uniquely suited to be sources of both transmission-level ancillary services (including reactive power) and sources of real power. Such large-scale energy storage facilities can perform the essential role of transmission grid “shock absorbers,” since they are capable not only of injecting large amounts of power into the grid quickly when operating in generation mode, but also of taking large quantities of power off the grid quickly when operating in compression mode. Smaller scale storage technologies, including batteries and flywheels, are well-suited to providing bridging power and power conditioning services.

This wide variety of capabilities makes energy storage technologies appropriate in many contexts, supporting an array of secondary policy objectives. Energy storage technologies can promote national security interests in today’s environment of heightened concerns regarding the vulnerability of our energy infrastructure. By permitting the “pre-positioning” of electric energy sources on the load side of transmission constraint points, energy storage facilities can ensure continued deliveries of energy in the event a transmission line is unavailable due to an emergency. Energy storage facilities can further aid in the recovery of transmission systems and generating facilities from upsets caused by natural or man-made catastrophes by providing black-start service and spinning reserves.

In addition, energy storage technologies can enhance the viability of renewable electric generation technologies by, for example, “smoothing” the delivery of power generated from wind and solar technologies. This can greatly increase the value of renewables by transforming low value, unscheduled power into schedulable, high-value products. Energy storage technologies also function as “enabling technologies” facilitating the use of distributed generation as a substitute for transmission upgrades in transmission-constrained markets. Energy storage technologies used in conjunction with distributed generation can improve the reliability of those assets by providing power conditioning service as well as “bridging” power to essential equipment during outages, thereby making distributed generation viable in a broader range of applications.

B. FERC Should Create Incentives that Encourage Investment in and Deployment of Energy Storage Technologies that Benefit the Transmission Grid

The U.S. is under-invested in energy storage technologies relative to other developed economies. In the U.S., approximately 2.5% of electric generating capacity available at the wholesale level is provided by energy storage technologies (primarily PHS);[5] in European countries in the aggregate the comparable statistic is closer to 5%; in Japan it is nearly 10%.[6] This shortfall in energy storage investment in the U.S. has significant implications in terms of electric system reliability and robustness. Incentives provided through transmission pricing, the allocation of firm transmission rights and related measures could induce market participants to remedy this shortfall, by encouraging additions of energy storage facilities that will enhance transmission grid capability, reliability and security.

It is critically important that incentives given to transmission owners to invest in traditional transmission facilities be crafted with care so that they do not inadvertently skew investment decisions away from alternative means of dealing with transmission-related needs, such as application of energy storage technologies. Incentives comparable to those given investments in traditional transmission facilities must be made available to proponents of innovative energy technologies, like energy storage technologies, to encourage investment in these technologies. Otherwise, the innovative technologies the Commission wishes to encourage (see Proposed Pricing Policy notice, ¶ 31) could inadvertently be stifled by Commission-approved incentives that favor traditional transmission system investment over other alternatives. Accordingly, the Commission should take care to ensure that its transmission pricing policies create a balanced set of incentives intended to encourage efficient investment in infrastructure that enhances the performance, reliability and security of the electric transmission grid.

FERC can take a number of steps that will encourage the pursuit of energy storage solutions to transmission grid problems (or will at least not discourage such actions). They include:

· Pricing radial transmission facilities linking new, large scale energy storage facilities (such as PHS or CAES facilities) with the transmission grid on a “rolled-in” basis to recognize the grid-wide benefits a strategically-placed energy storage facility can provide.

· Relaxing criteria for approval of negotiated rates for incremental capacity and ancillary services that can be supplied from energy storage facilities to promote the siting and construction of energy storage projects capable of providing services that contribute to transmission grid capacity, stability and security.

· Continuing to be responsive to, and being flexible in responding to, innovative technology proponents’ requests for certainty and supportive regulation under the Federal Power Act.

1. Treating Certain Energy Storage Technology Applications Comparably with Transmission Facilities Expansions and Upgrades

At the outset, the Commission should acknowledge in its final Pricing Policy that energy storage technologies are among the “other measures” that warrant encouragement as offering “significant promise to expand grid capacity, reduce congestion, improve reliability and enhance wholesale competition” (Proposed Pricing Policy notice, ¶ 31). The various reasons why this designation is appropriate are outlined in Part III.A above. The Commission should, moreover, make it clear that policies that it adopts for the purpose of encouraging investment in new technologies that can benefit the transmission grid will, to the maximum extent practicable, apply to investment in energy storage technology applications that can be shown to result in transmission capacity expansion, reductions in congestion, improvements in transmission grid reliability and security, or enhancements in wholesale competition. And, as discussed in more detail below, the Commission should provide in its final Pricing Policy that innovative technology options, such as energy storage, need not be pursued exclusively through the RTO planning processes.

2. Affording Equal Opportunity to Energy Storage Developers

The Commission should use its transmission pricing policies as a means of ensuring that all sources of transmission grid enhancement, including measures that reduce the need for traditional transmission facilities investment, are afforded an equal opportunity to participate in projects intended to address transmission system constraints. Thus, the Commission should incorporate in its final Pricing Policy the principle that non-traditional investments in technologies that can substitute for, or supplement, investment in transmission facilities upgrades should not be subjected to any discrimination or disadvantage in the transmission planning process. The core element of this principle is that transmission planning, whether undertaken by transmission owners, ITCs or RTOs, must not be skewed to favor traditional transmission (or, for that matter, generation) investment over alternative technology investments that can augment transmission capacity, relieve congestion, enhance reliability or security or obviate the need for more environmentally intrusive transmission facility expansion. The Commission should likewise declare that the public interest is served by ensuring that proponents of a bona fide energy storage project that could yield transmission system benefits are entitled to participate in the relevant RTO-sponsored transmission planning processes.

RTOs have been fully established thus far in only two regions.[7] It is likely to take some time before RTOs become more the rule than the exception. In the meantime, the need for transmission grid enhancements or substitutes for such enhancements will have to be addressed through processes other than the RTO planning process. In its final Pricing Policy, the Commission should note that, where an RTO has not yet been established and transmission planning is conducted by individual transmission owners, it will expect documented assurances from any transmission owner seeking to benefit from Pricing Policy incentives that proponents of alternatives to particular transmission projects have had a full and fair opportunity to present and pursue their alternative project proposals.

3. Establishing a “Safe Harbor” for Passthrough of Costs of Energy Storage that Enhances Transmission

Where energy storage solutions can substitute for, or reduce the scope of, traditional transmission facilities upgrades or greenfield transmission construction, such solutions should not be handicapped by uncertainty as to whether the associated costs can be considered to be “transmission” in nature and hence recoverable in transmission owner rates. This is particularly important where there may be questions as to the classification of particular energy storage facilities as “transmission,” “distribution” or even “generation.” To provide the necessary “up-front” certainty,[8] the Commission should declare that it will permit transmission owners to recover the costs of energy storage solutions in transmission rates where and to the extent that such costs can be shown to augment transmission capacity, relieve congestion, enhance reliability or improve security. The Commission took similar action recently by permitting Western Interconnection transmission owners to increase their transmission revenue requirements to reflect the cost of installing technology to augment transmission capacity on constrained interfaces.[9]

Moreover, the Commission should take care that its incentive mechanisms do not favor particular transmission-related technologies over others. To this end, the Commission should declare that the costs associated with investment in energy storage solutions undertaken in lieu of, or in addition to, investment in traditional transmission system upgrades will be eligible to attract the same generic ROE-based incentive (identified in the Proposed Pricing Policy notice as 100 basis points) as would apply under the final Pricing Policy to investment in new transmission facilities (see Proposed Pricing Policy notice, ¶ 30). This should make transmission owners contracting for services provided by energy storage facilities as receptive to opportunities to contract for such services as they would be to ownership of conventional transmission facilities or, for that matter, of their own energy storage facilities. The goal should be to ensure that transmission owners do not unduly prefer their own facilities or their own solutions to transmission problems (on which they could be eligible to earn a FERC-approved incentive premium) over beneficial alternatives, including alternatives employing innovative technologies, put forward by third parties.

4. Rewarding Developers of Energy Storage Facilities or their Customers with Valuable Congestion-Related Rights

In its Standard Market Design proceeding, the Commission has proposed that Independent Transmission Providers utilize Locational Marginal Pricing (“LMP”) and Congestion Revenue Rights to manage congestion. Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design, 67 Fed. Reg. 55,479 (Aug. 29, 2002) (“SMD NOPR”). Under a system employing LMP, market participants are able to “signal whether they are willing to buy their way through transmission constraints,” (SMD NOPR, ¶ 210), because market prices reflect the costs of delivering energy at a particular node on the transmission grid. As a result, energy on the demand side of a transmission constraint will be allocated to customers who value energy delivered at that point most highly, and market price signals will more accurately encourage siting of new resources where the demand is greatest.

Even when price signals accurately reflect the cost of delivering electricity at a particular location, however, there is a risk that community opposition, physical limitations, or other factors may still prevent siting of economically desirable generation, trapping customers in high-price load pockets. Energy storage technologies can enable market participants to fulfill the critical next step of responding to the price signals created by LMP mechanisms through their use of existing transmission infrastructure during off-peak periods to “pre-position” energy (via energy storage facilities) beyond transmission constraints. Energy storage technologies can also make distributed generation, which poses fewer siting challenges than traditional generation alternatives, a more viable option by providing bridging and power conditioning services. In this respect, the Commission should recognize the important contributions that smaller-scale storage technologies can make to transmission grid performance, and encourage those contributions with appropriate incentives, even if voltage levels or other criteria might result in those facilities being classified as “distribution” assets in other contexts.

LMP creates price signals allowing customers to convey their willingness to pay the marginal cost of redispatch, taking existing transmission constraints as given.[10] Congestion Revenue Rights are the mechanism through which LMP price signals would be converted into incentives to invest in the transmission grid under Standard Market Design; an entity paying to construct new generation or transmission facilities that add transfer capability, the costs of which are not rolled in, would receive Congestion Revenue Rights associated with the new transfer capability created by the upgrades (id., ¶ 238).[11]

In the current capital-constrained environment, it is important that FERC not foreclose any potential sources of investment by limiting the entities eligible to receive Congestion Revenue Rights or similar incentives in return for investment in upgrades relieving transmission grid congestion. Furthermore, FERC should ensure that its incentives feature maximum flexibility to encourage technologies which offer creative solutions to energy facility siting challenges. Both developers of energy storage facilities and their customers purchasing energy storage services should be eligible to receive valuable congestion related rights in exchange for investments that demonstrably improve grid capacity and reliability. The Commission should make it clear in its final Pricing Policy that all market participants who contribute to the relief of congestion – including proponents of innovative technologies such as energy storage – will be eligible to be compensated through such mechanisms as Congestion Revenue Rights to the extent that their facilities or services contribute to congestion relief.

5. Pricing Transmission Links to Large-Scale Energy Storage Facilities on a “Rolled-In” Basis

Large-scale energy storage facilities (such as CAES or PHS facilities) can provide enormous benefits to transmission grids serving entire regions. These include the ability to supply large amounts of reactive power (which enhances transmission system stability), to ramp up (and down) quickly (which enables them to respond to transmission contingencies and relieve congestion), to provide black-start service (which is critically important to system restoration following natural or man-made disruptions to the grid). Such benefits redound to the benefit of all users of the transmission grid in the region in which the CAES or PHS facility is located. For this reason, the Commission should declare as a matter of policy that the costs of radial transmission facilities and related transmission system upgrades required to interconnect a large-scale energy storage facility to the grid should be incorporated in the relevant transmission system rates on a rolled-in basis. The Commission has found such treatment appropriate in connection with its efforts to spur transmission and generation investment in the Western Interconnection;[12] it is similarly appropriate, where the siting of a large-scale energy storage facility benefits the grid as a whole, to spread the costs of attaching that facility to the grid across all grid users.

6. Approving Negotiated Rates for Incremental Capacity and Ancillary Services Produced by Energy Storage Facilities

As noted in the Proposed Pricing Policy notice (at ¶¶ 9-12), the Commission has approved negotiated rate pricing proposals advanced by merchant transmission project sponsors, finding that such proposals can enhance competition and market integration by expanding capacity and trading opportunities.[13] The same can be said of proposals involving the installation of technologies, such as energy storage technologies, that enhance transmission system transfer capability or improve system reliability and security. In order to encourage proposals to develop projects employing innovative technologies that can enhance transmission system capabilities, the Commission should express its willingness to entertain proposals involving the pricing of incremental capacity additions and ancillary services provided by projects employing energy storage and other innovative technologies that augment transmission system capacity, reliability or security. It would be appropriate for the Commission to require that such pricing proposals be subject to conditions relating to the assumption of market risk and non-discriminatory allocation of new transmission capacity, with such adjustments as may be necessary to take into account the characteristics of a particular project.

7. Continue Responsive and Supportive Regulation for Energy Storage Facilities or Jurisdictional Services They Require or Provide

The Commission has recognized the need for regulatory clarity and certainty involving aspects of energy storage operations that implicate its jurisdiction. See, e.g., Norton Energy Storage L.L.C., 95 FERC ¶ 61,476 (2001) (declaratory order determining that deliveries of electric energy to the Norton Energy Storage CAES facility, as part of an off-peak/on-peak energy exchange transaction employing a conversion/storage cycle, are wholesale transactions within FERC’s exclusive Federal Power Act jurisdiction).[14] It has been receptive and responsive to requests for determinations that provide required guidance as to how innovative technologies and unconventional projects will be treated for regulatory purposes.[15] The ESC urges the Commission to continue to treat requests for these sorts of determinations on a priority basis, and to bear in mind when considering them that it is appropriate to be flexible in the application of its policies and precedents where the goal is to provide incentives that will induce investments in critical infrastructure.[16]

C. FERC Should Reduce Impediments to the Establishment of Energy Storage Technologies as Viable Alternatives to Traditional Transmission Facilities Investment

In order to secure the myriad benefits of energy storage, including increased transmission system reliability and security, more efficient utilization of the existing grid, and increased efficiency of infrastructure investment, the Commission must eliminate regulatory uncertainty that could impede the development and deployment of energy storage technologies. Potential investors in energy storage technologies require certainty that their investment has a chance to obtain market share and earn a reasonable return. Potential lenders to energy storage projects and technology developers will be comforted by FERC’s recognition of the roles energy storage technologies can play in enhancing transmission grid reliability and security. Potential counterparties contemplating the purchase of energy storage services and equipment also need certainty that their costs will be appropriately recognized and will be recoverable in rates.

In the Proposed Pricing Policy notice, the Commission notes its concern that a requirement to participate in the RTO planning process could stifle development and deployment of energy storage technologies.[17] This is a legitimate concern, and it must be addressed in the Commission’s Pricing Policy. While it promotes the formation of RTOs as an important step toward the Commission’s goal of preventing market participants from curbing the development of competitive markets by, for example, granting unequal access to their own affiliates, FERC must also take care that it does not establish a new mechanism that forecloses competition between proponents of traditional transmission facility projects and proponents of alternatives such as energy storage. To do this, the Commission should encourage RTOs to establish mechanisms through which energy storage project developers can participate in the RTO planning process in a meaningful way. In particular, standing to participate in such planning processes should not depend on being a transmission owner or member of an RTO. In addition, FERC should communicate to RTOs its expectation that they will entertain proposals from non-members concerning the use of energy storage technologies in lieu of, or in addition to, investment in traditional transmission facilities, with appropriate mechanisms to ensure prompt and fair consideration of such proposals.

In adopting a new transmission pricing policy, FERC should retract its statement in the Proposed Pricing Policy notice that “only transmission owners which participate in RTOs will be able to take advantage of [the] incentives [established under its proposed policy]” (id., ¶ 1). This limitation is inconsistent with the objective of “encouraging investment in new technologies that can be installed relatively quickly … and may be environmentally benign [that] offer significant promise to expand grid capacity, reduce congestion, improve reliability, and enhance wholesale competition” (id., ¶ 31). The ESC strongly urges FERC to ensure that entities other than transmission owners (such as energy storage service or energy storage technology providers) are able to benefit from the incentives, subsidies, rights and credits FERC finds appropriate, either directly or by way of a passthrough of benefits from transmission owners or the RTO.

D. Promoting Alternatives to Investment in Traditional Transmission Facilities in the Absence of a Fully-Formed and Functioning RTO

RTO development has proved to be a time-consuming process with significant regional variation in progress to date. The ESC recognizes the important role that RTOs can perform in maintaining and expanding the transmission grid, but submits that FERC should not delay its efforts to encourage transmission grid benefits through incentives for investment in grid-enhancing facilities while awaiting the outcome of its efforts to encourage the formation of RTOs. Implementation of innovative technologies, including energy storage technologies, should not be held hostage to the pace of RTO development. Nor should regions where RTO development has lagged be disproportionately denied the benefits of increased transmission reliability and security that can be obtained through investments attracted by the incentives the Commission provides.

Several of the measures proposed in Part III.B of these comments can be, and should be, put in place now so that they can operate to encourage appropriate investment even prior to the formation of a fully-functioning RTO. These include treating energy storage facilities and the services they provide on a comparable basis to transmission facilities investment in appropriate circumstances; establishing the principle of equal opportunity; permitting a “safe harbor” as well as appropriate incentives for the passthrough of energy storage-related costs; adopting a policy favoring rolled-in pricing for radial transmission facilities and network upgrades required to link large-scale energy storage facilities with the grid; and approval of negotiated rates for providers of incremental transmission capacity and ancillary services provided via energy storage facilities. In addition, the Commission should endorse the principle that, regardless of how transmission planning takes place, whether through RTOs or through another mechanism at the pre-RTO stage, suppliers of alternatives to traditional transmission investments – such as energy storage project proponents – should be invited to participate fully in the transmission planning process.

For the foregoing reasons, the ESC urges FERC to adopt a Pricing Policy that recognizes the substantial benefits to efficient operation and expansion of the electric transmission grid that can result from a robust energy storage sector. To this end, the ESC recommends that FERC ensure that entities other than transmission owners (such as energy storage facility developers or energy storage service providers) are able to benefit from the incentives, subsidies, rights and credits FERC finds appropriate, either directly or by way of a passthrough of benefits from transmission owners or the RTO. The Commission can do this by, among other measures, adopting the measures described in Part III.B of these comments.

In addition, the ESC urges that FERC retract its statement that “only transmission owners which participate in RTOs will be able to take advantage of [the] incentives [established under its proposed policy]” (Proposed Pricing Policy notice, ¶ 1). The ESC strongly urges FERC to ensure that developers of energy storage facilities have standing to participate in the RTO planning process in a meaningful way. By providing this essential certainty to potential investors in energy storage technologies and specific energy storage projects, the Commission can encourage increased availability of capital resources for energy storage projects, further promoting the important goals of the Commission’s Proposed Pricing Policy by encouraging the development of technologies that can enhance the efficiency, reliability and security of the nation’s transmission grid.

[1] The Energy Storage Council was formed to support the energy storage community in its effort to accelerate the introduction of energy storage systems and technologies into the marketplace. ESC seeks to raise awareness of the role of energy storage among the public, policymakers and private business. The ESC’s membership comprises business enterprises that manufacture, develop or use energy storage systems, including natural gas storage firms, electric utilities focused on energy storage, and renewable energy system suppliers. More information on the ESC and its members may be found at ESC’s website, www.energystoragecouncil.org. A listing of the ESC’s membership is attached as Attachment 1.

The comments contained in this filing represent the position of the ESC as an organization, but not necessarily the views of any particular member with respect to any specific issue.

[2] The Commission has acknowledged this perverse incentive in the Proposed Pricing Policy notice, where it notes (at ¶ 17) that “ITCs would be more likely to relieve congestion through transmission investment than a company that benefits from the value of congestion in constrained areas.” The same would be true of energy storage project developers offering energy storage solutions that enhance transmission capability. Such developers would lack the conflict of interest some have observed in owners of both transmission and generation assets. See id. at ¶ 15 (“Market participants also complain that companies that own both transmission and generation under-invest in transmission because the resulting competitive entry often decreases the value of their generation assets”).

[3] Eric Hirst, Transmission Crisis Looming? Separating Hype from Fact, Public Utilities Fortnightly (Sept. 15, 2000) 54.

[4] Thomas R. Kuhn, President’s Message: The Best Opportunity to Lead, Electric Perspectives (May/June 2001), available at http:/www.eei.org/ep/editorial/Apr_01/0401PREZMSG.htm.

[5] Sources: Energy Information Administration, Annual Energy Outlook 2002; North American Electric Reliability Council, Reliability Assessment 2002-2011.

[6] Source: Energy Storage and the Electric Power Industry (ESC/Pearl Street, Inc. White Paper) (forthcoming).

[7] See Proposed Pricing Policy notice, ¶ 5 (noting that only two proposed RTOs have become fully approved RTOs – the Midwest Independent Transmission System Operator, Inc. and PJM Interconnection, L.L.C.).

[8] The Commission has recognized that “[i]n order for [its] incentives [to encourage investment in transmission infrastructure serving Western markets] to have their desired effect as quickly as possible, transmission owners must be given certainty at the outset.” Removing Obstacles to Increased Electric Generation and Natural Gas Supply in the Western United States, 94 FERC ¶ 61,272 at 61,969 (2001).

[9] See id., 94 FERC ¶ 61,272 at 61,970 (“to the extent that transmission owners can increase transmission capacity on constrained interfaces without capital intensive expenditures by, for example, installing new technology on existing facilities to better control voltage and power flow or by implementing new operating procedures, we propose to allow them to increase the revenue requirement of their network service rates to ensure that each additional MW of capacity will generate revenues equal to the provider’s current firm point-to-point rate”).

[10] Id., ¶ 216 (“LMP is a result of a least-cost dispatch of the resources available to the transmission system in a matter that recognizes both the operational limits of those resources and the operational limitations of the transmission system”).

[11] Congestion Revenue Rights could also be purchased through auctions. Id., ¶ 252-53.

[12] See Removing Obstacles to Increased Electric Generation and Natural Gas Supply in the Western United States, 96 FERC ¶ 61,225 at 61,767 (“The emergency facing the West justifies a measure that minimizes the cost of entry for each new supply source in order to facilitate the addition of as much supply as possible and as quickly as possible. Accordingly, the Commission will roll in the costs of interconnection and system upgrades for projects that are in service by November 1, 2002”), reh’g granted in part and denied in part, 96 FERC ¶ 61,155 at 61,674-77 (2001) (limiting roll-in policy to network upgrade costs, affirming that “[r]olled-in treatment of all network upgrades is in the public interest because it will minimize the cost of entry for new generation in order to maximize supply in this emergency situation…. [A]ny additional MW of generation added has system-wide benefits, and costs incurred to bring this power on-line should be treated as system costs”), citing Western Mass. Elec. Co., 66 FERC ¶ 61,167 (1994), aff’d sub nom. Western Mass. Elec. Co. v. FERC, 165 F.3d 922 (D.C. Cir. 1999).

[13] E.g., TransEnergie U.S., Ltd., 91 FERC ¶ 61,230 at 61,838 (2000). The Commission has found negotiated rate treatment appropriate where the sponsors have assumed market risks associated with the project and have allocated project capacity on a non-discriminatory and transparent manner. Id. at 61,839-40; see also Proposed Pricing Policy notice at ¶ 9.

[14] In Norton Energy Storage, the Commission stated:

[T]he use of compressed air as a medium for the storage of energy in an energy storage facility is a new technology. However, we find that a compressed air energy storage facility is analogous to a pumped storage hydroelectric facility, in that compressed air is used in a conversion/storage cycle just as water is used in a pumped storage hydroelectric facility in the conversion/storage cycle. We also find that, given the similarities between the facilities, it is appropriate to afford compressed air energy storage facilities the same regulatory treatment this Commission traditionally has afforded pumped storage hydroelectric facilities, namely, that deliveries of pumping energy as part of an off-peak/on-peak energy exchange transaction are considered to be exclusively wholesale transactions.

95 FERC at 62,702.

[15] E.g., id.; see also merchant transmission cases cited in the Proposed Pricing Policy notice at ¶¶ 9-12.

[16] See, e.g., Removing Obstacles to Increased Electric Generation and Natural Gas Supply in the Western United States, 96 FERC at 61,670 (“the Commission may set rates to achieve relevant regulatory purposes, and may do so by including non-cost incentives to encourage behavior in the public interest”), citing Mobil Oil Corp. v. FPC, 417 U.S. 283 (1974); Permian Basin Area Rate Cases, 390 U.S. 747 (1968); and East Tennessee Natural Gas Co. v. FERC, 863 F.2d 932 (D.C. Cir. 1988).

[17] Proposed Pricing Policy notice, ¶ 31 (“a requirement that new investment be made pursuant to the RTO planning process could foreclose the use of many promising technologies”).

* Admitted in Minnesota; admission in the District of Columbia pending.