FERC Permits MISO to Treat Electric Storage as a Transmission-Only Asset for Cost-Recovery Purposes

September 1, 2020

By Kurt R. Rempe, Fredrikson and Byron, P.A., and Rao Konidena, Rakon Energy LLC

Transmission lines

The Federal Energy Regulatory Commission (FERC) recently accepted a proposal by the Midcontinent Independent System Operator, Inc. (MISO) to revise its tariff to allow for storage facilities to be classified as transmission-only assets (SATOA) in the MISO Transmission Expansion Plan (MTEP) and receive cost recovery under the MISO tariff on the same basis as other MTEP projects.

The FERC order is important for two reasons. First, the order should incentivize the expansion of storage in the MISO market by permitting these projects to earn a return through cost-of-service transmission rates as opposed to relying on revenues earned in the MISO market through power sales. Second, the order is the first time that a regional transmission organization (RTO) has moved to treat energy storage resources solely as transmission resources and will likely set a precedent for other RTOs to seek to revise their tariffs.

As background, FERC had previously issued an order in 2010 authorizing incentive rate treatment for battery storage devices installed by Western Grid Development LLC within the California Independent System Operator system for reliability purposes. That order was followed by a 2017 policy statement which clarified that storage resources can recover their costs through cost-based rates in recognition of their ability to act as both generation and transmission assets. Then in 2018, FERC issued Order 841 and directed regional grid operators to establish market rules to accommodate the participation of storage resources in wholesale power markets. MISO filed its SATOA proposal in December 2019 shortly after FERC accepted its Order 841 compliance filing. FERC accepted and suspended MISO’s tariff revisions subject to a further order following a technical conference that took place last May.

Storage is generally thought of as a supply-side resource no different than a generation asset that injects power into the electric grid to earn revenue in the wholesale energy market. However, the ability to pull power from the grid and reduce congestion on the system makes storage an attractive substitute to more costly transmission facilities. To incentivize storage and in recognition of its transmission function, the FERC order allows an energy storage resource to be selected as a preferred solution to a transmission issue in the MTEP process similar to traditional wires-based transmission solutions.

This represents a fundamental shift in how energy storage resources are typically added to the system and will allow storage to be utilized to maximize reliability and efficiency of the grid. SATOA operators will be responsible for ensuring that their resources maintain an adequate state of charge to fulfill their designated transmission functions when called upon and for buying power to charge their storage resources. SATOAs may not participate in MISO’s capacity, ancillary services or day-ahead energy markets. Any revenues collected by the SATOA from market activities outside of its assigned transmission function will be credited back to customers through transmission rates.

The MISO tariff revisions provide a framework for considering energy storage resources as transmission-only assets and allowing such resources to be evaluated on a comparable basis to traditional wires-based transmission solution. The tariff provides: (1) a process for evaluating energy storage resources to be included in the MTEP, (2) cost assumptions that are considered in the evaluation of energy storage resources, (3) criteria for selecting an energy storage resource as a solution in the MTEP and (4) the process for developing operating guides for storage resources providing transmission. To qualify, the SATOA must be under the functional control of MISO and can only provide the transmission services that it was selected for in the MTEP.

Only incumbent transmission owners will be able to construct SATOAs. Non-transmission owner storage developers may only propose storage solutions in the MPTEP as a “non-transmission alternative” that must go through the interconnection queue, obtain a generator interconnection agreement, pay transmission charges for energy use to charge and are not entitled to cost-of-service rates to recover these costs. As a result, a broad coalition of utilities, renewable project developers, trade groups and environmental organizations protested the MISO filing arguing that the proposal creates an unduly discriminatory preference for storage projects proposed by incumbent transmission owners over identical projects owned by non-transmission owners. They also argued that the proposal runs afoul of Order 841 by preventing storage resources from utilizing their full technical capabilities.

Another more general concern is that the FERC order adds an additional layer of complexity to the organized markets when there are already different resource designations and market mechanisms that could have been used to accomplish the same objectives. The MISO tariff currently provides for Demand Response Resource type I and II as well as a Stored Energy Resource (SER) type I and II for resources capable of providing fixed demand reduction (DRR Type I) and flexible demand reduction (DRR Type II). These resource designations where originally established in response to a need for demand response and flywheel storage assets but have not kept pace with the evolving market.

The MISO tariff does provide for a SER Type II designation in response to a complaint filed by Indianapolis Power & Light. FERC’s order on the complaint concluded that emerging technologies such as battery storage have limited opportunities to participate in the market because SERs are only permitted to provide regulating reserve services. As a result, FERC ordered MISO to allow SER Type II assets to participate in the energy, capacity and ancillary services market. To complicate matters, the SER Type II designations will change once Electric Storage Resource (ESR) goes into effect the summer of 2022 with the new market participation model under Order 841.

A more holistic and flexible approach to integrate storage as a transmission alternative (SATA) into the MISO market as opposed to the narrower SATOA designation may be needed given that the development of these projects is expected to grow in the coming years. FERC may have been better off waiting until CAISO and other ISO’s caught up with SATA efforts before taking any action and then issuing a proposed rulemaking on SATA. CAISO has done some work in advancing rules to account for storage as a transmission asset, but currently those efforts are on hold until they resolve market commitment issues for a SATA resource. The CAISO initiative is available here.

Commissioner James Danly dissented from the order stating that it blurs the line between transmission and generation in the Federal Power Act and gives storage projects the benefit of guaranteed recovery of costs and profit without regard to the real functional difference between these projects and traditional transmission assets. Commissioner Danly further argued that storage resources should be compensated through the sale of ancillary services in competition with other generation facilities and that the order would open the door for generators to seek similar treatment.

MISO has already included a SATOA project in its 2020 expansion plan based in its conclusion that installing a 2.5 MW battery storage device on central Wisconsin would be more cost-effective and provide similar benefits to upgrading a substation and rebuilding a 115-kV transmission line.

MISO’s compliance filing on the order is due by September 24, 2020.

Kurt Rempe advises clients on tax, regulatory and commercial issues related to the development, financing, purchase and sale of energy projects

Rao Konidena focuses on providing policy and testimony support, business development and training in wholesale energy markets.