White Paper
Energy Storage in a Resurrecting
PJM Regulation Market
By Parag Nathaney and Harjeet Johal, ICF
Shareables
PJM Interconnection’s (PJM’s) frequency regulation market prices hit
§§
new lows in Q1, raising concerns about the value of energy storage in a
volatile market.
ICF projects that the regulation market clearing prices will recover and be
§§
driven by natural gas prices.
Renewable expansion and other proposed market changes are expected to
§§
increase the market size and preserve the value of energy storage.
Executive Summary
Energy storage is recognized as a flexible resource capable of delivering multiple
value streams that include frequency regulation service. Energy storage in PJM’s
frequency regulation market has derived substantial value in the past, and thus
the market has seen a substantial influx of energy storage resources. However,
from Q3 2015–Q2 2016, the market witnessed a decrease in the clearing prices.
This decrease, along with some structural changes in market participation rules
for energy storage, caused concerns among market participants about the value
proposition of energy storage.
ICF notes several upsides that will continue to maintain or even elevate the value
which current and future storage resources can derive from this market. These
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Energy Storage in a Resurrecting PJM Regulation Market
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are described in Exhibit 1. There are benefits to be accrued in the near-term
with the likely increase in natural gas prices and other proposed market design
changes. In the long-term, increased renewable penetration is expected to
support energy storage by increasing the market size for regulation.
EXHIBIT 1: FREQUENCY REGULATION MARKET AND VALUE DRIVERS
Impact on
Energy Storage
Driver
Implication
Increases in Natural Gas Price
Increases RMCP
Market Design Changes
Expands Market Size
Updates to Procurement Methodology
Supports New Entry
Increases in Renewable Penetration
Increases Market Size
Frequency Regulation Market in PJM
EXHIBIT 2 : FREQUENCY REGULATION PREMIUM IN PJM COMPARED WITH OTHER ISOs AND
NERC REGIONS (2012–2014)
$35
$30
$25
$/MW-hour
In 2011, FERC issued Order 755, paving
the way for pay-for-performance in the
frequency regulation market. Resources’
compensation was to be based on their
“responsiveness” to accurately follow the
regulation signal being dispatched by the
system operator.
The frequency regulation market clearing prices in PJM have shown a significant
premium, compared with other regions in the United States, as shown in Exhibit
2. This premium has attracted a lot of energy storage resources in PJM. Currently,
there are 265 MW of grid connected storage in PJM, of which approximately
160 MW was added in 2015 alone. The majority of the new entrants are expected to
provide regulation service. Additionally, there is around 700 MW of storage under
study in PJM’s queue which could be added to the system in the near future.1
Note: For
tariff-based
regions, an
average across
the utilities has
been reported.
$20
$15
$10
$5
$0
SERC
WECC
Tariff-Based
FRCC
CAISO
PJM
NYISO
Market-Based
Source: ICF
¹ Historically 10% to 11% of the queue capacity has been realized commercially.
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In 2012, PJM implemented the Federal Energy Regulatory Commission (FERC) Order
755 and established a “pay-for-performance” mechanism to value the accuracy
of providing the regulation service. This mechanism has enabled energy storage
to capture additional revenues on account of higher performance capabilities
relative to traditional regulating resources, while at the same time helping improve
the regulation market efficiency.2
PJM differentiates the capabilities of “slow-responding” thermal resources and
“fast-responding” energy storage resources by dispatching two types of signals—
RegA as RegD resources.3
EXHIBIT 3: RegA AND RegD RESOURCES PARTICIPATING IN PJM FREQUENCY
REGULATION MARKET
Breakdown of RegA Resources
Breakdown of RegD Resources
CT
23%
Hydro
18%
Steam
59%
Total = 5,271 MW
Energy
Storage
26%
CT
12%
Demand-Side
Resources
1%
Hydro
61%
Total = 684 MW
Source: Adapted from PJM, as of October 2015.
Considering a traditional regulation
resource like a steam turbine or
combustion turbine:
Lost opportunity cost is a measure of the
forgone revenues in the energy market
while providing regulation service.
Capability offer accounts for the cost of
operating the resource at a suboptimal
heat rate.
Performance offer accounts for the wearand-tear costs incurred as a result of
following PJM’s regulation dispatch signal.
Opportunity Costs Drive the Price
The reason for the value proposition of energy storage as strong in this market
going forward lies in understanding how PJM establishes the market clearing
prices. The market clearing prices are governed by the offer of the marginal cost
resources, which are RegA resources like steam turbines. The clearing price is
determined by three components: lost opportunity cost (LOC), capability offer,
and performance offer. Of the three, LOC is by far the biggest component of the
regulation market clearing price (RMCP), as shown in Exhibit 4. LOC credits are
derived from locational marginal prices (LMPs), thus leading to a high correlation
between the RMCP and LMP. Interestingly, the performance offer is only 4% of the
total clearing price. Even under a “pay-for-performance” mechanism, the market is
largely driven by the lost opportunity payments in the energy market.
² The implementation of FERC Order 755 reduced PJM’s frequency regulation requirement by 35%
from an average of 884 MW per hour in 2010–2012 to approximately 575 MW per hour in 2013–2014.
³ Energy-limited resources are limited in the total amount of energy they can produce over a period
of time.
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EXHIBIT 4: RMCP BREAKDOWN BY COMPONENT
80
$/MW-hour
70
60
50
Average = $35
40
30
Average = $19
20
10
Performance Offer
16
nJu
M
ay
-16
Ap
r-1
6
16
16
M
ar
-16
Fe
b-
15
nJa
15
De
c-
t-1
5
vNo
15
Oc
-15
Lost Opportunity Credit
Se
p-
5
15
l-1
Au
g
Ju
nJu
M
ay
-15
Ap
r-1
5
15
M
ar
-15
Fe
b-
Ja
n-
15
0
Capability Offer
Source: PJM State of the Market Report, 2015, Q2 2016.
Market Clearing Prices May Drop But Likely Will
Not Collapse
As indicated earlier, the market clearing prices are governed by the offer of RegA
resources like CTs or steam turbines. Energy storage resources simply become
the price-takers as their cost offers are ranked lower in the supply stack for
regulation service. As a result, with more storage entering the regulation market,
there is a possibility of displacement of some marginal resources. In this sense,
the market clearing prices may drop but will not collapse, because storage will
not be able displace all marginal resources.
Another reason is the energy neutrality of the RegD signal. Currently, the RegD
signal is designed for a 15-minute energy neutrality, implying that energy storage
systems must charge and discharge equally in a 15-minute time frame. This
constraint informs that during steep ramp-up/ramp-down hours when persistent
response is required in one direction only, RegD resources alone will not be
adequate. The need for RegA resources will continue, and with higher cost offers
than RegD resources, they will continue to set the market clearing price.4
Additionally, the following factors will continue to present an upside for energy
storage in the future:
Expected Natural Gas Price Recovery
§§
Potential Market Design Changes
§§
Increasing Renewable Penetration
§§
These factors are discussed in greater detail in the following sections.
4
Short-duration energy storage is classified as a non-energy regulation resource in PJM. Thus, such
storage has no opportunity cost of providing regulation over energy. As a result, energy storage
invariably has lower cost offers than traditional regulating resources, and offers clear the market
more often.
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Gas Price Recovery Expected to Support the Regulation
Market Price
LMPs in PJM have been closely linked to natural gas prices, as marginal resources
in the energy market are generally natural gas fired.5 Given that LOC is a major
component of RMCP and that LMPs are closely aligned with movements in natural
gas prices, RMCPs also show high correlation with natural gas prices, as seen in
Exhibit 5.
EXHIBIT 5: MONTHLY AVERAGE RMCP AND NATURAL GAS PRICE CORRELATION
180
20
160
18
14
120
12
100
10
80
8
60
6
40
Gas Price, $/MMBtu
16
140
4
g14
Se
p14
Oc
t-1
4
No
v14
De
c14
Ja
n15
Fe
b15
M
ar
-15
Ap
r-1
5
M
ay
-15
Ju
n15
Ju
l-1
5
Au
g15
Se
p15
Oc
t-1
5
No
v15
De
c15
Ja
n16
Fe
b16
M
ar
-16
Ap
r-1
6
M
ay
-16
Ju
n16
Au
14
4
l-1
n-
Ju
Ju
4
r-1
ay
M
14
ar
Ap
M
n-
Fe
Ja
-14
0
-14
2
0
14
20
b-
Regulation Market Clearing Price, $/MW-hour
PJM Regulation Market Clearing Prices and TETCO Zone 3 Natural Gas Prices, 2014-2016
Regulation Market Clearing Price
Natural Gas Price
Source: PJM, SNL Financial.
Natural gas prices have seen record lows. In the first few months of the year,
Henry Hub spot prices reached $1.6/MMBtu due to factors like a warm winter,
relatively weak demand, and a large inventory of drilled-but-uncompleted wells
in the Marcellus and Utica shales. However, natural gas prices started to rebound
during the past couple of months. In June, Henry Hub spot prices increased to
nearly $2.9/MMBtu due to a warmer-than-normal summer that bolstered power
sector gas demand, despite the U.S. natural gas storage inventories were above
the five-year (2011–2015) average.
Natural gas prices are expected to rise in the near-term as the gas supply
tightens due to persistent low upstream investments in the past year and a
drawdown of drilled-but-uncompleted wells in conjunction with growing demand.
This recovery in natural gas prices will provide a boost to the frequency regulation
market clearing price.
5
All the new capacity proposed to be online in PJM by 2020 is either natural gas fired or renewables.
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Energy Storage in a Resurrecting PJM Regulation Market
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Market Design Changes that Support Energy Storage Value
The regulation market size in PJM may increase in the near future. PJM’s proposal
is to vary the regulation requirement by season, i.e., sensitizing the requirement
to the seasonality of load shape and renewables output. A preliminary proposal
under consideration is an increase in the regulation requirement to 800 MW for
ramp hours and 600 MW for non-ramp hours from the current requirement of
700 MW (on-peak hours) and 550 MW (off-peak hours).6 The higher regulation
requirement is indicative that RegD resources may be able to derive greater value.
Another potential change being deliberated is the energy neutrality aspect of the
RegD signal. Currently, the RegD signal is designed to be energy-neutral during a
15-minute period, which limits participation of energy storage in some hours that
require unidirectional ramp support.7 PJM is considering an increase in the energyneutrality limit from 15 to 30 minutes, which will enable increased participation and
procurement of energy storage in these unidirectional ramp hours.8 Such a change
will therefore increase the market size for energy storage resources.
Lastly, PJM’s Independent Market Monitor (IMM) has indicated that market clearing
prices must differentiate the service provided by RegA and RegD resources.
Currently, all of the cleared resources receive a uniform market clearing price. IMM
has reported concern that RegD resources may be underpaid relative to RegA
resources. How this deficiency will be addressed has not been determined, but a
more favorable clearing price is possible for RegD resources.
Renewable Penetration Will Increase Regulation Market Size
Renewable generation like wind and solar photovoltaic is characterized by
variability in output power. Therefore, a higher influx of such resources will
likely increase the regulation requirement, thereby potentially increasing the
participation of energy storage resources.
A PJM-commissioned study showed that if the states in PJM were to reach their
RPS goal by 2029, the regulation requirement will increase to an average of
1,500 MW from the current maximum requirement of 700 MW.9 Additionally,
between 2016 and 2018, approximately 2,000 MW of utility-scale wind and solar
generation is expected to be online in PJM.10
6
Ramp and non-ramp hours change depending on the season and the nature of load shape.
7
15-minute energy neutrality implies that, on an average, the discharge and charge of energy from
the resource must be equal in this time period
8
This market design change is being considered for a future scenario when longer duration energy
storage will start participating in the frequency regulation market.
9
PJM Renewable Integration Study, February 2014. Available from https://www.pjm.com/~/media/
committees-groups/committees/mic/20140303/20140303-pris-executive-summary.ashx;
accessed in August 2016.
10
In the long term, very high renewable penetration is expected, although increasing regulation requirement may lower energy prices (or LMPs) and thus RMCPs. However, the timeline of this impact is difficult to ascertain as markets and products also may undergo substantial change.
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Earlier this year, California Independent System Operator (CAISO) increased its
frequency regulation requirement from 300 MW to 600 MW, attributing this
increase to higher renewable penetration. The increase in the requirement also
saw an increase in RMCPs. As seen in Exhibit 6, regulation prices jumped from
an average of $8/MW-hour from January 1–February 19 to approximately $19/
MW-hour February 20–March 31. CAISO’s internal market monitor concluded
that increases in regulation requirements are the most likely reason for a price
increase, not a change in participant bidding behavior.
Weighted Averages Shadow Price ($/MW-hour)
EXHIBIT 6: CAISO REGULATION MARKET CLEARING PRICES INCREASE AS REGULATION
REQUIREMENT INCREASES
$25
Before Requirement Increase
After Requirement Increase
$20
$15
$10
$5
Regulation Up
27
-M
ar
ar
-M
20
ar
-M
13
ar
-M
06
eb
-F
28
eb
-F
21
eb
-F
14
eb
-F
07
an
-J
31
an
-J
24
an
-J
17
an
-J
10
an
-J
03
27
-D
ec
$0
Regulation Down
Source: CAISO, Q1 2016 Report on Market Issues and Performance, June 2016.
Conclusion
The regulation market will continue to be an important domain where energy
storage can continue to be valuable, especially in PJM. Concerns may be
unwarranted that greater influx of energy storage resources is causing price
suppression. ICF believes that low natural gas prices and overall energy market
supply mix are better determinants to explain the price volatilities. Energy storage
in PJM will also continue to derive value going forward as favorable changes are
expected in PJM’s market design in the near- to medium-term future. In the longterm, increased renewable penetration is expected to support energy storage by
increasing the market size for regulation.
The importance of storage as a resource lies in its flexibility and multiplicity
of its function. There are additional value streams of storage (highlighted in a
previous ICF white paper on duck curve and recent webinar) including renewable
integration, transmission deferral, and resource adequacy benefits. These
streams can be integrated along with regulation service. The key lies in creation
of market mechanisms like frequency regulation that unlock the resource
potential and effectively monetize resource capabilities.
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About the Authors
About ICF
Parag Nathaney is an Associate with ICF. He has been involved
in distributed energy resource integration, power system
modeling and wholesale market assessments. Mr. Nathaney
holds a masters degree from University of Delaware.
ICF (NASDAQ:ICFI) is a global consulting
and technology services provider with
more than 5,000 professionals focused
on making big things possible for our
clients. We are business analysts, policy
specialists, technologists, researchers,
digital strategists, social scientists, and
creatives. Since 1969, government and
commercial clients have worked with ICF
to overcome their toughest challenges
on issues that matter profoundly to their
success. Come engage with us at icf.com.
Harjeet Johal is a Senior Manager with ICF, and over 10 years
of experience renewable integration, T&D planning, financial
due diligence, and power system strategy. Mr. Johal holds a
PhD and has authored several patents, journal articles, and
industry papers.
For more information, contact:
Parag Nathaney
Harjeet Johal
[email protected] +1.703.713.8766
[email protected] +1.703.272.9544
Any views or opinions expressed in this white paper are solely those of the author(s) and do not
necessarily represent those of ICF. This white paper is provided for informational purposes only and
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