Paying for performance: The role of policy in energy storage deployment

Abstract

Energy storage has long been viewed as a solution to the growing challenge of intermittent electricity supply. However, energy storage deployment remains limited despite falling costs. One reason for this is current market rules that inadequately compensate storage for the value it can provide. A recent policy change in the United States (FERC Order 755) seeks to rectify this by requiring grid operators to compensate providers of frequency regulation services based on their speed and accuracy. This seemingly subtle change has a beneficial effect for fast-acting storage resources. Using a difference-in-differences method, exploiting the fact the Order covers only a subset of U.S. electricity regions, we find the order increases the likelihood projects are built to provide frequency regulation services by about 37%. While cost barriers remain to widespread storage deployment, our results suggest improving market rules to properly reflect the value of storage can overcome many regulatory barriers impeding investment. • In 2011, Federal Energy Regulatory Commission (FERC) introduced Order 755. • Order 755 modified compensation for ancillary services based on speed and accuracy. • This seemingly subtle change had a beneficial effect for fast-acting storage resources. • The Order caused new investments in energy storage that provide frequency regulation. • Lifting market barriers to properly reflect the value of storage can unlock its investment.