The Federal Energy Regulatory Commission (FERC) recently established a new two-part method for compensating resources that provide frequency regulation service.1 The new FERC-mandated compensation method could encourage the deployment of electricity storage devices and thereby enable greater penetration of renewable resources. A transmission system’s frequency must remain within an acceptable range in order to provide reliable service. Major deviations can cause equipment to disconnect from the grid and even lead to a cascading blackout. Frequency regulation service quickly corrects such deviations in the transmission system. Frequency regulation service is the injection or withdrawal of real power by facilities in response to a transmission system operator’s signal, and is used to balance supply and demand on the transmission system. This order—which requires changes in the compensation to resources providing frequency regulation service to independent system operators (ISOs) and regional transmission organizations (RTOs)—is indicative of FERC’s commitment to incorporating advances in technology and adding into market rules features to help bring new capabilities to grid operations.

Frequency Regulation Service

All transmission system operators must obtain frequency regulation service to maintain the reliability of their systems. Frequency regulation service is called an “ancillary service” that supports the transmission grid. RTOs and ISOs already have FERC-approved market mechanisms for obtaining frequency regulation service from generators, demand response resources, and other types of resources (including electricity storage technologies).

Resources providing frequency regulation vary in their ability to increase or decrease their provision of service (commonly referred to as “ramping”) and in the accuracy with which they can respond to the system operator’s dispatch signal. FERC noted in the final order that the use of faster-ramping resources for frequency regulation has the potential to improve operational and economic efficiency of the transmission grid.

FERC found that current compensation methods for frequency regulation service in RTO and ISO markets are unjust, unreasonable and unduly discriminatory, in part because they “fail to acknowledge the inherently greater amount of frequency regulation service being provided by faster-ramping resources.”2

New Compensation Method

First, the new compensation method will give all resources that clear the frequency regulation markets a uniform capacity payment that will include the opportunity costs of the marginal unit selected in the RTO or ISO market to provide frequency regulation service. Second, each resource will receive a market-based performance payment for service, and that payment will reflect a resource’s accuracy of performance. Each RTO and ISO must propose a method for measuring the resource’s accuracy in responding to the system operator’s automatic generation control dispatch signal.

Next Steps

The order is effective December 30, 2011, and FERC is requiring each RTO and ISO to work with its stakeholders to develop proposals to comply with the requirements of Order No. 755 and make any necessary compliance filings with FERC by April 30, 2012. The new compensation approaches must be implemented 180 days thereafter.

The final order is available here: http://www.ferc.gov/whats-new/comm-meet/2011/102011/E-28.pdf.