On February 17, 2011, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued a notice of proposed rulemaking (“NOPR”) soliciting comments on its proposal to require that resources providing frequency regulation in the organized wholesale markets be properly compensated for such services. If adopted, FERC’s proposed rule will likely have profound effects on non-traditional resources that can quickly provide frequency regulation services such as energy storage technologies and electric vehicles. Comments are due 60 days after the NOPR’s publication in the Federal Register, or by May 2, 2011.

FERC describes frequency regulation as the injection to, or the withdrawal of power from the transmission grid in order to correct a system’s frequency deviations. Frequency regulation is an essential grid-stabilizing tool that allows for the maintenance of reliable transmission operations. If unchecked, frequency deviations can cause major disruptions to generation and transmission equipment as well as widespread blackouts. Frequency regulation service has been historically performed by electric generators, but now non-traditional energy technologies such as large-scale battery systems, flywheels, electric vehicle-to-grid systems, and demand-side processes have the ability to ramp up or down faster than some traditional resources and, as such, are able to provide frequency regulation services more accurately than traditional resources.

In response to these emerging technologies, FERC proposes to adopt a frequency regulation compensation mechanism for regulation providers in the organized wholesale electricity markets (those characterized by either a regional transmission organization (“RTO”) or an independent system operator (“ISO”)) in order to eliminate undue discrimination and to ensure just and reasonable rates. In FERC’s view, faster-ramping resources, like developing energy technologies such as batteries and flywheels, deserve fair compensation not only because of their accuracy and performance relative to traditional generators, but also because they enhance the operational and economic efficiency of the grid by ensuring efficient price signals for regulation resources that forgo the opportunity to earn revenues in the energy markets. FERC therefore proposes a two-part payment scheme for resources providing frequency regulation service to RTOs and ISOs:

  • A capacity, or option, payment that will compensate the resource for having a certain amount of capacity held in reserve, and to not participate in the energy market in order to provide frequency regulation service. This payment will include the opportunity cost of the marginal regulation resource to reflect the revenue that is passed up by being on stand-by instead of providing energy;
  • A performance payment based on the amount of up and down movement, in megawatts, the resource provides in response to a control signal.

The NOPR expressly seeks industry input and comment on its payment proposals, including its proposal to require regulating resources to be provided a uniform capacity payment that includes the supplier’s opportunity costs, and whether there are alternative payments for performance that would address concerns of undue discrimination.

FERC’s NOPR is available here.