Enabling Versatility: Allowing Hybrid Resources to Deliver Their Full Value to Customers
Rob Gramlich and Michael Goggin, Jason Burwen, September 2019 (Grid Strategies and Energy Storage Association)
Hybrid resources are growing dramatically. Energy storage-paired generators offer enhanced capabilities and can respond to economic signals differently than traditional generator resources. Yet, many grid planning rules overstate the cost of interconnecting hybrid resources, and operating rules unduly limit the flexibility and other services that these resources can provide. Industry practices, market rules, and regulations need to be updated to remove barriers to entry and allow these resources to offer their full value to the power system, which will enhance market competition and ensure just and reasonable rates.
The Federal Energy Regulatory Commission (FERC) and regional grid operators must act quickly to ensure the development of these resources is not stunted or driven in inefficient directions. Some changes can be made in the near-term to better integrate these resources by treating hybrid resources as two separate units and harmonizing the participation models of those separate units.
However, for hybrid resources to deliver their full value, they may eventually need to be treated as fully integrated single machines, able to optimize what they provide and when they provide it. Neither current market rules nor those being actively considered by regional transmission organizations (RTOs) and independent system operators (ISOs) allow them this flexibility to optimize their output. A much broader discussion involving grid operators, regulators, and the industry can consider different ways of operating the bulk power system and electricity markets, where what happens behind the point of interconnection of a supply facility is treated as the responsibility of its owner and where grid operators focus on providing accurate market price signals to encourage efficient and reliable behavior of all participants.
Introduction: Hybrid resources are the next big thing in regional electricity markets
Among the biggest changes occurring in electricity markets today is the rush to develop hybrid resources. Hybrids now represent a large share of new proposed projects in all regions and are increasingly being selected as the most economic resources in competitive solicitations.
A hybrid resource is a co-located pairing of two different electric supply technologies.1 Batteries are the core technology driving hybridization of resources since they are highly scalable and modular, and therefore can be installed in all parts of the electric grid—co-located at generation sites, directly integrated into transmission or distribution infrastructure, or located on customer premises, with the optimal site depending on localized conditions and needs. While solar photovoltaic generation paired with batteries are the most common hybrid resource, there are also wind-battery, gas-battery, and hydro-battery configurations in operation or being planned, as well as hybrids of wind-solar-storage and other paired generation configurations.
This paper assesses barriers to and proposes solutions for enabling storage-plus-generation hybrid resource deployment on the bulk power system, particularly in organized wholesale markets administered by RTOs and ISOs. We developed the following material and recommendations through interviews with developers of hybrid resources, grid operators, and transmission owners, as well as our own analysis. While there are related barriers to the deployment of hybrid resources on the distribution system or in behind-the-meter configurations, those considerations are beyond the scope of this paper. Similarly, while hybrid resources face barriers as qualifying facilities under PURPA rules,2 those considerations are also beyond the scope of this paper. Many of the barriers here also reflect issues faced by stand-alone storage units; we include them to comprehensively catalogue the issues faced by hybrid resources. Finally, while many of the barriers to storage-generation hybrids discussed in this paper also apply to generation-generation hybrids, addressing generation-generation hybrid issues fully are beyond the scope of this paper.
The surge of market interest in hybrids is moving faster than the evolution of market rules, which are presently unclear at best and in many cases ill-suited to these projects. We strongly recommend RTOs/ISOs and FERC begin the process of reform now. Broad groups of market participants are requesting a clearer regulatory framework for hybrids. 3 The rationale underlying FERC Order 841, which was focused on removing wholesale market barriers for storage resources, justifies an effort to remove similar barriers for hybrid resources. We hope that this paper provides a useful starting point for the discussion of needed reforms.
Dramatic growth in hybrid resources is expected
Hybrid resource deployment is rising dramatically. Interconnection queues, where developers file generator interconnection applications with grid operators and transmission owners, are filling up with proposals for hybrid resources. PJM, ISO-New England (ISO-NE), and California ISO (CAISO) interconnection processes all allow specification of whether proposed resources will be co-located with a storage device, and MISO categorizes co-located interconnection requests as hybrids in their interconnection queue. Collectively, these four RTOs/ISOs have 56,547 MW of active hybrid projects in their interconnection queues.4 In particular, California ISO reports that 41% of the projects in its interconnection queue are hybrid resources.5
Hybrids are also increasingly being selected as the most economic resources in competitive solicitations outside of RTO/ISO markets. Of the 430 proposed projects that Xcel Energy received in response to an all-source procurement request in 2017, 110 were hybrid projects featuring wind and solar connected to storage.6 The Hawaiian Electric Company recently selected 262 MW worth of new solar-plus-storage contracts of solar and 1,048 MWh of storage capacity at contract prices 14% lower than those set in 2017 and 40% lower than 2016 prices. 7 In Oklahoma, Western Farmers Electric Cooperative recently signed a contract with NextEra Energy Resources for a hybrid 250 MW wind, 250 MW solar, and 200 MW/800 MWh battery project, while earlier this year Portland General Electric also signed a contract with NextEra for a hybrid 300 MW wind, 50 MW solar, and 30 MW/120 MWh battery project.8 NV Energy in Nevada recently contracted for a portfolio of hybrid projects consisting of 1200 MW of solar and 590 MW of batteries, building on the prior year’s procurement of 1,001 MW of solar and 100 MW of storage. 9 One of the first large-scale hybrid projects was a 100 MW solar and 30 MW battery hybrid contracted in 2017 and currently under construction for Tucson Electric Power.10
Market projections indicate rapid growth of hybrids. Analytical Research Cognizance estimated the global market for hybrid projects to reach $58 billion/year by 2023. 11 Major project developers are publicly reporting large increases in hybrid projects, with many announcing additions of storage to most or all of their renewable energy projects. 12
In theory, there should be little reason to co-locate storage and generation resources that operate in wholesale electric markets. Since grid operating areas inherently aggregate all supply resources to meet demand, there is no need to co-locate a storage resource with a generator. In practice, however, technical, economic, and regulatory factors are increasingly driving wholesale market participants to colocate storage with generation:
• Cost reductions. As illustrated in Figure 1, the costs of batteries, solar, and wind resources have fallen dramatically, making both stand-alone and hybrid resources with any combination of those resources far more competitive than just a few years ago. As shown in Figure 2 from NextEra, the cost of adding batteries to solar projects is expected to continue to decline.
• Project cost savings. The capital costs of co-located storage and solar projects are generally cheaper than two separate project installations, as shown in Figure 3. A recent study by the National Renewable Energy Laboratory (NREL) found that the cost of a co-located, DC-coupled storage-solar hybrid system is 8% lower than the cost of the system with storage and solar sited separately; similarly, the cost of a co-located, AC-coupled system is 7% lower. Project cost savings derive from the ability to share inverter and associated balance of system (BOS) electrical equipment, as well as the economies of scale from sharing relatively fixed design, interconnection, permitting, and construction costs.
• Investment tax credit (ITC). Over the last several years the IRS has clarified rules around how the Section 48 and 25D investment tax credits (ITC) apply to storage integrated into solar power projects. The industry has become comfortable with the practice of applying the federal ITC to the battery portion of a renewable project which is eligible if 75 percent of the battery’s charging comes from the renewable facility for the first five years of the project’s operation. As the solar ITC phases down from 30% to 10%16 over the next few years, this incentive creates pressure for utility off-takers and project developers to increasingly deploy these projects while this benefit is in effect. This tax credit advantage typically accrues to solar and not wind projects. Almost all land-based wind projects elect the Section 45 Production Tax Credit (PTC) and not the ITC option, as wind plants’ high production relative to their investment cost makes the PTC more beneficial. 17 However, wind projects may elect an ITC in lieu of the PTC, which could potentially provide an incentive to integrate storage.
• Efficient Use of Transmission Interconnection Capacity. Generator interconnections have become a scarce and valuable commodity in most electric power markets. There are large queues of generation and long waits for projects to move through the process. FERC attempted to improve interconnection queues with its four-year process culminating in Order No. 845. While these reforms have helped, queue logjams remain. Long queues will likely continue as long as transmission planning processes fail to proactively develop transmission capacity to serve remote high-quality resource areas. Indeed, then-FERC Commissioner Cheryl Lafleur raised the question during the FERC interconnection process, “Where does the interconnection process leave off and the transmission planning process start?”18 In many regions, the answer is that interconnecting generators carry a large share of the cost burden for network transmission upgrades. Scarce interconnections create an opportunity for hybrid resources since two resources together can utilize less interconnection capacity together than two separate interconnections. This is particularly true when storage resources can be charged by the colocated generator to limit injections onto the power system. Order No. 845 began to enable this efficiency, though as discussed below, barriers remain to developers’ ability to capture this efficiency.
• More efficient plant design. Another efficiency aspect of hybrid resources is that components of the system, mainly the inverter and associated electrical equipment, can be shared. This is especially true for battery storage DC-coupled with a PV facility on the generation side of the inverter. Inverters and associated electrical equipment are expensive components of projects, so many solar developers significantly oversize the solar module’s DC capacity relative to the rating of the inverter. This results in a DC solar module capacity rating that is higher than the AC capacity rating of the inverter, called the Inverter Loading Ratio (ILR). Average ILRs have increased from 1.2 in 2010 to 1.32 in 2017, and continue to increase as PV module costs decline faster than the cost of inverters and AC balance of plant equipment. 19 An additional reason driving high ILRs is that PV module output degrades somewhat over time, so a fully-sized inverter will not be fully used for much of its life. Higher ILRs also drive more energy production, higher capacity value, and less variable output, as the output from the oversized PV modules reaches the inverter rating in more hours. When the inverter capacity is less than the PV output, some of the output is “clipped,” or “spilled,” similar to when a hydroelectric dam cannot use all of the available water and must divert some to its spillway. High ILRs are economic because solar plants seldom reach maximum output, and the marginal value of midday production in solar-saturated markets is not high enough to justify the additional inverter expense. However, co-locating storage can “soak up” this excess production for later use, increasing utilization of the inverter and the output of the plant and often discharging this stored energy during more valuable hours in the evening or morning. In one analysis, the amount of clipping was reduced by 80 percent by co-locating a 3 MW/3 MWh battery with a 7.1 MW (AC) PV facility with a 1.4
• Optimizing resources in inefficient markets. In a perfectly efficient wholesale power market, each resource would sell its services into a market that would aggregate variable generation resources, more dispatchable resources like storage, and all other resources with no “firming” of individual resources would be necessary. However, many US power markets are a long way from such ideal efficiency. Outside of ISOs and RTOs, market participants rely on bilateral contracts that bundle multiple services together, and have limited liquid market opportunities to procure the range of services they need. Hybrid resources are therefore especially in demand in less efficient power systems. This is true internationally as well, where power markets are less developed than in US regions with RTOs. 21 Even in RTOs, inefficient scheduling and dispatch processes and penalties, capacity market crediting rules, rules setting duration requirements to provide ancillary services, and other requirements can limit the ability of resources, particularly variable wind and solar resources, to offer into markets. Until those requirements are updated, hybrid resources can ease participation of renewable resources in these markets.
• Self-optimization opportunities. Hybrid resources allow generation owners many more tools and strategies to optimize their resource in electric power markets compared to stand-alone generators. Many project owners have extremely sophisticated forecasting, marketing, and trading operations that they use to increase the value of the resources they own. Power markets are volatile, fast-moving, and complex. Very often small changes, such as shifting power output from one 5-minute period to another, can lead to much higher revenues. Efficient RTO markets strive to optimize dispatch for overall system efficiency, but plant owners possess superior knowledge about their resources and have a much greater incentive than anyone else to optimize their operations. This is particularly true for hybrids that incorporate energy-limited storage resources and stochastic wind and solar resources, as the optimal commitment and dispatch of those resources is best determined through probabilistic analysis that is not widely used by grid operators today. Providing the plant owner the option for self-control ensures they have the freedom to use their own forecasting and probabilistic analysis to optimize the commitment and dispatch of their own resources. This should result in more efficient commitment and dispatch of the entire system, with dispersed information aggregated and incentives coordinated through market prices. Indeed, a central tenet of markets is that decentralized decision-making can increase efficiency by aggregating information and incentivizing individual market participants to maximize their value—one reason why power markets should consider allowing this versatility from individual project owners.
• Congestion reduction. Significant generation deployment is occurring in areas with limited transmission delivery capacity. Most high-quality renewable resource areas are remote from population centers with limited transmission access, and very limited transmission planning proactively taking place to access those resources. The result is low locational energy prices and occasional curtailment in the areas of the renewable energy development. This is occurring mainly for wind energy, but increasingly for solar as well. Storage can help a renewable project owner avoid some of the low prices and curtailment if it is placed on the generation side (as opposed to the load side) of these transmission constraints. The most efficient place on the generation side of the constraint may be on-site with the generator in order to capture the benefits described above. Congestion is expected to grow in coming years as renewable deployment, particularly the current flurry of activity driven by the phase down of the aforementioned tax credits, outpaces transmission expansion to renewable resource areas.
Regulations have not kept pace with technology and markets…Devising a regulatory framework for hybrid resources…Near-term reform priorities by region…Fully integrated hybrid operation requires much broader changes…
Continuing progress toward wider market competition As power sector technology innovation continues to evolve rapidly in electricity markets, there are significant opportunities to improve electricity market rules, remove barriers to entry, and evolve industry practices to better enable RTO/ISOs to serve customers with reliable and low-cost energy. Hybrid resources present another significant new technology advancement, potentially comparable to the recent growth of wind, solar, and stand-alone storage. In the near-term, co-locating storage and generation can provide efficiencies with plant design and interconnection, as well as allow customers to gain the benefit of tax credits that cover the storage portion as well as the renewable portion of the 48 CAISO plants. FERC and each RTO and ISO have major roles to play in this endeavor. A few of the RTOs and ISOs have begun the complicated and important stakeholder discussions and analysis needed to clarify rules for hybrid resources and allow for some incremental improvements. FERC can extend the leadership it showed recently with Order No. 841 for energy storage and Order No. 845 for generator interconnection to address hybrid resources, which were not addressed in either rulemaking. There is some urgency to this initiative, since so many market participants are making business decisions without the clarity of market rules and regulatory policy they need.
Longer term, there are more fundamental issues of how to allow hybrids to participate in markets as fully-integrated single machines, which may require broader reforms in the level of control maintained by grid operators over individual plants on the system. With hybrid resources comprising a large share of newly interconnecting generation and with most of the new plants capable of operating as fully integrated machines, there is little time to wait for this analysis of broader reforms.
Grid operator discussion papers on hybrid resources
Three grid operators, PJM, MISO, and CAISO have held meetings and issued discussion papers on hybrid resources.
CAISO Hybrid Issues White Paper:49 Citing an increase in interest in hybrid resources by stakeholders, as well as an increase in hybrid interconnection requests and actual deployment, CAISO released a white paper in July of 2019 that seeks to address solutions that can more easily integrate these resources into the market. This paper touches on topics that explore issues related to interconnections, markets and operations, ancillary services, deliverability, and resource adequacy, as well as metering telemetry, and settlements. CAISO offers this paper as part of the preliminary stage of a stakeholder engagement plan, which ultimately aims to produce a proposal for enhanced or potentially new market rules and business processes that can more efficiently accommodate hybrid resources.
PJM’s FAQ: 50 Following the release of the original PJM electric storage resource participation model FAQ document in September of 2018, 51 the ISO later revised the FAQ to include a section on hybrid resources in February of 2019. The document includes links that summarize FERC Order 841 and lay out its directives, as well as describe the current state of the market as it relates to storage resources and how PJM plans to comply with the Order. With regard to hybrid storage in particular, the FAQ document topics range from the different types of hybrid resources that PJM considers to how they might participate in the capacity market, among other specifics.
MISO ESTF: 52 In May of 2019, the MISO ESTF submitted an issue form concerning a market participation model for generating facilities with multiple fuel sources. The ESTF notes that while FERC Orders 845 and 845-A allow for the interconnection of hybrid interconnection facilities, they find there to be issues and requirements that necessitate an evaluation of solutions that can increase market efficiency as the number of hybrid resources on the grid increases in the future. Specifically, the task force identifies issues related to reliability, planning and cost allocation, resource adequacy, and markets, and considers the issue surrounding hybrids to be a candidate for the MISO “Integrated Roadmap.”53…