Context

As grid operators grapple with managing the rapid growth of energy storage, the rules of the road for how storage assets operate in wholesale markets are being written and contested in real time. With ERCOT’s NPRR1186, the Texas grid operator is proposing to require battery operators to reserve a full hour of energy (State-of-Charge, or SOC) for awarded ancillary service capacity heading into the operating hour.

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For the vast majority of hourly intervals, actual deployments of ancillary services are in the 0-30% range. By requiring 100% of awarded capacity to be backed by a reserved SOC, batteries cannot offer as much ancillary service capacity throughout the day. As such, many storage operators argue the NPRR requirement is overly punitive and takes operational control out of their hands. In addition, with tight reserve margins, batteries are increasingly being leaned upon by ERCOT to meet reliability needs and this may adversely impact their ability to support that.

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Overview of NPRR1186

ERCOT’s stated goal with this NPRR is to improve awareness, accounting, and monitoring of the SOC for energy storage resources (ESRs). However, as drafted, this revision to ERCOT’s Nodal Protocol goes beyond that and introduces new operating constraints on ESRs as well as penalties for non-compliance.¹

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For example, if an ESR has a 10 MW Responsive Reserve Service (RRS) award, it is required to have at least 10 MWh of energy stored in the battery at the start of the operating hour. Non-compliance can lead to fines of up to $25k for each five-minute interval in which the ESR does not meet the SOC threshold.

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Despite unanimous approval by the ERCOT Board of Directors, in its November 30, 2023 meeting, the Public Utility Commission of Texas (PUCT) delayed its vote to finalize the new rules citing “...it would be discriminatory to adopt burdensome operational requirements on storage devices when no such requirements are placed upon thermal plants.” The PUCT vote may be held at the next open meeting on January 18, 2024.

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While ERCOT, PUCT, and stakeholders continue to work through NPRR1186, this blog dives into how the revision (as currently drafted) would impact ESRs. 

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Current Operating Approach vs. under NPRR1186

Today, most revenue from ESRs in the ERCOT market comes from upward ancillary service products (ECRS, Regulation Up, and RRS). Storage operators often commit multiple consecutive hours of upward ancillary service awards to maximize revenue opportunities. 

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This approach relies on the expectation that there will be no or low levels of ancillary service deployments² (e.g. ERCOT calling on the resource to provide the service) and, with that, minimal risk for non-performance and exposure to charging at high Real-Time energy rates. 

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NPRR1186 makes the approach many storage operators take today riskier and, at times, non-compliant. In particular, operators will face:  

1. More complex SOC management - Day-Ahead offers for ancillary services will need to better account for minimum SOC requirements to avoid over-exposure. 
2. Greater real-time charging exposure - If deployed more than expected earlier in the day, operators may be forced to charge ESRs at the real-time energy price above and beyond what would normally be needed. This could significantly impact the net revenue achieved that day in certain circumstances.
3. Increased risk/financial impact from high ancillary service deployments  - Operators will need to develop an accurate view of ancillary service deployments by product and hour and incorporate that into bidding strategies and real-time SOC management. 

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Case Study

To help inform the impact NPRR1186 could have on the revenue potential for storage assets in ERCOT, we simulated the operating and revenue profile for an ESR under the following strategies:

1. Current rules and typical deployment rates for each ancillary service product each day.
2. A strategy that incorporates NPRR1186 and assumes typical deployment rates for each ancillary service product each day. On days with higher-than-normal ancillary service deployments, there would be some risk of NPRR1186 non-compliance and/or exposure to unplanned Real-Time Energy charging.
3. A strategy that incorporates NPRR1186 and assumes potential high deployment rates (up to the full SOC reservation) for each ancillary service product each day. Taking this strategy would remove any risk of NPRR1186 non-compliance and exposure to unplanned Real-Time Energy charging.
4. An energy-only strategy that co-optimizes across the Day-Ahead and Real-Time energy markets.

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For each of the strategies above, we assumed:

• 10 MW ESR with 1 and 2-hour duration
• Settling at HB Houston using 2023 pricing data
• Under a perfect foresight approach
• Limited to 1 cycle per day

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Bidding Impacts (Example Day for 1 Hour Duration ESR)

The following charts compare an example day across strategies 1, 2, and 3 listed above. The top part of the graphic details ancillary service offers (in kW) by product. The middle graphic details actual prices (in $/MWh) across each energy and ancillary services product. The bottom graphic details the state of energy (in kWh) as well as charge and discharge actions (in kWh). 

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Current rules and expectation of normal ancillary service deployments

• Start day with near-full SOC.
• Bid varying levels of RRS throughout the day. 
• Pursue energy arbitrage midday targeting sales during high DA Energy price intervals (HB14 and HB19) and charging at low RT Energy price intervals (HB13 and HB15).
• For HB19, combine RT Energy Charge (CLR), Reg Up (CLR), with RRS (Gen). 

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NPRR1186 constraint applied and expectation of normal ancillary service deployments

• Very similar bid/dispatch plan as the current rules strategy. 
• However, given minimum SOC considerations, RRS offers during the late afternoon/evening are reduced.

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Post NPRR1186 constraint applied and expectation of high ancillary deployments

• Prioritize energy arbitrage to take advantage of the ~$50/MWh spread between the high and low-priced hours.
• For HB19, pair RT Energy charge (CLR) with Reg Up (Gen) actions to take advantage of the highest priced ancillary service interval and manage the min SOC constraint through the negative basepoint.

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Revenue Impacts (2023 Reference Year)

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Final thoughts:

1. Shorter duration ESRs will be more impacted by NPR1186 (on a % revenue basis). 
2. All else equal, the opportunity cost between ancillary services and energy market participation is reduced, so we expect an increased share of revenue from energy arbitrage. 
3. More advanced optimization strategies, factoring in ancillary services deployment uncertainty and mitigating NPR1186 compliance risk can help close the revenue gap.
4. Ultimately, the operator bears responsibility for factoring the minimum SOC requirement  into daily bid plans and managing ancillary service deployment uncertainty. For example, under a normal day (with low deployment rates for ECRS and RRS), an ESR with a 2-hour duration could continue to offer extended periods of consecutive ancillary service obligations without bumping into SOC compliance issues and/or be exposed to unexpected/significant real-time charging costs. However, if sustained deployments are expected, the operator would need to decide when to dial back ancillary service offers.

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If looking to evaluate how NPRR1186 would impact your operating or under development storage assets, reach out.

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Footnotes:

1. ERCOT introduced similar SOC constraints as part of a revision to its Business Practice Manual (BPM) in December 2022. 
2. Deployment rates (sometimes called attenuation or utilization rates) represent how much, during a given operating interval, the market operator (ERCOT) calls on the resource to provide the ancillary service. For a given interval, this can range from no deployments (or 0%) to being called the entire interval (or 100%). Deployment rates vary by market product, operating hour, and season and are not known at the time of submitting ancillary service offers.