Has the Time Come for Electric Energy Storage?

February 2, 2018

For years, observers of electric markets have predicted, or at least hoped for, a way to store energy on a large scale, making it easier to maintain a reliable electric network and integrate intermittent generation resources, such as solar and wind facilities, not to mention ease market volatility. However, a solution remained stubbornly elusive, requiring the amount of electric generation on any interconnected network to closely match the amount of consumption at all times.

That is, until now. Improvements in energy storage technology and changes in energy markets and the regulatory environment look to put large-scale electric storage capacity soon within reach.

Prospects for Electric Energy Storage Growth

Of course, energy storage is not a new concept. Some electric markets have long featured pumped storage hydroelectric projects, which use electrically driven pumps to transfer water up to a reservoir at a higher elevation for later use to generate electric energy. But the limited availability of sites for these projects and the high cost of alternative technologies have severely hampered storage capacity at a greater scale. That’s changing with improved technologies for electric battery storage, including mass-produced lithium ion batteries.1 A recent study by GTM Research and the Energy Storage Association forecasts that annual deployments of new storage projects could grow from 295 MW of capacity in 2017 to 2,535 MW of capacity in 2022.2 The projected value of new storage deployments in 2022 alone is over $3 billion.3 While the vast majority of storage projects currently are utility-owned, and while utility-owned deployments are expected to grow at a fast pace, the largest area for future growth is behind-the-meter storage projects owned by residential and commercial/industrial electric customers.4

Regulatory and Market Issues Affecting Electric Energy Storage

Addressing technological and cost barriers is only one part of the equation. Energy regulators and operators of wholesale electric energy markets will also need to change their rules to better incorporate storage into their markets under various models for revenue recovery. Under one model, utilities can incorporate storage projects into their transmission networks and recover their costs (plus a rate of return) through their regulated rates. Alternative models include ownership of storage projects by retail customers or by providers of storage services (similar to independent power producers). To encourage development of storage owned by non-utilities, the rules governing competitive electric markets must enable storage owners to receive revenue for the services they can provide. Possible sources of revenue include:

  • Capitalizing on arbitrage opportunities in electric markets by charging the battery (or other storage device) when prices are low and discharging when prices are high. Consumers with behind-the-meter storage projects can efficiently time their withdrawals from (or injections into) the grid, taking into account any variations in electric prices and managing their peak level of consumption to minimize their electric bills.
  • Receiving capacity payments for the reliability benefits provided by the storage project’s capability to discharge energy (which assists utilities in meeting regulatory requirements to have sufficient generation capacity to serve peak demand plus a reserve margin).
  • Receiving payments for providing certain ancillary services needed to maintain reliable electric networks (for example, for quickly and flexibly injecting or withdrawing energy into or from the network to keep generation in balance with consumption, to maintain the voltage on electric networks, and to restart a network after a blackout).

Wholesale electric markets generally have been designed to support participation by entities that generate and sell electric energy, entities that purchase electric energy for sale to retail consumers (including traditional utilities as well as competitive electric suppliers in states with retail electric choice programs), wholesale energy marketers, and entities that provide electric transmission service. However, electric storage can pose challenges for these markets because it acts at times like a generator and at other times acts like a customer, and it also may serve a function more like transmission or may provide capacity or various ancillary services. The current market designs generally do not provide the proper incentives for development of storage projects.

The Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking in November 2016, which would require the operators of competitive wholesale markets in many regions of the US to revise their market rules to facilitate the participation of storage projects (including small, distributed resources that are aggregated for purposes of market participation) in these wholesale markets.5 FERC received over 100 comments from interested parties in early 2017, but has not yet issued a final rule. Separately, FERC has issued two rulemakings on fast-start resources that can provide energy regulation services, which can include storage, and has issued a number of orders addressing specific storage projects.6 Further action by FERC and by the operators of competitive energy markets would help to provide certainty to storage developers seeking to participate in those markets and would facilitate financing.

State Initiatives Affecting Electric Energy Storage

While FERC considers the issues, state regulators and regional energy market operators are free to continue making improvements to their market rules to better incorporate storage (subject to filing any tariff changes with FERC). In fact, several states have made significant strides in promoting the development of electric storage. For example, the New York Independent System Operator is continuing its efforts to create a new model for participation of storage resources in its electric markets, optimize the deployment of storage resources, and explore aggregations of storage resources with intermittent resources.7 Likewise, California, Hawaii, Massachusetts, Oregon, and Puerto Rico have set mandates for or are in the process of incorporating storage into their electric grids.

Potential Ownership and Financing Structures

As markets for energy storage projects grow and evolve, sponsors and investors will need to adapt the structures currently used to develop, own, and finance these projects. Some of the ownership and financing structures that may be used include the following:

  • Utility ownership. Utilities may seek to incorporate storage into their transmission or distribution systems (or, for vertically integrated utilities, into their generation portfolios) to meet mandatory storage targets or otherwise to reduce costs or support reliability of their systems. 
  • Independent storage owner with an offtake contract. Non-utility sponsors may develop stand-alone storage projects with contracts to sell their services to utilities (including utilities subject to mandatory storage targets). 
  • Independent transmission owner. It may be possible to develop some storage projects as independently owned transmission projects that would sell their services at cost-based or negotiated rates. 
  • Independent merchant owner. Another approach would be to construct a project to participate in energy, capacity, and ancillary service markets without a contract to sell services to a utility. These projects likely would be difficult to finance, however. It is possible that energy trading entities, including units of investment banks, may develop hedging products that would provide firm revenues to these projects and facilitate financing in a similar manner to an independently owned storage project with an offtake contract.
  • Combination with renewable energy generation. Combining storage with a renewable energy generation project may enable the sponsor to finance the storage project in the same manner as financing of the overall project. As discussed below, this may enable the storage project to qualify for the federal investment tax credit (particularly if combined with a solar project) and to obtain tax equity financing together with the financing for the overall renewable energy generation project. 
  • Behind the meter, owned by single entity (can be aggregated among multiple sites). Another approach is to own storage projects in a similar manner as distributed energy generation projects (such as portfolios of rooftop solar or fuel cell projects). In this case, the sponsor would create an entity to own a specific set of projects and would lease the projects to the customers or sell the storage services to the customers under long-term contracts.

Tax Benefits for Electric Energy Storage

Tax incentives are another way to encourage energy storages systems, including the investment tax credit (ITC) and accelerated depreciation deductions (including bonus depreciation unless a taxpayer elects to apply standard Modified Accelerated Cost Recovery System [MACRS] depreciation). If at least 75% of the energy stored by the system is supplied by an ITC-eligible project (e.g., a qualifying solar electric generation project), then the storage system generally is eligible for the ITC (subject to partial reduction of the ITC if the stored energy is not exclusively supplied by an ITC-eligible project). In addition, the system is eligible for bonus depreciation or, at the election of the taxpayer, standard MACRS depreciation. The MACRS class life of an energy storage system is 5-years or 7-years, depending on the percentage of total stored energy supplied by qualifying renewable sources. All of these benefits are subject to certain conditions and limitations.


The dream of widespread integration of electric storage capacity into the US electric system may be close to becoming a reality, particularly in several states that have adopted ambitious targets for adding storage capacity. For electric storage to follow in the footsteps of solar technology and become “mainstream,” governments at the federal and state levels and operators of regional electric markets will need to clarify the rules to ensure that owners of storage projects have the opportunity to receive revenue commensurate with the value of services provided by their projects. Also, sponsors of storage projects will need to work together with investors and advisors to develop ownership and financing structures that will attract capital to these projects.

1 For a good summary of electric battery storage technologies and opportunities, see Kevin B. Jones, et al., The Electric Battery: Charging Forward to a Low-Carbon Future (2017). Other storage technologies that have been used or may be used in the future include flywheels, compressed air energy storage, rail energy storage, and various forms of electrochemical, electromagnetic, and thermal energy storage.

2 US Energy Storage Monitor: Q4 2017 Executive Summary, Energy Storage Association and GTM Research (December 2017) (accessed here [last accessed on Jan. 10, 2018]).

3 Id.

4 Id. “Behind-the-meter” projects are those where the storage capacity is located on the customer side of the electric meter (as opposed to projects located on the utility side of the electric meter).

5 Electric Storage Participation in Markets Operated by Regional Transmission Organizations and Independent System Operators, 157 FERC ¶ 61,121 (2016).

6 See cases cited at id., P 6 and notes 15 and 16.

7 “The State of Storage; Energy Resources in New York’s Wholesale Electricity Markets,” New York Independent System Operator, at 31-35 (Dec. 2017).

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Arthur V. Hazlitt, an O’Melveny partner licensed to practice law in New York, Hugh E. Hilliard, an O’Melveny senior counsel licensed to practice law in the District of Columbia and Maryland, and Alexander Roberts, an O’Melveny counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York's Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, Phone:+1 212 326 2000. © 2018 O'Melveny & Myers LLP. All Rights Reserved.