How DERs can participate in Ancillary Markets
An up shot of an electricity pylon.
CAISO Ancillary Services Market and Participation of Distributed Energy Resources
Cities, counties, campuses, and utilities are increasingly considering distributed energy resources to meet their electricity needs. In fact, the growth of distributed energy resources (DERs) is accelerating nation-wide, driven by robust federal policies, decreasing technology costs, and increasing investments in clean energy. Nationally, DER capacity is expected to reach 387 gigawatts by 2025, with significant contributions from solar and battery storage.[1] California leads in DER adoption through aggressive regulatory support, cementing its role as a pioneer in sustainable energy solutions. As DER solutions proliferate, an important benefit to their development under the right conditions, can be participation in Ancillary Service markets. This paper offers a high-level overview of ancillary service markets, and how DER operators can participate.
The California Independent System Operator (CAISO) operates a sophisticated ancillary services market to maintain grid reliability and stability. This market includes various ancillary services such as Regulation Up and Regulation Down, which balance supply and demand in real-time to maintain grid frequency. Spinning Reserves are online resources that can respond within 10 minutes, Non-Spinning Reserves are offline resources that can also respond within 10 minutes, and Replacement Reserves are resources that can be brought online within 60 minutes to replace deployed reserves.
The CAISO ancillary services market functions through both a Day-Ahead Market (DAM) and a Real-Time Market (RTM). In the DAM, market participants submit bids to provide ancillary services for the next day, and CAISO selects the lowest-cost bids to meet forecasted requirements, setting schedules for service provision. In the RTM, CAISO continuously adjusts the deployment of ancillary services to respond to real-time conditions, with automated dispatch systems ensuring precise control.
Pricing for ancillary services in CAISO is determined through competitive bidding in both the DAM and RTM, utilizing Locational Marginal Pricing (LMP) to reflect the locational value of services based on grid conditions. Compensation includes availability payments for being ready to provide services and performance payments for actual service provision, particularly for regulation services. In 2021 and 2022, prices for Regulation Up services can range from $10 to $30 per MWh, Regulation Down services from $5 to $25 per MWh, and Spinning Reserves typically between $5 and $15 per MWh, though these can fluctuate based on market conditions and demand.[2]
Participation in the ancillary services market is limited to qualified resources that meet specific technical and performance criteria.
Scarcity pricing is another important aspect of the CAISO ancillary services market. During periods of high demand or supply shortages, scarcity pricing mechanisms can lead to significantly higher prices for ancillary services. This ensures that sufficient resources are available to maintain grid reliability, providing strong financial incentives for resources to be available during critical times.
Participation in the ancillary services market is limited to qualified resources that meet specific technical and performance criteria. To offer ancillary services, DER operators need to ensure their resources meet CAISO's technical requirements and participate in the market bidding process.
To offer ancillary services, DERs must first qualify by meeting CAISO's technical and performance standards, which may include the ability to respond quickly to grid signals, maintain certain reliability metrics, and interface effectively with CAISO's grid management systems. Once qualified, DER operators should engage in the market by submitting competitive bids in the DAM and RTM. They can participate through direct market participation or aggregation, where multiple DERs are pooled together to provide a substantial and reliable service offering.
DER operators must also ensure compliance with CAISO's monitoring and performance standards, as CAISO continuously evaluates the performance of ancillary service providers to maintain market integrity and grid reliability. Additionally, staying informed about market rules and changes, and leveraging advanced grid technologies and software for optimal bidding strategies, can enhance competitiveness. For example, generators and loads must establish and maintain telemetry with the ISO Energy Management System (EMS) in accordance with the specifications and standards provided in the GCP and the PLP.
Distribution-level generation and storage, such as rooftop solar panels paired with battery systems, can also participate in the ancillary services market. These resources can provide valuable services such as frequency regulation and voltage support. To do so, they must be equipped with smart inverters and advanced control systems that can communicate with CAISO's grid management system. Aggregators play a crucial role by combining the capacities of multiple small-scale DERs to create a significant and reliable resource that can bid into the market.[3]
Besides CAISO, other ISOs/RTOs across the United States also allow DERs to participate in their ancillary services markets. PJM Interconnection, NYISO, ERCOT, MISO, and ISO-NE each have their own market structures and rules. PJM uses a two-tiered pricing system for frequency regulation based on performance, while NYISO has a strong focus on grid flexibility through its DER Roadmap. ERCOT operates independently with unique market dynamics, and MISO and ISO-NE are progressively incorporating DERs through various initiatives.
These ancillary services markets play a crucial role in maintaining the stability and reliability of the electric grid. By facilitating the integration of DERs, it promotes economic efficiency and supports the incorporation of renewable energy, providing the necessary flexibility to manage variable generation. The participation of DERs not only aids in grid stability but also offers economic opportunities for DER operators, contributing to a more resilient and sustainable energy system.
REFERENCES
CAISO Market Operations. (n.d.). Retrieved from https://www.caiso.com/market/Pages/MarketProcesses.aspx
CAISO. 2022. 2022 Annual Report on Market Issues and Performance.
Deloitte Insights. Retrieved from https://www2.deloitte.com/us/en/insights/industry/power-and-utilities/der-grid-modernization.html
DOE. Retrieved from https://www.energy.gov/eere/analysis/articles/market-and-policy-barriers-demand-response-providing-ancillary-services
Electrical Contractor Magazine. Retrieved from www.ecmag.com
Joule. Retrieved from: https://www.joulecase.com
Scarcity Pricing. (n.d.). Retrieved from https://www.caiso.com/Documents/ScarcityPricingOverview.pdf
Wood Mackenzie. Retrieved from https://www.woodmac.com
Wood Mackenzie. Retrieved from: https://www.woodmac.com/news/editorial/der-growth-united-states/
Wood Mackenzie. 2020. The next five years will see massive, distributed energy resource growth. Available at https://www.woodmac.com/news/editorial/der-growth-united-states/#:~:text=The%20report%20also%20finds%20that,a%20new%20peak%20in%202025.
CAISO. 2022. 2022 Annual Report on Market Issues and Performance.
FOOTNOTES
[1] Wood Mackenzie. 2020. The next five years will see massive, distributed energy resource growth.
Available at https://www.woodmac.com/news/editorial/der-growth-united-states/#:~:text=The%20report%20also%20finds%20that,a%20new%20peak%20in%202025.
[2] CAISO. 2022. 2022 Annual Report on Market Issues and Performance.
[3] Several aggregators are particularly active in the CAISO ancillary services market. Tesla uses its Virtual Power Plant (VPP) initiatives, aggregating Powerwall systems to provide services like frequency regulation. Enel X offers demand response and energy storage solutions, participating in CAISO programs for grid services. Stem, Inc. is known for AI-driven energy storage, providing frequency regulation and spinning reserves. Sunrun aggregates rooftop solar paired with battery storage, participating in demand response and energy management. Sonnen aggregates residential battery systems through VPPs to provide grid services in CAISO. These aggregators play a crucial role in maintaining grid stability and integrating renewable energy resources in California.
