Engineer-Poet provided links to AC Propulsion White Papers on the idea of using a vehicle's battery capacity to perform ancillary services. Alas, it appears I have not yet had an original idea in the field of entropy production.
The top paper is the one to read, A Vehicle-to-Grid Demonstration Project: Grid Regulation Ancillary Service with a Battery Electric Vehicle. It seems they actually put together an electric vehicle and simulated it operating as a voltage regulator. The paper is remarkable numbers free for a real-world system. Since they are talking about an all-electric vehicle, the electricity numbers are way higher than what we need for a plug-in hybrid. In particular, they need special, high power throughput connections to handle the load. I think most people will agree, the all-electric is dead in the water, since it will never be as flexible as a hybrid car.
I did find some issues that I take umbrage with. For one, following the end of driving in the morning, they recharge immediately to about 80 % capacity. I think this is largely impossible from a utility point of view (and a huge strike against the morbid electric concept). The peaking power necessary to simultaneously recharge millions of vehicles at the end of rush hour would be too expensive to imagine. For the plug-in hybrid, it is much more reasonable to trickle recharge slowly over several hours. After all, if you decide to take the car out for lunch, you aren't going to be in danger of running out of juice. You can also drive through more than one state/province per day.
The AC Propulsion paper does explicitly state that the value majority of services are provided while the car is connected at home, relative to the workplace. In a truly deregulated market, power would be cheapest to buy during the dead of night. I.e. the plug-in hybrid can peak shave.
The biggest philosophical difference between my proposal and AC Propulsion's is that they assume their electric can act as a sink and a source. I think the hybrid should be a pure sink. My idea is flat out simpler (and hence better). When power can only travel in one direction you avoid issues like net metering and up-voltage transforming. This does not impact the ability of thousands of plug-ins to do up and down regulation. Let me explain.
When recharging the plug-in, you are trickle charging it at some slow rate. If you need to regulate up, you stop the charging process. If you need to regulate down, you increase the rate of charging. The power flowing into the vehicle can be between zero and the maximum rate. Normally it will be at some median value to minimize the peak power demand on the utility and maximize the value of regulation service that it can provide.
The sort of flexible, predictable demand management provided by the grid-integrated plug-in hybrid is more valuable than supply side ancillary services. Imagine the ocean floor, with all its ridges and shelves. Now imagine the plug-in hybrid demand is the water. Notice how everything has become oh so much flatter. This metaphor essentially explains how flexible demand can fill in all the vibrations in the supply and demand for electrical power.
One concept they do introduce that is helpful is the idea of an aggregator in a deregulated market. The aggregator is a business entity that contracts out your vehicle's ancillary capacity and sells the aggregate, decentralized services of thousands of vehicles on the ancillary market. The aggregator basically acts as the middle-man, insulating the consumer from the complexities of the power market.
Imagine this scenario as an aggregator: an organization leases out the ground levels of all the parkades around your office. All the parking spaces on the ground floor are labeled in yellow 'plug-in ONLY'. You hop out of your car, plug it into the provided inverter, and go grab a coffee with the time you've saved hunting for a parking space. When it's time to go home, you unplug your car and drive out, laughing at the line-up of gasoline powered cars waiting to pay the attendant. The aggregator basically barters you a ground-level parking space. In return, you let them use the batteries on your car to regulate the grid. It is a fine example of creative marketing -- you get quality of life back by buying a hybrid. That's worth more than a few pennies on the kilowatt-hour.
In a deregulated market the aggregator might be able to function without much extra regulatory support. However, most power markets in North America are not deregulated, and legislation would still be needed in those areas.