November 11, 2020

Federal Order Boosts Rooftop Solar

FERC Allows Aggregated Distributed Energy Resources to Bid into Wholesale Electricity Markets

By Jordan Graham, Policy Intern & Nikhil Vijaykar, Staff Attorney

Last month, the Federal Energy Regulatory Commission (FERC) issued a crucial and long-awaited order that is good news for renewable energy. Rooftop solar, battery storage, and other new technologies known as distributed energy resources (DERs) are growing across the country. But they have not been allowed to compete in energy markets originally designed for centralized facilities like coal-fired power plants. This new FERC order will open the door for DERs to team up together, or aggregate, to compete in wholesale electricity markets. FERC Order 2222, in Docket No. RM18-9-000, passed 2-1, with Commissioner (now Chair) James Danly dissenting.

Leveling the Playing Field

Order 2222 is the latest addition to a line of FERC decisions that are transforming wholesale electricity markets by removing barriers to the participation of non-traditional resources. Wholesale markets, originally designed for large gas- and coal-fired, transmission-connected power plants, tend to have certain qualification and performance requirements that make it impractical for small-scale, distributed energy resources to compete. Recognizing this inefficiency, and seeking to level the playing field, FERC Order 745 – issued in 2011 and upheld by the Supreme Court in 2016 – opened up wholesale markets to demand response (controlled changes in electricity demand in response to grid conditions).

Two years later, FERC Order 841 – upheld by the D.C. Circuit this July – directed similar market changes to support participation by energy storage resources (such as batteries) located on the distribution grid. The scope of Order 2222 is broader. It goes beyond specific distributed technologies and enables diverse portfolios of distributed resources to participate as bundled market offerings. Specifically, Order 2222 directs Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) to remove market barriers to aggregated DER, which, as several commenters noted, is a key step towards unlocking the potential of those resources.

The Value of Distributed Energy Resources

DERs are capable of supplying a raft of services—including electricity, capacity, demand reduction, and load-shaping or ancillary grid services—much like traditional power plants. DER aggregators use emerging technology to remotely coordinate and control the functionality of small-scale solar generation; energy storage; energy-efficiency and demand response (DR) programs; and even electric vehicles (EVs) to create “virtual power plants” (VPPs).

Those VPPs can decrease carbon emissions, increase grid flexibility, and provide a variety of grid services – all of which stands to benefit consumers and the environment. Aggregated DER can also provide benefits to distribution grids (for which markets do not currently exist) by reducing the amount of energy lost across transmission lines, adding to local resiliency, and shoring up grid reliability.

Virtual Power Plants in Action

Utilities, recognizing the multi-faceted potential of aggregated DER, have started to experiment with implementing VPPs. Earlier this year, Southern California Edison, a California utility that serves 15 million people, partnered with Sunrun to pilot a 300-home, solar-plus-storage VPP. They hope to demonstrate the capability of aggregated customer-sited DERs to provide peaking capacity and load shifting, and mitigate wildfire-induced power outages. Closer to home, Michigan utility Consumers Energy is collaborating with Sunverge to develop a pilot program that will aggregate residential batteries to benefit the grid and its customers.

Today, a small number of DER aggregators participate in wholesale markets in New England and California, where regional market operators have voluntarily allowed aggregated DERs to bid into certain markets. Further, DERs generally participate in wholesale markets under constructs created for demand response, which limits the value DER can provide.

How will this new FERC Order help?

Order No. 2222 requires RTOs and ISOs to revise their tariffs to allow for DER aggregators to register as participants in wholesale markets, and to create participation models that accommodate the unique physical and operational characteristics of DER aggregations. Importantly, FERC also ruled that state utility regulators will not be allowed to prohibit DERs or DER aggregators within their jurisdictions from participating in wholesale markets, because doing so “would interfere with the Commission’s statutory obligation to ensure that wholesale electricity markets produce just and reasonable rates.”

Order 2222 signals that DERs are not only here to stay, but also have the potential to be used in increasingly creative ways.

This decision is timely. The U.S. has experienced a rapid increase in customer- and third-party-owned DERs in recent years, and growth projections indicate that aggregated DERs could soon be a major contributor to electricity markets. By 2025, Wood Mackenzie projects U.S. DER capacity will grow to 387 GW – more than three times the nation’s current wind energy capacity. While that increase accounts for growth in small-scale solar, storage, EVs, and DR, it illustrates the immense potential that diverse DERs could soon bring to wholesale markets

Order 2222 signals that DERs are not only here to stay, but also have the potential to be used in increasingly creative ways. It also creates new considerations for distribution utilities and their regulators, as they evaluate the best way to integrate DERs into traditional distribution planning processes and compensate DERs fairly for the services they provide.

What’s next for implementation?

Order 2222 is the culmination of several years of work at FERC. But before aggregated DERs can participate effectively in wholesale markets, additional tariffs and rules are required. Last month’s Order sets in motion the development of those tariffs and rules. Once Order 2222 is published in the Federal Register, RTOs/ISOs are required to develop tariff changes needed to implement the requirements of Order 2222 (and must file those changes within 270 days of the publication).

In parallel, state public utility regulators may develop rules that avoid the market distortions that could occur if DERs are compensated for the same services by both the wholesale markets and retail utility programs, update interconnection rules, and develop processes to oversee utility review of DER participation in aggregations. Much work remains to be done before aggregated DERs will become a major competitor in wholesale markets, displacing centralized, carbon-intensive forms of generation, but Order 2222 creates a clearer pathway toward that future.

Further Reading – Additional Key Insights from Order 2222:

• DER Aggregators: To the extent a DER aggregator makes sales of electric energy into ISO/RTO markets, it will be considered a public utility subject to FERC jurisdiction. That means such aggregators must fulfill certain responsibilities set forth in the Federal Power Act and in FERC’s rules and regulations. However, to the extent that an aggregator aggregates only demand resources, or aggregates only customers in a net metering program that are not net sellers, that aggregator would not become a public utility.
• Definitions of DER: Whereas the Notice of Proposed Rulemaking defined DER as a source or sink of power, the final Order includes demand response and energy efficiency within the definition of DER. The definition of DER in the final Order also leaves room for future technologies that might be aggregated to sell energy, capacity, or ancillary services.
• Demand Response: The participation of demand response in DER aggregations is subject to opt-out and opt-in requirements set in Order Nos. 719 and 719-A. If the relevant electric retail regulatory authority where a demand response resource is located has either chosen to opt out or has not opted in, then the demand response resource may not participate in a DER aggregation.
• Participation Models: The final Order requires each RTO/ISO to establish DER aggregators as a type of market participants, and to allow DER aggregators to register DER aggregations under one or more participation models. But the final Order gives RTOs/ISOs flexibility to determine how best to revise participation models in their market rules in order to facilitate the participation of DER aggregations.
• Double Counting of Services: The Notice of Proposed Rulemaking prohibited DER receiving compensation from a retail program from participating in RTO/ISO markets as part of a DER aggregation. The final Order finds that prohibition overly broad, and instead, permits RTOs/ISOs to place narrowly designed restrictions on market participation if necessary to prevent double counting of services.
• Role of Distribution Utilities: The final Order directs RTOs/ISOs to coordinate with distribution utilities to develop a review process that includes criteria by which the utilities would determine whether (1) each proposed DER is capable of participation in a DER aggregation, and (2) the participation of each DER in an aggregation will not pose significant risks to the reliable and safe operation of the distribution system. RTOs/ISOs must demonstrate that the proposed review process is transparent, provides specific review criteria, and provides adequate and reasonable time for utility review.
• Small-Utility Exemption: Final Order establishes an “opt-in” mechanism for small utilities (utilities whose total electric output for the preceding fiscal year did not exceed 4 million MWh). Those utilities may not participate in DER aggregations unless the relevant retail regulator affirmatively allows such customers to participate in DER aggregations.
• Role of Retail Regulators: Retail regulators (ie, public utility commissions) retain jurisdiction over the interconnection of individual DERs, including DERs that seek to participate in RTO/ISO markets exclusively as part of an aggregation. Further, state retail regulators will be responsible for developing local rules to ensure distribution system safety and reliability, data sharing, metering and telemetry requirements, overseeing utility review of DER participation in aggregations and resolving disputes between DER aggregators and utilities over issues such as access to DER data.