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FERC Opens Organized Markets to Distributed Energy Resources | Orrick, Herrington & Sutcliffe LLP

At its September 17, 2020, meeting, the Federal Energy Regulatory Commission (“FERC”) issued a groundbreaking order that will enable aggregators of distributed energy resources (“DERs”) located on utility distribution systems or behind a customer meter, including small energy storage resources, to participate in organized wholesale electricity markets. Building upon FERC’s reforms in Order No. 841, which opened wholesale markets to energy storage resources, Order No. 2222 directs regional transmission organizations and independent system operators (“RTOs”) to revise their wholesale market tariffs to develop participation models that will permit aggregators of DERs to sell all energy, capacity and ancillary services that they are technically capable of providing. RTOs will have the flexibility to determine how best to achieve these goals, but they must submit proposed tariff revisions within 270 days of the date of publication of Order No. 2222 in the Federal Register.

Flexible Participation Models Accommodate New Technologies

Recognizing the rapid advancement of technologies capable of providing value in wholesale electric markets, FERC chose to define DERs broadly as “any resource located on the distribution system, any subsystem thereof or behind a customer meter.” Although FERC’s DER definition is intentionally resource-neutral, FERC clarified that such resources may include energy storage resources, distributed generation, demand response, energy efficiency, thermal storage and electric vehicles. In addition, FERC defined a “DER aggregator” as an entity that aggregates one or more DERs to participate in any wholesale energy, capacity or ancillary service market administered by an RTO.

To preserve flexibility for the integration of new resource types and technologies, RTOs must not prohibit any type of technology from participating in DER aggregations. FERC also stated that it supports DER aggregators’ grouping of different types of technologies within a single portfolio. In response to comments, FERC determined that mixed technology portfolios could prove useful where individual resource types or technologies are unable to meet qualification or performance requirements on their own, but may be able to satisfy such requirements when paired with other DER types within an aggregated portfolio. For example, pairing energy storage with distributed generation within an aggregated portfolio can expand the services that such resources can provide.

RTOs will have flexibility to determine minimum size requirements for an aggregation of DERs, but the minimum size must not exceed 100 kW, which is a commonly used resource size. For example, in Order No. 841, FERC directed RTOs to establish a minimum size requirement for energy storage resources that did not exceed 100 kW to participate in organized wholesale markets. In the instant proceeding, FERC declined to establish a minimum capacity requirement for the individual DERs participating in an aggregation, but RTOs will have flexibility to establish maximum capacity requirements for any individual DER within an aggregation.

Because DERs are located on electric distribution systems or behind a customer meter, they are uniquely positioned to participate in both retail and wholesale programs. To guard against double recovery from retail and wholesale markets, FERC initially proposed that DERs participating in one or more retail compensation programs or another wholesale market program would not be eligible to participate in a DER aggregation. However, in response to comments, FERC chose to allow DERs to participate in both retail and wholesale markets. In addition, FERC directed RTOs to revise their tariffs to include any appropriate restrictions on such participation to avoid double counting the services that DERs provide in wholesale markets.

Regarding interconnection, FERC held that it will not prescribe or require standard procedures or agreements for DER interconnections to distribution facilities where the DEF will participate in RTO markets exclusively as part of a DER aggregation. Rather, interconnection arrangements by DERs will continue to be subject to regulation by state and local authorities. Also, while FERC confirmed that aggregators that sell power into organized wholesale markets will be subject to FERC regulation as “public utilities” (presumably as market-based rate sellers with lightened regulation), FERC stated that it would not subject individual DERs to Federal Power Act regulation even though FERC traditionally has subjected all sellers of power for resale on the interstate grid to such regulation.

Under Order No. 2222, RTOs must allow aggregators to include within their DER portfolios resources that are not necessarily physically proximate to each other. FERC adopted its proposal in the proposed rule to require RTOs to establish the broadest technically feasible geographic requirements for DERs to participate in an aggregation. In addition, FERC rejected proposals to limit aggregation to a single node, concluding that the cost savings of a single node approach are outweighed by the benefits of greater market participation and optimizing the sizing of DER portfolios that can be obtained by multi-node aggregations.

A Looming Jurisdictional Conflict

It has been nearly four years since FERC first proposed to address DER participation in wholesale markets. In 2016, FERC issued a notice of proposed rulemaking that proposed to require RTOs to allow both energy storage resources and DERs to participate in wholesale markets. However, when FERC issued Order No. 841 in 2018 – directing RTOs to revise their tariffs to facilitate the integration of energy storage resources in wholesale markets – FERC decided that it needed more information before moving forward with its DER proposals. Accordingly, FERC opened a new proceeding, held technical conferences and continued to make incremental progress towards developing its DER rule.

In the interim, FERC has successfully defended its jurisdiction to direct RTOs to allow participation from resources located on utility distribution systems. Under the Federal Power Act, FERC has jurisdiction over the interstate transmission grid, but its jurisdiction does not extend to facilities “used for local distribution.” States, rather than FERC, generally have authority over distribution systems used to deliver electricity to end users. However, FERC has asserted jurisdiction over wholesale power sales and transmission from generation interconnected at the distribution level. In response to FERC’s directive in Order No. 841 to allow energy storage resources located on distribution systems to participate in wholesale markets, the National Association of Regulatory Utility Commissions appealed FERC’s order, stating that FERC lacked jurisdiction over the distribution system. However, on May 5, 2020, the Court of Appeals for the D.C. Circuit upheld FERC’s jurisdiction to allow distribution level resources to participate in wholesale markets, thereby paving the way for FERC to issue Order No. 2222.

To mitigate further jurisdictional conflict, FERC was careful not to impede upon states’ jurisdiction over the interconnection and operation of DERs on the distribution system. As noted above, DERs will continue to interconnect to distribution systems pursuant to tariffs adopted by retail electric utilities, which are subject to oversight by state public utility commissions (“PUCs”). In addition, state PUCs will continue to have exclusive jurisdiction over the retail operations of DERs. Accordingly, if any retail electric utilities, state utilities, or their trade groups challenge Order No. 2222, FERC could point to the D.C. Circuit’s decision on Order No. 841 as precedent that FERC can direct the participation of distribution level resources in wholesale markets. In addition, Order No. 2222 requires RTOs not to accept bids from aggregation of resources located on “small” utilities whose electric output in the preceding fiscal year was 4 million megawatt-hours or less, unless the state commission with jurisdiction over the utility allows participation by the aggregator.

It could be a few years before RTOs will be ready to facilitate participation of DER aggregators in wholesale markets, but Order No. 2222 lays a framework for how RTOs should design their participation models. The more challenging task could fall on DER aggregators and their investors, who will be required to navigate state public utility regulations, local utility tariffs, FERC regulations and wholesale market tariffs and rules to deliver energy, capacity and ancillary services from their DERs to the centralized RTO markets. Potential DER aggregators should start preparing now, including by building relationships with local utilities and state PUCs in target jurisdictions and by participating in the upcoming RTO compliance proceedings.

A copy of Order No. 2222 can be accessed by clicking here.

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