Will FERC’s Latest Order Open the Door for Distributed Resources?

It is time for the U.S. electric grid to start thinking small. The grid of the future will be built around distributed energy resources (DERs) such as rooftop solar, neighborhood battery storage, and advanced energy efficiency and smart appliances, capable of responding to fluctuations in electricity demand to optimize energy use and supply. DERs encompass a wide variety of technologies – they can be small-scale energy generators, smart appliances, renewable and non-renewable generating resources. In aggregation, DERs contribute to a more distributed, decentralized, and responsive grid. They also reduce demand for electricity from fossil fuel plants, avoiding the need for costly grid infrastructure like centralized power plants that spew greenhouse gases and air pollutants into the communities they are sited in. Thankfully, the grid is one step closer to this vision of a clean, distributed future thanks to the recent Federal Energy Regulatory Commission (FERC) Order 2222.

On September 17,  FERC, the federal body that oversees the regulation of the U.S. electric markets, will require regional electric regulatory bodies to come up with market rules to allow DERs to compete and be compensated for services provided in the wholesale electric markets. This will level the playing field for DERs, while providing owners of DERs, such as homeowners, with revenue for services delivered to the grid.

The U.S. grid is often called the most complicated machine in the world. Comprised of large fossil-fuel and nuclear power plants, renewable generators like wind, solar, and hydropower; poles, wires, sensors, and meters; and finally, end-use consumers, such as homes and businesses, the grid must balance supply and demand at every moment. Energy technologies have emerged over the last 20 years that allow consumers to generate, save, store, and use electricity on-site or send back to the grid. DERs , often called behind-the-meter resources, as they are sited behind the utility-issued electric meter at the distribution level[1], like rooftop solar systems, home battery storage, electric vehicles, and active demand response, can either reduce energy use during periods of high demand or sell energy back to the grid if the right price signals and market structures are present.

As the cost of these distributed technologies rapidly declined, consumers adopted DERs to reduce their carbon footprint, save energy and money, and improve reliability during power outages. In fact, the DER market is expected to play a vital role in the decarbonized and distributed grid of the future, with some estimates of as much as 380 gigawatts (GW), or almost one-third of installed U.S. generation capacity, of DERs over the next 5 years, with most of it at the residential level.

In New England, DERs have expanded rapidly and will continue growing. The regional grid operator, ISO-NE, noted that in 2019, DERs provided a full 20% of total system capacity. ISO-NE’s forecast anticipates continued rapid development and adoption of energy efficiency, demand response, rooftop solar, battery storage, and other DERs over the next decade, with an estimated 4,300 megawatts (MW) of additional behind-the-meter solar by 2029 (on top of 3,500 MW installed already), and up to 10% of energy demand met through energy efficiency efforts.

While DERs are an important and growing energy resource they are, on their own, often too small to effectively participate in wholesale markets due to high barriers to entry with specific participation parameters. Although DERs benefit the grid through reduced demand, reduced emissions, cleaner air, and enhanced reliability, they are not properly compensated for those services. Without clear market rules these DERs are unable to participate fully in the regional wholesale markets, meaning that vital revenue streams from the regional markets are not available to small-scale distributed resources. Under new market rules ordered by FERC, potentially millions of rooftop and community solar panels, batteries, energy efficiency investments, electric vehicles, and smart appliances can access revenue streams that previously excluded them.

Ultimately, FERC Order 2222 could be a game-changing piece of regulatory reform that opens the door to a cleaner, more reliable, more distributed and democratized electric grid. This a refreshing and needed piece of regulatory reform from FERC and in notable contrast to a number of recent rulings favoring large incumbent generators like natural gas and that continue to undermine state-level clean energy policy through heavy-handed and burdensome federal intervention into wholesale markets. Ultimately, FERC Order 2222 has the potential to spur new and exciting innovations in the clean energy sector, creating market opportunities for not-yet-invented technologies and solutions.

What does FERC Order 2222 Say and Do?

FERC began addressing market participation for DERs in late 2015. The Commission collected data, held technical conferences, and released a proposed rule in 2016. In a separate but related order, FERC required regional grid operators to develop rules that allow battery storage located at the distribution level to participate in wholesale markets. After several years of legal challenges to FERC’s authority, the storage order was upheld in July 2020, paving the way for this new supplemental order affecting other DERs. Together, these two reforms will open the wholesale markets to battery storage and aggregated DERs, allowing groups of smaller DERs to participate in wholesale markets as if they were a single resource controlled by the aggregator.

FERC Order 2222 provides clarity to regional grid operators as they develop participation rules that remove barriers for DER aggregations in capacity, energy, and ancillary service markets. FERC found that existing market rules are “unjust and unreasonable” barriers to participation of DERs, hindering competition and increasing rates by creating barriers to emerging technologies by unfairly favoring large incumbent generators, such as fossil-fuel plants. FERC notes in its order that by reforming market rules to allow DERs to compete fully in wholesale markets, regional grid operators will be able to “account for the impacts of these resources on installed capacity requirements and day-ahead energy demand, thereby reducing uncertainty in load forecasts and reducing the risk of over procurement of resources and the associated costs.” Specifically, FERC requires that each grid operator develop market rules that address DER aggregation in the following ways:

1. Allow DERs to participate directly in the wholesale markets and establish DER aggregators as a type of market participant;
2. Allow DER aggregation to register under a participation model that accommodates the physical and operational characteristics of the DER aggregation;
3. Establish a minimum size for DER aggregation no larger than 100 kilowatts (kW) (roughly equivalent to 12 home solar systems);
4. Address locational, distributional, information and data, and grid coordination requirements for DER aggregator participation; and,
5. Require market participation rules for DER aggregators located in large utility service territories while allowing smaller utilities (defined as distributing more than 4 million megawatt-hours (MWh) in the previous year, approximately 70% of the U.S. utility market) to opt-in to the DER market rules.

By requiring regional grid operators to develop market rules allowing DERs to participate in wholesale markets, FERC Order 2222 paves the way for increased DERs, and will create markets and new ways to finance distributed energy projects. These market opportunities will make DERs more financially viable, increasing adoption, and result in a stronger, cleaner, and more resilient grid.

Next Steps

FERC Order 2222 goes into effect after publication in the Federal Register. At that point, regional grid operators will have 270 days to submit proposed changes to their market rules to implement the order. However, it will likely take several years before all the rules and processes are in place and full market participation is possible due to the need to develop, design, and implement complex technical and market parameters for participation. Acadia Center holds a membership position in NEPOOL, the region’s stakeholder governance body. Acadia Center will coordinate with state, regional and national stakeholders to ensure the region has fair and transparent market participation rules that support continued development of DERs.

[1] The electric distribution system is typically defined as electric transmission at 69 kilovolts (kV) or less, whereas the transmission system operates at higher voltages and travels further distances.

By Deborah Donovan, Senior Policy Advocate and Massachusetts Director, and Stefan Koester, Policy Analyst