The Federal Energy Regulatory Commission has passed a long-awaited order to open up the country’s wholesale energy markets to distributed energy resources (DERs) like rooftop solar, behind-the-meter batteries and electric vehicles.
Now comes the hard part: creating market rules that allow these DERs to play in bulk energy markets while retaining the role of state regulators and utilities to maintain the soundness of their distribution grid operations and retail DER programs.
Order 2222, passed by a 2-1 vote Thursday during FERC’s open meeting in Washington, D.C., is the culmination of years of work on how to allow DER aggregations to compete in the energy, capacity and ancillary services markets operated by the regional transmission organizations (RTOs) and independent system operators (ISOs) that manage the transmission grids carrying electricity to about two-thirds of the country.
The new order is an outgrowth of FERC Order 841, passed in 2018 to set similar rules for batteries and other energy storage systems to serve in wholesale markets. But with its much broader scope, Order 2222 could have an even more profound impact on the value of DERs in U.S. markets, as well as the operations of its wholesale markets.
“DERs can hide in plain sight in our homes, businesses and communities, but their power is mighty,” FERC Chairman Neil Chatterjee said at Thursday’s meeting. Projections indicate that from 65 gigawatts to more than 380 gigawatts of DERs could be added to the country’s power grids over the next four years, he noted.
“Today’s order is designed to capitalize on those shifts,” he said. “[It] will help us increase competition and efficiencies in our markets. It will enhance grid flexibility and reliability attributes. And it will stimulate the kind of innovation that’s needed to keep pace with our ever-evolving energy demand.”
DERs do participate in wholesale energy markets today, but almost exclusively under traditional demand-response constructs that limit their full effectiveness, he said. This status quo represents a violation of FERC's responsibility to assure "just and reasonable" rates for electricity consumers, which serves as the basis of issuing the new order, according to Chatterjee.
Aggregated rooftop solar, batteries, EV chargers, grid-responsive water heaters and air conditioners, and other DERs can be installed much more quickly than large-scale resources in locations where “price signals indicate they’re most needed,” driving down congestion costs and reducing market inefficiencies that add to customers’ electricity bills, Chatterjee said.
They’re also “more nimble,” with inverters and software controls that allow them to “serve multiple functions” and “meet various grid needs as they arise,” he said. Batteries, EV chargers and other fast-acting resources have already proven their ability to regulate grid frequencies and deliver localized capacity in utility pilot projects across the country.
A big challenge: Merging distribution grids and retail programs with wholesale markets
But much like Order 841, the new DER order ushers in a complex set of challenges for grid operators, utilities and state regulators to align the rules for operating behind-the-meter assets connected to low-voltage distribution grids to those governing bulk markets.
Those cross-jurisdictional complications have already drawn the opposition of state regulator and utility groups. In June, a federal court denied their efforts to challenge Order 841 on the grounds that FERC can’t impose rules on DERs connected to distribution grids under state regulations. The court also denied a request for states to be able to “opt out” of participating in Order 841-created markets.
That court victory has given FERC confidence to assert broad authority over how DERs beyond energy storage assets can take part in wholesale markets under Order 2222, Chatterjee said. For example, the order doesn’t offer states the option of opting out of the market structures that ISOs and RTOs will create to comply with it.
But it does offer small utilities — those whose annual electricity sales are below 4 million megawatt-hours — an opportunity to decide not to opt into those markets, to avoid “overburdening them” with the costs and complexities of complying, Chatterjee noted.
And much like Order 841, the new DER construct will give states and utilities “the authority to oversee the interconnection of individual DERs,” he said. That’s a key concern, given that DERs have significant impacts on distribution grid operations and reliability.
Order 2222 also requires RTOs and ISOs to “establish a comprehensive process ensuring distribution utilities can review the individual DERs that [are the constituent parts of] an aggregation,” Chatterjee said. “We understand the importance of real-time coordination to guarantee safe and reliable operations of both the transmission and distribution systems.”
Finally, FERC's order will allow state regulators to set up rules to avoid the market distortions that could arise from DERs earning money for the same services simultaneously from utility retail programs and wholesale markets, he said.
FERC Commissioner Richard Glick, a Democrat who has opposed Chatterjee and FERC’s other Republican commissioners on many issues, including capacity market rules for mid-Atlantic grid operator PJM and New York grid operator NYISO that are expected to have a negative impact on clean energy resources, offered his full support of Order 2222.
With DERs becoming a more and more integral part of the country’s electric grid, “options for the supply of energy, capacity and ancillary services will increase” as the ruling is implemented, he said. Order 2222 will also “enhance reliability as ISO and RTO operators will have greater visibility into behind-the-meter” DERs, something they lack today, he pointed out.
The next steps
Order 2222 will go into effect in 60 days, and RTOs and ISOs will have 270 days to create compliance filings on how they’ll implement it. The timeline for full implementation will likely take longer, however, given the experience with Order 841, which some grid operators have already implemented in part or in full but others are still working on.
“This is undoubtedly a game-changer, in some ways more profound than its sibling Order 841,” said Ravi Manghani, head of solar research for Wood Mackenzie. “I think the key action now moves to individual ISOs and RTOs. Each will interpret and implement tariffs based on their respective market realities.”
As for potential pushback from distribution utilities, "the order provides sufficient cover on metering and telemetry and expected jurisdictional coordination,” Manghani said.
There are certainly some complexities to be worked out, however. Allowing utilities and state regulators to manage DER interconnection rules to prevent them from destabilizing distribution grids through wholesale market operations could present challenges for ISOs and RTOs. So could state regulator rules seeking to differentiate between retail and wholesale market participation.
Clean energy groups including the Solar Energy Industries Association, Advanced Energy Economy and the American Council on Renewable Energy (ACORE) expressed support of FERC’s new order in Thursday statements.
“Integrating aggregated DERs will lower consumer costs, increase electric reliability and unlock the potential for new innovation,” Gregory Wetstone, ACORE president and CEO, wrote. On the other hand, FERC’s orders for PJM's and NYISO’s capacity markets “erect barriers to the entry of new technologies” in those markets, he said — a fact that could bear on how state-supported, carbon-free DERs are valued in them.