FERC’s Distributed Energy Resource Rule Explained

On September 17, 2020, the Federal Energy Regulatory Commission (FERC) issued Order No. 2222 to allow aggregators of distributed energy resources (DERs) to participate in the organized wholesale markets that FERC oversees. Order No. 2222 has been in the works for a while. It was initially proposed in 2016, and then in 2018 FERC issued Order No. 841, which was focused on the participation of electric storage resources in wholesale markets, deferring further action on DERs until now.

Order No. 2222 largely received accolades from clean energy groups. It is an important step in allowing for and promoting the participation of a diverse set of clean energy resources in wholesale markets. The following presents an overview of Order No. 2222 and next steps.

FERC issued a notice of proposed rulemaking in 2016, under the leadership of then-Chairman Norman Bay, to remove barriers to the participation of energy storage resources and DER aggregations in organized wholesale markets operated by regional transmission organizations (RTOs) and independent system operators (ISOs). In 2018, FERC, under the leadership of then-Chairman Kevin McIntyre, issued Order No. 841, a final rule to remove barriers to the participation of storage resources. FERC stated that it needed more time to explore DER aggregation reforms and convened a technical conference to further gather information.

Several parties objected to FERC’s decision in Order No. 841 not to allow state commissions and other regulatory authorities to opt out of allowing storage to participate in wholesale markets, on the grounds that these resources often use state-jurisdictional distribution systems to reach the wholesale market. The D.C. Circuit upheld Order No. 841. In an amicus brief in support of the order, a multistate attorney general coalition emphasized the importance of storage to a clean energy future and defended FERC’s action as consistent with the necessary respect for state jurisdiction under the Federal Power Act.

Turning to Order No. 2222, FERC Chairman Neil Chatterjee called the order a “landmark foundational rule that paves the way for the grid of tomorrow.” Commissioner Richard Glick noted the substantial benefits of the rule, including enhancing competition and lowering rates, improving reliability, and improving the economic viability of DERs. Commissioner James Danly dissented, calling the order “an imprudent exercise of the Commission’s power” and asserting that if DERs are as good as they seem to be, the market will encourage their development. (Note that then-Commissioner Bernard McNamee, who dissented from the order on rehearing of Order No. 841 on jurisdictional grounds, left the Commission in early September.)

FERC adopted a broad, technology-neutral definition of DER: “any resource located on the distribution system, any subsystem thereof or behind a customer meter.” That definition may include storage, intermittent generation, electric vehicles, energy efficiency, demand response, and thermal storage. RTOs/ISOs will be permitted to propose their own definitions as part of the compliance process as long as the scope and applicability are consistent with FERC’s definition.

FERC defined a DER aggregator as “the entity that aggregates one or more distributed energy resources for purposes of participation in the capacity, energy and/or ancillary service markets of the regional transmission organizations and/or independent system operators.”

FERC found that it is not just and reasonable to have barriers to the participation of DER aggregations in RTO/ISO markets, so it is instructing each RTO/ISO to make changes. Order No. 2222 directs each RTO/ISO to revise its tariff to allow for the participation of DER aggregators in wholesale markets. Specifically, these revisions must:

1. Allow DER aggregations to participate in RTO/ISO markets and establish DER aggregators as a type of market participant;
2. Allow DER aggregators to register DER aggregations under one or more participation models that accommodate the physical and operational characteristics of the DER aggregations;
3. Establish a minimum size requirement for DER aggregations not to exceed 100 kW;
4. Address locational requirements for DER aggregations;
5. Address distribution factors and bidding parameters for DER aggregations;
6. Address information and data requirements for DER aggregations;
7. Address metering and telemetry requirements for DER aggregations;
8. Address coordination between the RTO/ISO, the distribution utility, the DER aggregator, and the relevant regulator;
9. Address modifications to the list of resources in a DER aggregation; and
10. 1Address market participation agreements for DER aggregators.

FERC believes that with these changes, market competitiveness will be enhanced as DERs enjoy increased, nondiscriminatory access to wholesale markets.

DERs may participate in both wholesale and retail markets, and indeed this is already permitted and occurring in some cases. FERC requires each RTO/ISO to allow DERs that participate in one or more retail programs to participate in its wholesale markets, to allow DERs to provide multiple wholesale services, and to include any appropriate restrictions on the DERs’ participation in RTO/ISO markets if needed to avoid double counting.

Is there an opt-out?

As in Order No. 841, FERC did not include a broad opt-out for all relevant electric retail regulatory authorities – namely state commissions, public power, and cooperative utilities – to prohibit DERs from participating in wholesale markets through DER aggregations. But FERC adopts an opt-in for small utilities in recognition of the potential indirect costs and burdens – for example, resources needed to coordinate with the RTO/ISO and DER aggregators – that could outweigh benefits for smaller utilities. FERC defines smaller utilities as those with a total electric output for the preceding fiscal year not greater than 4 million MWh.

The participation of demand response in DER aggregations remains subject to the opt-out and opt-in requirements established in earlier FERC rules (Order Nos. 719 and 719-A). States retain the authority to oversee the interconnection of individual DERs to the distribution grid.

Order No. 2222 will become effective 60 days after publication in the Federal Register. Each RTO/ISO must file the tariff revisions needed to implement the rule 270 days after publication, and should propose a reasonable implementation date in their filing. Requests for rehearing of Order No. 2222 are due October 17 and are a prerequisite to seeking judicial review.