FERC Breaks New Ground with DER Aggregation Order

Morgan Lewis
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Morgan LewisUnder Order No. 2222, the Federal Energy Regulatory Commission hopes to “usher in the electric grid of the future” by opening wholesale markets to distributed energy resource aggregations.

The Federal Energy Regulatory Commission (FERC) reached a new milestone in its continued quest to reform wholesale electric markets when it issued Order No. 2222 on September 17. Order No. 2222 is a final rulemaking that amends FERC’s regulations to remove barriers to the participation of distributed energy resource (DER) aggregations in the capacity, energy, and ancillary service markets operated by Independent System Operators and Regional Transmission Organizations (ISOs/RTOs). The rule has the potential to have an extremely broad reach once fully implemented because it applies to any DER located on a distribution system, any subsystem thereof or behind a customer meter. Eligible resources may include behind-the-meter and front-of-the-meter resources, electric storage resources, intermittent generation, distributed generation, demand response, energy efficiency, thermal storage, and electric vehicles, among others.

Order No. 2222 is the product of a years-long effort that began with the inquiry that ultimately led to Order No. 841, FERC’s landmark electric storage order. In Order No. 841, FERC observed that an electric storage resource that injects electric energy back to the grid for purposes of participating in a wholesale market engages in a sale of electric energy at wholesale in interstate commerce, regardless of whether it is sited on a state or federally regulated electric system. That same jurisdictional theory, which was resoundingly upheld by the US Court of Appeals for the DC Circuit earlier this year in NARUC v. FERC, provides the basis for FERC’s assertion of jurisdiction over DER aggregators. Namely, FERC believes that it has jurisdiction over a DER aggregator’s transactions to the extent they involve the injection of electric energy onto the grid and a sale of that energy for resale in wholesale electric markets.

FERC’s latest DER reforms were also informed by the agency’s experience deploying Order No. 841. The administrative record leading up to the issuance of Order No. 841 captured a wealth of information addressing DER aggregation issues. Based on a review of that information, FERC became convinced that wholesale market rules create barriers that prevent the full participation of DER aggregations, and initiated the proceeding that produced Order No. 2222. As it did with electric storage resources in Order No. 841, FERC wants to ensure with Order No. 2222 that any DER that is technically capable of providing wholesale services through aggregation is eligible to do so.

RULE OVERVIEW

FERC’s issuance of Order 2222 was a direct outgrowth of the proposed rulemaking that produced Order 841 as well as FERC’s determinations in Order 841 itself. For that reason, many of the rulings and rationales set forth in Order No. 841 provide a roadmap for FERC’s analysis in the context of DERs. Just as FERC mandated in Order No. 841, ISOs/RTOs will implement the Order No. 2222 reforms through the creation or modification of wholesale market participation models. FERC directed the ISOs/RTOs to establish DER aggregators as a discrete market participant category and to accommodate the participation of DER aggregators under one or more participation models. The ISOs/RTOs will have broad discretion to craft those models, so long as they satisfy the criteria set forth in Order No. 2222.

We address key aspects of those criteria below.

Qualifications for Participation

FERC directed the ISOs/RTOs to implement a minimum size requirement not to exceed 100 kW for all DER aggregations, matching the minimum size threshold under FERC’s storage participation rule. FERC refused to impose a maximum size threshold for DER aggregations, but recognized that market operators may experience modeling and metering challenges with larger individual DERs. Thus, FERC directed the ISOs/RTOs to propose a maximum capacity size for an individual DER resource under a DER aggregation or, alternatively, to explain why such a requirement is not necessary.

Unsurprisingly, the final rule requires that ISOs/RTOs implement market rules that are technology neutral. FERC believes this approach will ensure broader resource participation and drive more competitive market outcomes. Along those same lines, FERC made clear that it wants to maximize the number of resources covered in the rule by requiring ISOs’/RTOs’ tariffs to allow different types of technologies to participate under a single aggregation. These so-called heterogeneous DER aggregations would allow, for instance, a single aggregation to leverage both battery and distributed generation resources in order to meet minimum qualifications, such as run time requirements, that each resource type may not be able to meet on its own. Alternatively, the rule will also allow a single DER to participate in wholesale markets as its own aggregator, so long as it meets the ISO’s/RTO’s qualifications.

Additionally, ISOs/RTOs will need to allow DERs to provide multiple wholesale services and describe how those benefits are accounted. However, market operators are free to propose restrictions to prevent double counting of resources (e.g., a situation in which a DER is registered to provide the same market service twice, once as a standalone resource and once under a DER aggregation). Importantly, that restriction does not limit a DER from participating in both retail and wholesale programs and being compensated in each for providing distinct services.

State Opt-Outs

An “opt-out” refers to the ability of a state to prohibit resources sited on the distribution grid from participating under a FERC rulemaking. FERC refused to allow an opt-out under Order No. 841 on the basis that it alone has jurisdiction over transactions occurring in wholesale markets regardless of where participating resources are sited, a decision that spurred multiple challenges to the storage rule.

FERC again refused to provide a broad opt-out in Order No. 2222, but has taken a slightly different approach in recognition of the potentially greater burden the rule may impose on smaller utility systems. Specifically, FERC directed ISOs/RTOs to prohibit bids from DER aggregators if the aggregation includes DERs that are customers of small utilities (i.e., those that distributed 4 million MWh or less in the previous fiscal year), unless the relevant electric retail regulatory authority has permitted such participation under FERC’s rule.

Coordination

The final rule requires that ISOs/RTOs devise ways to implement coordination schemes among the ISO/RTO, the DER aggregation, the affected distribution utility, and the applicable local regulatory authority.

The ISOs/RTOs must modify their tariffs to (1) provide a process for a distribution utility to timely review the individual DERs that compose a DER aggregation, including any changes to the resources under a DER aggregation; (2) provide a process for ongoing operational coordination among the ISO/RTO, the DER aggregator, and the distribution utility, to include a mechanism for distribution utilities to override ISO/RTO dispatches for reliability or safety reasons; and (3) accommodate the voluntary participation of relevant electric retail regulatory authority(ies) in coordinating the participation of aggregated DERs in wholesale markets.

FERC further encouraged, but did not require, the ISOs/RTOs to develop a more holistic approach to coordination by establishing a “coordination framework,” through which the ISO/RTO can ensure that affected parties do not work at cross-purposes.

Other Requirements

ISOs/RTOs will also have to modify their tariffs to incorporate other minimum technical and operational criteria to implement the final rule, such as locational requirements for DER participation, information and data requirements, bidding parameters, and metering and telemetry requirements. ISOs/RTOs will also need to create form market participation agreements that define the DER aggregator’s role and responsibilities and relationship with the grid operator.

ANALYSIS

Prior FERC rulings have permitted DERs to participate in wholesale markets if those resources were able to otherwise meet the applicable qualification criteria. However, Order No. 2222 is significant because it reflects the first time that FERC has clearly and explicitly opened the doors for aggregated DERs to participate, even when each individual DER may be quite small in size. The implications of such a bellweather ruling across the power sector are numerous. Below, we identify just a limited number of those considerations and opportunities that Order No. 2222 presents.

Distribution System Impacts

For those familiar with the Order No. 841 administrative proceeding and subsequent appeal, as well as the many comments and discussions offered throughout the history of the DER proceeding, it will come as no surprise that FERC’s rulemaking has implications for distribution systems. Although the potential issues are numerous and could be the topic of a separate discussion, we identify three issues for consideration at this time.

First, as noted above, FERC determined not to provide an opt-out that would allow a retail regulatory authority to prohibit DER participation in organized markets. However, the Commission did clarify that it is not infringing on a state regulatory authority’s ability to condition participation in retail DER programs on nonparticipation in organized markets.

Second, FERC confirmed that it is willing to approve (if it finds it appropriate on a case-by-case basis) the assessment of wholesale distribution charges against DER aggregators participating in organized markets.

Third, FERC addressed the impact of the final rule on its existing interconnection requirements and precedent, and expanded the circumstances whereby resources can access wholesale markets without creating a FERC jurisdictional interconnection. FERC determined that all DERs that access wholesale markets as part of an aggregation may do so through an interconnection that FERC will not view as a jurisdictional interconnection. That DER interconnection will not cause subsequent interconnections to trigger FERC jurisdictional treatment either (in contrast to FERC’s first use rule).

Opportunity to Realize and Capture Full Value Stack

In its final rule, FERC determined that DERs can and should be able to realize their full value and, in turn, capture their entire value stack so long as they are not double-compensated or double-counted.

FERC unequivocally determined that DERs can participate in one or more retail programs as well as wholesale markets, and that DERs can provide multiple wholesale services. However, FERC is permitting organized market operators to establish “appropriate” restrictions on the DER participation if those restrictions are narrowly designed to avoid counting the services provided by DERs more than once. FERC will consider whether the restrictions are “appropriate” on a case-by-case basis.

Unprecedented Opportunity Created by Heterogenous Aggregation

As noted above and similar to FERC’s approach in Order No. 841’s energy storage rulemaking, FERC’s mandate concerning DERs is technology agnostic. The power creating the impact behind FERC’s rule is FERC’s decision to permit DERs to aggregate in order to participate in organized wholesale markets. With Order No. 2222, DERs may now aggregate for the purposes of satisfying minimum size and performance requirements that the organized markets will establish; individual DERs may not be able to satisfy those requirements on their own.

The types of resources that are able to be aggregated span the sector and include storage, on-site renewable resources, energy efficiency resources, distributed and/or backup generation, electric vehicles and associated charging equipment, and other microgrid systems. Thus, the ability for different resource types to aggregate for purposes of participation opens the doors for all DERs in organized wholesale markets.

CONCLUSION

Against the backdrop of a rapidly evolving electric grid, the potential implications of Order No. 2222 cannot be understated. The rule has the potential to unlock the capabilities of an extremely broad scope of resources, many of which, as FERC Chairman Neil Chatterjee observed, can “hide in plain sight in our homes, businesses, and communities.” Indeed, the rule paves the way for DERs, such as grid-enabled water heaters, small solar installations, and electric vehicles, to combine under single aggregation and compete alongside traditional generators for a slice of wholesale market revenues.

While the rulemaking reflects a major leap forward for DERs, it still may be some time until the industry can accurately gauge the impact of these reforms. As a preliminary matter, ISOs/RTOs will have 270 days from the date the rule is published in the Federal Register to submit their compliance filings and propose implementation dates for their regions. This could mean that the new market rules will not be deployed until 2022.

Additionally, the technological advances that spurred the development of Order No. 2222 reflect the further blurring of traditional state and federal jurisdictional lines. Thus, it is likely that aspects of the rule will be challenged on jurisdictional grounds before FERC and ultimately in the courts, similar to Order No. 841.

While such challenges will not delay the implementation of the rule, unless the deadline is tolled by FERC, they may introduce some uncertainty as ISOs/RTOs prepare to implement what are sure to be complex sets of market reforms. In the interim, affected industry participants should seek out opportunities to contribute to stakeholder discussions as ISOs/RTOs draft those rules.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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