FERC Proposes Adding Electric Storage and Distributed Energy Resources to the Wholesale Electric Market

On November 17, 2016, the Federal Energy Regulatory Commission (FERC or the Commission) issued a Notice of Proposed Rulemaking (NOPR) on electric storage and distributed energy resources, Docket Nos. RM 16-23-000; AD16-20-000.

A table summarizing the salient points of the proposed rule is set out below.

The NOPR proposes to create competitive opportunities for electric storage and distributed energy companies in wholesale markets. Currently, electric storage is being used more frequently as part of the grid to facilitate integration of renewable resources and to help level changes in load, but the rules governing the use of electric storage vary around the country. Resources that provide electric storage have been used mostly in combination with other resources (wind and solar) and have been subject to individual, regional standards determined by regional transmission organizations (RTOs) and independent systems operators (ISOs), without regard to uniform or standardized treatment across the RTOs and ISOs. Similarly, distributed energy resources have been too small, are located too far apart, or have faced costs too high to enter wholesale markets on their own. 

The Commission has recognized that electric storage and distributed energy resources can provide an integral service to the market. The Commission’s sweeping NOPR is proposing to remove barriers to these resources participating in the wholesale electric market by introducing uniform treatment by RTOs and ISOs while ensuring that utilities, RTOs and ISOs retain control over their integration.

Electric Storage Resources Could Gain Big Benefits

Final regulations contemplated in the NOPR could be a boon for many electric storage resources because they will help define a clear regulatory path for entry into wholesale electric markets, especially for resources that make use of new and emerging technologies. 

In the NOPR, the Commission recognizes that there are many different electric storage technologies and, as such, is proposing that RTOs and ISOs not restrict opportunities to only resources capable of performing certain technical requirements. Instead, the Commission proposes that RTOs and ISOs accommodate resources that are variable in nature or capable of delivering only short duration of power of varying sizes or technology (e.g., batteries, flywheels, compressed air, pumped hydro and others). 

FERC also seeks to accommodate emerging electric storage technologies, which are becoming cost-effective, to enable them to participate in the wholesale electricity market as well. Under the current state, because of the different rules depending on the RTO or ISO, some of these technologies are excluded from market participation. Recognizing that the parameters established by the RTOs and ISOs for certain services favor particular resources and types of technology, FERC proposed that the criteria for performance be based on physical and operational attributes. Therefore, FERC proposes that electric storage resources that are technically capable of providing a service may provide it, and may receive separate compensation for the services that RTOs and ISOs do not procure through a market mechanism. Under the proposed rules, these resources would be able to bid a price into the market as a load resource where market rules allow it and would be available as a dispatchable resource. 

Distributed Energy Resources May Face High Costs

In an attempt to foster market penetration by energy providers that are small, including behind-the-meter resources, which currently are not significant market participants, FERC proposes that RTOs and ISOs issue market rules permitting distributed energy resources to be aggregated such that they can participate as one resource in the market. FERC justifies the benefits of this approach by contrasting distributed energy resource aggregators with larger fossil fuel generators, noting the former are able to co-locate with load more readily and respond to near-term generation or transmission reliability-related requirements more rapidly. In order to assist RTOs and ISOs in their efforts to integrate these smaller resources, the Commission seeks comments on what reporting requirements should be imposed on distributed energy resource aggregators to provide RTOs and ISOs with the information needed to operate. The Commission also requests comments on appropriate bidding parameters that account for the physical and operational characteristics of these distributed energy resources.

The Commission notes that the addition of metering, telemetry and software equipment will be necessary to incorporate distributed energy resource aggregators, and therefore asks RTOs and ISOs to identify such equipment, and provide comments on whether there should be different types of equipment for different resources. Further, while the Commission recognizes the potential high costs of these requirements, it does not address who should bear the costs.

The Commission also asks RTOs and ISOs to consider how the operational characteristics of different distributed energy resources, in the aggregate, complement each other and could be used to participate. Sending a positive signal to distributed generation aggregators of different varieties, the proposed rules would expand the types of energy resources eligible to aggregate by eliminating “any unnecessary” operations limitations. Much like its approach to electric storage resources, FERC discourages restrictions on the types of technology eligible to participate as a distributed energy resource. 

But FERC does envision some limitations for distributed energy resource aggregators seeking to participate in the wholesale electricity market. For example, the Commission is proposing to require the resource aggregators to meet the minimum size requirements set out by the RTO or ISO, and to comply with the RTO’s or ISO’s requirement to locate the resource at a specific point of interconnection. The aggregators also would be required to provide RTOs and ISOs with default distribution factors when they register (default distribution factors indicate how much of the total response would be coming from each source), and to update those factors as necessary. Another proposed requirement is for aggregators to maintain aggregate settlement data to allow an RTO or ISO to regularly settle with the aggregator for its market participation. 

Final regulations proposed in the NOPR could give utilities a significant gatekeeper role. FERC is proposing that, before the distributed energy resources may participate in the wholesale market, RTOs and ISOs would be required to allow utilities to review the list of individual sources located on their distribution system in an aggregation. Utilities would assess whether the resources would be able to respond to RTO/ISO dispatch instructions. Further, utilities could ensure that distributed energy resources in an aggregation are not participating in any other retail compensation programs, such as net metering, or another wholesale program, such as a demand response program. A utility could report such information to the RTO or ISO for its consideration before allowing the distributed energy resource aggregators to participate in the wholesale market. 

Finally, FERC included a catch-all for distributed energy resource aggregators. To enter into the market, in addition to all other requirements, the Commission is proposing that a distributed energy resource aggregator be required to execute a market participation agreement with the RTO or ISO to define “its roles and responsibilities and its relationship with the RTO/ISO.” And RTOs and ISOs would be instructed to create market participation agreements in their tariffs that allow the various business models the distributed energy resource aggregators may adopt, including allowing cooperatives and municipalities to participate in aggregation. While the Commission recognizes that these market rules should not limit the business models under which distributed energy resource aggregators operate, it is clear that all market participants must have a voice in the development of such agreements and tariffs.

Order No. 745 Revisited

But FERC may not have jurisdiction to regulate these resources. The U.S. Supreme Court in FERC v. Electric Power Supply Association, (577 U.S. __, 136 S. Ct. 760 (2016)) recently upheld Order No. 745, affirming FERC’s role in regulating demand response resources in wholesale markets even when it has indirect impacts on retail market conditions. Justice Antonin Scalia in his dissent noted that demand response customers are energy consumers and not resellers and that, accordingly, FERC does not have jurisdiction to regulate demand response transactions. 

FERC appears to be undertaking a similar regulatory approach in the NOPR. Recognizing that electric storage is often used for retail service, FERC is proposing that RTOs and ISOs create a new participation model that allows electric storage resources to participate in the wholesale market. It also is proposing that metering and accounting practices can be used to delineate between wholesale and retail activities, and is requesting comment on how accounting and metering mechanisms could be used to achieve this purpose. For distributed energy resources, the Commission is proposing that utilities serve as gatekeepers for the potential participation of individual resources and their compensation for serving retail markets. Thus the Commission is urging commenters to provide a workable solution that steers clear of the potential gray area that had been at issue before the Court in considering Order No. 745.

Conclusion

The NOPR proposes many sweeping changes to the wholesale market by proposing to require RTOs and ISOs to develop participation models—rules that would mandate revisions to the tariffs of RTOS and ISOs to accommodate the integration of electric storage and distributed energy resources. The NOPR also would impose certain information collection requirements that would be collected from distributed energy resource aggregators seeking to become market participants. Further, the NOPR proposes to provide utilities the right to review the list of proposed distributed energy resources to be bid. While the information collection by the RTOs and ISOs is important for their operations and reliability and, while coordination with utilities is clearly critical to the success of integrating distributed energy resources into the market, the rules must ensure that they are fair and necessary and do not impede the market penetration of these resources. In view of the proposed imposition of these new rules, all market participants need to ensure, through the rulemaking process, that the standards for participation and requirements for information to be collected are necessary and not onerous, do not impose an undue, inequitable cost burden on a market participant, and would not inadvertently impose barriers of entry for market participants.

Comments are due to the Commission 60 days upon publication of the rule in the Federal Register, which is expected to be shortly.