Opting In (or Out): FERC’s Approach to Integrating Electric Storage and Distributed Energy Resources

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White & Case LLPIn a breakthrough final rule, the Federal Energy Regulatory Commission carves out space in wholesale markets for the aggregation of distributed energy resources. Earlier in the summer, the US Court of Appeals for the DC Circuit denied a petition arguing that FERC overstepped its jurisdiction by facilitating the integration of electric storage resources in wholesale power markets.

Landmark rule on distributed energy resources

On September 17, 2020, the Federal Energy Regulatory Commission (FERC) issued Order No. 2222, a highly anticipated final rule relating to the aggregation of distributed energy resources (DERs) in wholesale markets. DERs are typically small-scale, behind-the-meter energy resources — such as residential and commercial rooftop solar panels, battery storage installations, electric vehicles and associated charging equipment, and energy efficiency assets including home appliances — that have not yet had access to provide services beyond their immediate proximity. To this point, wholesale energy markets needed to work through operational and technical constraints prior to establishing a framework for DER aggregations.

However, by aggregating clusters of DERs, these individually small resources are able to pool their services to the electric grid. Multiple DERs can fulfill minimum size and performance requirements in instances where, individually, their access to markets would be restricted. To date, DERs implicitly functioned as demand response (DR) by bolstering grid resilience to spikes in usage, but any mechanism attempting to bring more DERs into formal markets has been either region-specific or contingent on the appetite of incumbent utilities. FERC stated that this restriction on competition can reduce the efficiency of the regional markets, potentially leading to dispatching more expensive resources to meet system needs.

"By removing barriers to the participation of such resource aggregations in the RTO and ISO markets, this draft final rule will enhance competition and, in turn, help to ensure that the RTO and ISO markets produce just and reasonable rates."

Order No. 2222 significantly expands the potential role of DERs in the US by enabling aggregated groups to participate in regional organized capacity, energy, and ancillary services markets. In addition to building a more diverse, reliable power grid, Order No. 2222 continues FERC's approach in accommodating modern energy resources and ascribing market value to their attendant services and products. During the discussion of this rule at the September open meeting, FERC chairman Neil Chatterjee stated that "consumers win" when DERs can aggregate and compete with traditional resources in wholesale markets, namely by bolstering grid resilience and driving down costs levied to ratepayers.

Current DER landscape and growth potential

The six Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs)2 under the purview of FERC have varied widely in their embrace of DER capacity to date, as is typical for intermittent resource penetration in these markets. Of the grid operators, only two have disclosed specific data on total installed DER capacity on their systems: approximately 7500 MW in ISO New England and approximately 2700 MW in the New York ISO. In the interim, the California ISO is currently developing a framework for DER participation (projected to be finalized in 3Q 2021) and the PJM Interconnection is conducting stakeholder processes to evaluate potential methods of DER participation in its markets.

Cumulative DER investments in the US will eclipse $110.4 billion between 2020 and 2025.3

During the FERC open meeting in September, it was estimated that 65 gigawatts of new DER capacity will come online over the next four years. Thus, by 2025, total DER capacity in the US may reach 387 gigawatts, which would be a substantial increase and boon to the US power grid in terms of system flexibility and services to ratepayers.

Implementation of Order No. 2222

FERC found that existing rules are unjust and unreasonable and instructed RTOs and ISOs to establish provisions in their tariffs to allow DER aggregations to sufficiently engage as market participants. The rule defines a DER as "any resource located on the distribution system, any subsystem thereof or behind a customer meter and defines a DER aggregator as the entity that aggregates one or more DERs for purposes of participation in the capacity, energy and/or ancillary service markets." Further, the order directs grid operators to register such aggregations under one, or more, participation models based on their physical and operational capabilities. The minimum size threshold cannot exceed 100 kW — ensuring that Tariff provisions do not subvert the intent of the rule nor the inherently small scale of DERs. Additionally, while Order No. 2222 precludes retail regulatory authorities from broadly prohibiting DERs from participating in wholesale markets, DER aggregations may not bid the demand response of retail customers into regional markets.

FERC instructs the RTOs and ISOs to address the following technical considerations in their Tariff filings4:

  • Locational requirements
  • Bidding parameters and distribution factors
  • Metering and telemetry requirements
  • Communication coordination among the regional grid operator, DER aggregator, the distribution utility, and relevant retail regulatory authority
  • Information and data requirements

Recognizing the different market conditions across its jurisdiction, FERC also included an "opt-in" provision. For small utilities — defined as producing an electric output of 4 million megawatt-hours or less in the preceding fiscal year — there is no requirement to solicit or accept bids from DER aggregators. Additionally, the logistical matter of interconnecting individual DER systems will remain under state and local jurisdiction; FERC does not proffer any new requirements on this subject that may be perceived on intruding on state and local authority, a common thread of legal contention in recent years.

  • It is important to note, however, that most distribution electric cooperatives in the US sell below the threshold explained above, which was promulgated in the Energy Policy Act of 2005 to exempt "small" entities selling under 4 million MWh per fiscal year. Electric cooperatives generate five percent and deliver twelve percent, respectively, of total US electricity.5 Therefore, given that most will not be compelled to comply with Order No. 2222, it is worth observing their participation — most have demonstrated a clear interest in adopting more renewable energy capacity.

Following publication of Order No. 2222 in the Federal Register (and after a 90-day period, upon which the order officially takes effect), RTOs and ISOs are required to produce compliance filings within 270 days to FERC. These respective filings should delineate each grid operator’s approach to incorporating DER aggregations into wholesale markets and a timeframe for various stages of implementation, as is appropriate for the region.

Issuance and scope of electric storage order

Meanwhile, in February of 2018, FERC issued Order No. 841, foundational guidance requiring regional grid operators to accommodate electric storage. FERC directed the RTOs and ISOs to create, and appropriately ascribe value to, services and products stemming from the provision of storage resources in their respective capacity, energy, and ancillary services markets. As the development and proliferation of intermittent renewable generation — such as solar and wind — has shifted the US energy landscape, FERC acted to broaden market rules under its purview to include the full range of electric storage capabilities. Order No. 841 specifically required the six RTOs and ISOs to enact participation models for storage that achieve the following objectives:

  • Create a minimum size requirement for storage resources in order to participate in wholesale markets –– Not to exceed 100 kilowatts
  • Expand the services storage resources can provide based on products that are technologically feasible –– For example, products provided through capacity, energy and ancillary services markets, and services not procured through organized markets such as black start service
  • Allow storage resources to be dispatched in wholesale markets — Set market-clearing prices as both wholesale buyer and seller
  • Clarify and account for the technological and operational characteristics of storage –– Devise new bidding parameters and other market design modifications

Each regional grid operator has since submitted a compliance filing, at a minimum, outlining its proposed participation model and intended effective date. While the overarching goal is the same, each approach varies due to the unique market of each RTO and ISO as well as their current degree of electric storage integration:

  • For the California Independent System Operator (CAISO), FERC required only minor changes because its market rules were already in compliance with most of Order No. 841’s requirements. CAISO serves as a useful policy and regulatory model for other regional grid operators to emulate.
  • The PJM Interconnection (PJM) initially proposed a 10-hour requirement for storage resources; however, in October 2019, FERC initiated a paper hearing to investigate whether PJM’s provisions for establishing the capability of ESRs in the capacity market are unjust and unreasonable.
  • In April 2020, FERC approved Southwest Power Pool (SPP) revisions to its tariff to define the must-run requirements applicable to storage resources as well as a longer phase-in timeline for SPP.
  • The Midcontinent Independent System Operator (MISO) has a minimum size requirement of 0.1 MW but no ability to phase-in very small generators.
  • In ISO New England (ISO-NE), electric storage resources are not precluded from participating in retail markets if they are able to fulfill their wholesale market obligations.

In May of 2019, FERC affirmed its guidance on electric storage by issuing Order No. 841-A. This clarifying order preserved the core tenets of Order No. 841 and refused to include a provision proposed by intervenors that would have allowed states to opt out of the participation model requirement.

Petition to appeals court for review

Industry groups and the National Association of Regulatory Utility Commissioners (NARUC) opposed the mandate furnished in Order Nos. 841 and 841-A, and in May of 2020, argued before the United States Court of Appeals for the District of Columbia Circuit (DC Circuit) to invalidate FERC compelling states to incorporate electric storage. NARUC and the industry groups claimed that FERC contravened the Federal Power Act (FPA) by infringing on the jurisdiction granted to states over local electricity distribution systems. The principal argument centered on the physical nature of those local systems — typically under state purview — and the logical extension that utilizing those systems to integrate storage on wholesale markets would unlawfully intrude into federal jurisdiction.

Additionally, the industry groups and NARUC argued that providing an "opt-out" mechanism in Order No. 841 would be an appropriate legal remedy. Given the Order No. 841 has reduced the size of storage facilities eligible to access wholesale markets — to as small as 100 kilowatts — reversing that approach would eliminate a large number of residential installations of battery storage.

FERC argued before the court that the provisions of Order No. 841 do not technically create restrictions of the distribution system, which is unquestionably under states’ jurisdiction. Rather, FERC stated that once storage resources are made available to wholesale markets — from distribution systems, where states are entitled to regulate in any manner they elect to — the resources are subject to the new rules stemming from Order No. 841 compliance by RTOs and ISOs.

Circuit court ruling

On July 10, 2020, the DC Circuit denied the petition. In the decision, the court contemplated the line between federal and state jurisdiction in this matter, siding with FERC in its application of the FPA.

The DC Circuit ultimately determined that a state cannot mandate opting out of policies that integrate storage because the states do not have the authority to block sales of any resource in wholesale power markets. Under the FPA, states are precluded from delegating which resources are able to participate in wholesale markets — such an action would clearly invade federal authority vested in the FPA where FERC holds jurisdiction over wholesale (i.e., federal) facilities and markets. Conversely, if FERC had attempted to enact an order pertaining to retail (i.e., state) markets, the line would be drawn in favor of states’ jurisdictions and FERC would have been rebuffed. To that end, the DC Circuit refers to "retail sales," "local distribution systems," and "behind the meter" interchangeably as all referring to matters over which states have jurisdiction6, which may warrant legal scrutiny if such local distribution facilities are under the scope of future policy or incentive programs.

"Order No. 841 does not usurp state power, nor does it impose a 'reasonably related' test that re-draws the jurisdictional divide between FERC and the states."7

While FERC retains the authority to oversee and regulate wholesale electric markets, the DC Circuit also clarified that states can prohibit local storage resources from "participating in the interstate and intrastate markets simultaneously." Such a distinction would enable states to compel storage facilities into electing which market to provide services — between federal (interstate) and state (intrastate) and not overlapping in both. Further, states wield instruments that FERC does not, in the form of incentives aimed to attract investment in certain types of energy resources as well as their own self-contained regulatory mechanisms. 

State opt-outs are a "state effort that aims directly at destroying FERC's jurisdiction"8

On the merits, the DC Circuit recognized that Orders No. 841 and 841-A promote just and reasonable rates, a key principle bestowed in the FPA. In its argument, FERC asserted that promoting more participation of storage resources in wholesale markets will increase competition. Consequently, a more competitive landscape will beget lower prices and more diversity of participation models, ultimately bolstering grid resilience and reliability. The ruling may accelerate similar FERC action on distributed energy resources — such as aggregating small behind-the-meter renewable assets — which has been beset by delays. As the nexus of wholesale and retail market integration comes into focus with this ruling, FERC may return to that effort with increased legal certainty.

Future outlook for DERs and storage

The dynamic between states and FERC with regard to electric storage is still materializing, but this ruling offers significant clarity going forward and incents storage development. The DC Circuit affirms that under the FPA, FERC retains the privilege of integrating storage into wholesale markets, while states still dictate interconnection regulations for facilities that ultimately feed into the grid. Dovetailing with Order No. 2222, these orders and related FERC actions signal that regulators have recognized the value — in wholesale electric markets — of renewable generating resources and storage products. Domestic markets in this space may interpret such policies as beneficial to the broader investment environment and, therefore, the opportunities for small renewable facilities and battery installations may accelerate in the light of regulatory certainty.

1 FERC Staff Presentation Item E-1. Available at: https://ferc.gov/staff-presentation-item-e-1
2 The six RTOs and ISOs are as follows: California Independent System Operator Corporation (CAISO), Southwest Power Pool, Inc. (SPP), Midcontinent Independent System Operator, Inc. (MISO), PJM Interconnection, L.L.C. (PJM), New York Independent System Operator, Inc. (NYISO), ISO New England Inc. (ISO-NE)
3 The next five years will see massive distributed energy resource growth. Wood Mackenzie (23 June 2020). Available at: https://www.woodmac.com/news/editorial/der-growth-united-states
4 FERC Order No. 2222: A New Day for Distributed Energy Resources. Available at: https://ferc.gov/sites/default/files/2020-09/E-1-facts.pdf
5 America’s Electric Cooperatives: Co-Op Facts and Figures (as of June 2020). Available at: https://www.electric.coop/wp-content/uploads/2020/06/Coop_FactsAndFigures_June2020.pdf
6 National Association of Regulatory Utility Commissioners v. Federal Energy Regulatory Commission, No. 19-1142 (D.C. Cir. July 10, 2020), pg. 12
7 Id. at 15.
8 Id.
 

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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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