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FERC Order Removes Barriers for Distributed Energy Resource Aggregations in Wholesale Markets

On September 17, 2020, the Federal Energy Regulatory Commission (“FERC”) issued Order No. 2222 (the “Order”) to allow for the greater participation of distributed energy resource (“DER”) aggregations in organized wholesale markets. The long-awaited rule is aimed at increasing competition in electric markets, enhancing grid flexibility and reliability, and leveling the playing field when it comes to organized capacity, energy, and ancillary services run by regional grid operators. The rule will become effective 60 days after it is published in the Federal Register, which, as of this writing, has not occurred and each Regional Transmission Organization (RTO) and Independent System Operator (ISO) must file tariff compliance changes within 270 days of publication.

The Order describes a DER as “any resource located on the distribution system, any subsystem thereof or behind a customer meter.” In layman’s terms, a DER is a small-scale power generation or storage technology that can provide an alternative to, or an enhancement of, the traditional electric power system. These resources typically range from 1 kW to 10,000 kW, and include rooftop solar, electric vehicles, and battery storage, among others. These DERs tend to be easier and quicker to install than traditional large-scale resources which enable them to locate in areas where they are needed and quickly address the energy demands and reduce some market inefficiencies and congestion costs.  

Many of the requirements set by regulatory authorities were created based on traditional technologies and have the effect of limiting the ability for emerging and disruptive technologies to participate in the electric markets. DERs tend to operate on a smaller scale than regional grid operators, which on an individual basis, pose difficulties for these DERs to meet minimum size and/or performance requirements set by these regulatory authorities. DER aggregation, on the other hand, allows a number of DERs to work together to compete against traditional energy assets in a way that each would likely not be able to do on its own. The Order not only enhances competition in the country’s wholesale electricity markets, but also encourages DERs to innovate and “shape the grid of tomorrow”

FERC’s decision has been applauded by many, including Advanced Energy Economy (AEE), a trade association representing the advanced energy industry. Since 2016, AEE has pushed FERC to examine the market barriers faced by DERs. On November 17, 2016, FERC took a preliminary step and issued a notice of proposed rulemaking (NOPR) to “remove barriers to the participation of both energy storage and aggregated DERs in organized wholesale electricity markets”. On February 15, 2018, FERC issued Order No. 841, which directed RTOs and ISOs to remove barriers for electric storage resources but not DERs, citing that the Commission needed more information before finalizing a rule. Therefore, the September 17, 2020 directive represents a major advancement for DERs. Nearly four years after FERC’s NOPR, Order No. 2222 now acknowledges that “existing RTO/ISO market rules are unjust and unreasonable in light of barriers that they present to the participation of distributed energy resource aggregations in the RTO/ISO markets, which reduce competition and fail to ensure just and reasonable rates.”

Developers and owners of DERs have the option under this Order to either offer their services through a third-party aggregator, or to act as their own aggregator if they qualify. Under the Order, each RTO/ISO has 270 days following the date of publication of the Order to revise its tariff to include DER aggregators as a type of market participant, including to allow a single qualifying DER to serve as its own aggregator as opposed to offering products through third-party aggregators. This will allow DER aggregators to register under one or more participation models that accommodate their physical and operational characteristics. The tariffs must also address a number of technical factors including, but not limited to, “locational requirements for DER aggregations; distribution factors and bidding parameters; and metering and telemetry requirements”. In the Order, the FERC did not impose any minimum size requirements and it further explicitly prohibits RTOs/ISOs from imposing minimum size requirements on individual DERs through tariffs. This means that the wholesale markets are open to any DER regardless of size. However, DER aggregators (and any individual DER serving as its own aggregator) must meet minimum size requirements set by the RTO and ISO tariffs. Such a minimum cannot exceed 100kW, imposing only a slight barrier to entry for aggregators. Further, state regulators will be imposing additional regulations in order to prevent DERs from earning money through both utility retail programs and the wholesale markets which they now have access to. The RTO and ISO tariffs combined with state regulations will need to be analyzed closely by DER owners and developers when they are finalized. 

The Order passed with a 2-1 vote, with Commissioner James Danly dissenting. Chairman Neil Chatterjee spoke enthusiastically about the rule, remarking, 

"We at the Commission always talk about being ‘fuel neutral’ when it comes to our actions. But today, the rule we’re issuing is, just as importantly, ‘technology neutral.’  Now, that’s a really critical component of this final rule, because it means it’s built for the future and will allow us to continue to evolve and adapt as emerging technologies and capabilities develop. The policies we’re putting forth today aren’t just near-term, short-sighted wins. They’ll have long-lasting, meaningful impacts for years to come. And that’s something we can all be proud of."

Regardless of restrictions imposed by RTOs, ISOs and the states, this Order allows DER developers and owners to enter new markets and become more integral parts of the electric grid. Projections show that DERs could introduce between 65 GW and 380 GW of energy to power grids, and the flexibility to easily locate in high-need areas promises to create valuable opportunities for these developers and owners and more competitive markets for the foreseeable future.

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Garrett Galvin is an attorney at Mintz who focuses his practice on corporate and securities law, contracts, mergers and acquisitions, debt and equity financing and general corporate matters. He represents clients across the energy and sustainability, life sciences, including biotechnology and pharmaceuticals, and technology industries.