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FERC Enhances Role of Distributed Energy Resources in RTO/ISO Markets

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On September 17, 2020, the Federal Energy Regulatory Commission (“FERC”) issued Order No. 2222, entitled “Participation of Distributed Energy Resource Aggregations in Markets Operated by Regional Transmission Organizations and Independent System Operators.” The purpose of Order No. 2222 is to remove barriers to the participation of distributed energy resource aggregations in the Regional Transmission Organization (“RTO”) and Independent System Operator (“ISO”) markets (“RTO/ISO markets”). The order defines distributed energy resources broadly to include any resource located on the distribution system or any subsystem thereof or behind a customer meter. These resources may include, but are not limited to, electric storage resources, distributed generation, demand response,1 energy efficiency, thermal storage, and electric vehicles and their supply equipment.

Order No. 2222 requires RTOs and ISOs to amend their market rules to allow distributed energy resources to participate in the RTO/ISO markets as if they were a single, larger resource through a new type of market participant known as a resource aggregator. The minimum aggregate amount required to participate will be no larger than 100 kW, and individual markets will be permitted to propose smaller minimums if they choose. There is no maximum size for the aggregation. FERC declined to establish a minimum size for an individual resource to be included in an aggregation but directed each RTO and ISO either to propose a maximum size for inclusion or explain why a maximum size is not necessary. The effect of a maximum size would be to establish a threshold at which a resource must participate in the market on an individual basis.

Order No. 2222 is expected to provide significant benefits to developers and owners of distributed energy resources, as well as the newly created market segment of resource aggregators. Under current market rules, distributed energy resources often could not meet the technical requirements, such as minimum size or operating characteristics, to participate in the RTO/ISO markets. Order No. 2222 opens the possibility for distributed energy resources to access new revenue streams (including capacity payments in certain markets).  Moreover, the order allows for aggregation of multiple technologies, which may increase the value of each component of the aggregation. FERC determined that, while some individual resources or certain technologies may not be able to meet the qualification or performance requirements to provide certain services to RTO/ISO markets on their own, they may be able to satisfy such requirements as part of a distributed energy resource aggregation where resources complement one another’s capabilities. For instance, FERC stated that aggregating electric storage resources with distributed generation could allow the aggregation to achieve performance requirements (such as minimum run times) that an electric storage resource could not meet on its own and provide services (such as regulation) that distributed generation may not be able to provide on its own. The ability to participate in the RTO/ISO markets may also cause developers to increase the scale of the facilities. A solar facility located on a customer site could be sized to be larger than the customer requires with the excess being aggregated and sold into the RTO/ISO markets.

Order No. 2222 does place a few constraints on aggregation, although FERC attempted to limit their impact. First, the RTOs and ISOs may propose rules that prohibit a distributed resource from being compensated twice for the same service. For example, energy put onto the grid under a net metering arrangement cannot also be sold into the energy market. FERC stated, however, that any rules against double counting must be narrowly tailored. FERC acknowledged that a distributed energy resource may have the ability to provide services simultaneously in the retail and wholesale markets and should get paid for both. Second, the RTOs and ISOs are required to propose geographic limitations on aggregation that are as broad as technically feasible. Geographic limitations may limit the ability to aggregate multiple technologies or may make it harder to meet the minimum size requirement. There will likely be some variation in the geographic limitations across markets, with some markets limited to a single pricing node while other markets may allow aggregation across multiple nodes. Within markets, aggregation may be limited geographically due to transmission congestion.

FERC made a helpful ruling regarding regulatory compliance by deciding that a distributed energy resource that participates in RTO/ISO markets solely through a resource aggregator will not become a public utility under the Federal Power Act. This means that owners of distributed energy resources and their investors will not have to comply with filing and reporting requirements for potentially dozens of public utilities. It also means that interests in distributed energy resources that participate in the RTO/ISO markets solely through an aggregator may be bought and sold without the need to obtain prior FERC authorization under Section 203 of the Federal Power Act. Whether a distributed energy resource that participates in wholesale markets on an individual basis — either inside or outside of the RTO/ISO markets — is a public utility would continue to be determined based on current FERC policy.2 FERC also clarified that a resource aggregator that makes sales in RTO/ISO markets will be a public utility while one that aggregates solely demand response resources will not be.

The one area where FERC did not go as far as it could have to support distributed energy resources is interconnection. Some commenters urged FERC to adopt standardized procedures for any resource desiring to participate in an aggregation. This would have required overriding state tariffs. FERC opted to leave all existing interconnection procedures in place, which may signal that FERC did not want to pick a fight with state regulators. FERC also did not want to create a flood of interconnection requests for the RTOs and ISOs to process.

Order No. 2222 leaves many of the details of the required changes to the market rules to the RTOs and ISOs, including the role of distribution utilities in reviewing individual energy resources that propose to participate in an aggregation, ongoing operational coordination to ensure the safe and reliable operation of the transmission and distribution systems, the role of retail regulatory authorities, and the terms and conditions of market participation agreements for resource aggregators, and it will take some time for the details to be worked out. The order takes effect in 90 days and the compliance filings from the RTOs and ISOs are required in 270 days. The stakeholder committees in the various markets will have a great deal of input on the compliance filings, and the specifics may impact how much the rule actually benefits distributed energy resources. Although the notice of proposed rulemaking proposed that the compliance filings be made effective one year after the final rule, Order No. 2222 allows each RTO and ISO to propose a reasonable implementation date in its compliance filing. Those implementation dates are likely to be more than one year in the future.

1 The participation of a demand response resource in an aggregation is subject to the opt-in and opt-out requirements of Order Nos. 719 and 719-A.  If the relevant electric retail regulatory authority where a demand response resource is located has either chosen to opt out or has not opted in, then the demand response resource may not participate in a distributed energy resource aggregation.

2 Under current FERC policy, a distributed generation resource or an electric storage resource that directly makes sales in wholesale markets is a public utility while such a resource that injects electric energy onto the grid under a net metering program is not.  A demand response resource that participates in a wholesale market is not a public utility.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.