FERC Opens the Door for DERs in Wholesale Markets. Now It’s Up to Grid Operators to Bring Them In.

On September 18, the Federal Energy Regulatory Commission (FERC) issued Order No. 2222, a long-awaited order setting the stage for aggregations of distributed energy resources (DERs) to participate on a level playing field in the wholesale markets operated by Regional Transmission Organizations and Independent System Operators (RTOs/ISOs). Adoption of these small, flexible, customer-sited resources has proliferated across the United States, primarily driven by customer demand, technology improvement, and falling prices. However, DERs have been largely left out of U.S. wholesale power markets. FERC’s order embraces these market trends and directs RTOs/ISOs to remove market barriers and allow aggregated DERs to compete. That opens the door for new revenue streams for DER owners, new business models for DER aggregators, and new flexibility for the grid. But realizing this potential will depend on how RTOs/ISOs implement the order.

When DERs are discussed, we tend to think about homeowners or businesses installing rooftop solar panels to reduce their carbon footprint and save money, or the use of battery storage to manage demand charges or provide backup power during an outage. While these small resources provide concrete value to their hosts/owners, they’re also capable of providing broader value to the power system as a whole. As we detailed in our report, “Putting Distributed Energy Resources to Work in Wholesale Markets,” allowing DERs to aggregate and access wholesale markets can save everyone money by optimizing overall asset utilization, increasing competition, and providing alternative solutions that limit the need for costly infrastructure upgrades. Integrating DERs in wholesale markets also provides a new flexible set of resources that operators can call upon to maintain reliability and address resilience threats like extreme weather. 

That’s why, since 2016, AEE has been advocating that FERC issue new rules to allow distributed energy resources to aggregate to participate in the RTO/ISO wholesale markets. In 2018, FERC split out DERs from its consideration of energy storage, which led to Order No. 841. Order No. 2222 is the much-anticipated culmination of FERC’s separate DER proceeding. 

The order directs RTOs/ISOs to ensure that aggregations of DERs are able to sell all of the wholesale services they are technically capable of providing. This means, for example, that the batteries in homes, solar panels on rooftops, electric vehicles and charging equipment in garages, and demand response and energy efficiency created by smart appliances and controls will all be able to pool together and bid into wholesale energy, capacity, and ancillary services markets. 

As a result of Order No. 2222, DERs will soon be able to provide a range of valuable wholesale services and compete directly with traditional resources, spurring innovation, lowering costs, and displacing conventional power plants and reducing carbon emissions.  As FERC Chairman Neil Chatterjee stated in announcing the order, referring specifically to electric vehicles as one form of DER:

“When [electric] vehicles are charging . . . they amount to a significant energy resource that could – over time, using the power of advanced technologies – be managed through aggregations to provide a range of services in our organized energy markets. They could provide energy and spinning reserves, or even frequency regulation. By unleashing the power of EVs in this way, we have the ability to further drive down costs in our markets and bolster grid resilience. That’s to say nothing of the added benefit of emissions reductions we could see from increased EV deployment.”

FERC’s order points toward a future in which aggregations of DERs can provide a wide variety of services in wholesale markets, thereby providing a new source of revenue for DER hosts and aggregators. FERC defines the DERs that are eligible to participate in wholesale aggregations broadly to include any resource located on the distribution system or behind a customer meter. This encompases a range of technologies such as battery energy storage, renewable energy, distributed generation, demand response, energy efficiency, thermal storage, and electric vehicles (EVs). 

In addition, Order No. 2222 makes clear that these technologies will be allowed to be combined in many different ways and that RTOs/ISOs may not adopt rules to prohibit particular technologies from competing. Importantly, the order also specifies that resources participating in retail programs may also participate in wholesale markets, as long as they are not being compensated twice for the same service. Further, FERC declined to allow states and utilities to opt-out and prevent the DERs on their distribution grids or on the premises of their customers from participating in wholesale markets. Only small utilities (with annual retail sales of 4 million MWh or less) are exempt from the requirement that DERs be permitted to participate in wholesale markets through aggregators.

While FERC provided these guardrails to ensure broad market participation by aggregated DERs, the implementation details are left to the individual RTOs/ISOs. Each RTO/ISO will now work with stakeholders to design its own market rules that address specific technical and operational details governing market participation by DER aggregations. These market rules will ultimately determine the extent to which DER aggregations are truly allowed to access wholesale markets and compete on fair terms. Key technical and operational details that RTOs/ISOs must address in compliance with Order No. 2222 include:  

• No Double Counting: Order No. 2222 allows DERs to participate in both retail and wholesale markets, as long as they do not receive compensation twice for the same service. The order directs RTOs/ISOs to develop market rules that, among other things, set forth clear, transparent, narrowly tailored restrictions to ensure DERs are not paid twice for the same service. Given that many DERs provide retail services, these market rules will be critical to determining whether they could be excluded from wholesale markets to prevent double-counting.
• Aggregation Limits: While FERC directs RTOs/ISOs to establish “locational requirements” that allow DERs to aggregated into a single resource in a manner that is as “geographically broad as possible,” it declined to mandate that DER aggregations be permitted across pricing nodes, leaving the door open for RTOs/ISOs to limit them to single pricing nodes. This would reduce the opportunity to build larger aggregations that can provide more services. 
• Metering and Telemetry Requirements: FERC gave RTOs/ISOs flexibility to demonstrate what metering and telemetry is needed to ensure that they can efficiently and reliably run the markets and operate the grid, while cautioning that such requirements should not result in unnecessary and costly barriers to market participation. Requiring costly telemetry technology at individual DERs, for instance, could make market participation prohibitive for aggregations of many small DERs.
• Coordination Protocols and Procedures: Order No. 2222 requires development of extensive market rules with respect to coordination among RTOs/ISOs, distribution utilities, DER aggregators, and state and local retail regulators. These markets must address several coordination issues, including (but not limited to) implementing a process for distribution utilities to ensure that the individual DERs in an aggregation are capable of participating in the market and can do so safely and reliably. FERC also directed the RTOs/ISOs to establish a process to allow state and local retail regulators to participate in coordination, if they choose. These critical processes must be carefully designed to ensure effective coordination without creating new barriers to DER participation in the markets. 

Additional details on these key compliance issues, and a more complete list of compliance requirements and key determinations in Order No. 2222, can be found in a new paper from AEE. “Opening the Door to DERs” summarizes Order No. 2222’s key findings and determinations, catalogues the specific compliance requirements that RTOs/ISOs must satisfy, and highlights compliance details that will ultimately determine the extent to which wholesale markets are ultimately opened to participation by aggregated DERs.

The many decisions left to RTOs/ISOs will be critical to ensuring that DERs are able to provide all of the services they are technically capable of providing. RTOs/ISOs are required to submit proposed implementation plans within 270 days of the order’s publication in the Federal Register. FERC will then review those proposals to determine whether they are consistent with the requirements of Order No. 2222, and issue subsequent orders ruling on each RTO/ISO’s plan. 

When the rules will get implemented is uncertain and will likely differ for each region. FERC did not propose a specific date by which each RTO/ISO must have market rules in place. Instead, it directed that each RTO/ISO propose in its compliance filing “an implementation plan appropriately tailored for its region,” and stated that this plan “must outline how the final rule will be implemented in a timely manner.” 

It is critical that the advanced energy industry closely monitor and engage in the RTO/ISO process of developing compliance plans, to ensure that they do not erect new barriers to DERs. If Order No. 2222 is fully implemented, DERs could usher in a more distributed, flexible, reliable, customer-focused electricity system, but only if the market rules created by grid operators reflect – and embrace – this new reality.