When a rancher opens a gate, his livestock can move through it to the next pasture, but only a few cattle at a time; limited by the width of the gate. But if he removes an entire fence, he now has a single, much larger pasture for his livestock.
This pastoral allegory captures the regulatory watershed that the utility industry finds itself in with the passage of FERC Orders 841 and FERC Order 2222. Until recently, only utility scale generation resources connected to the transmission grid were able to participate in the wholesale market.
“Soon there will no longer be a fence, and distribution-level generation and
demand resources will be able to participate as well”
What will this mean for the future of Distributed Energy Resources (DERs) in the wholesale electricity market?
In 2018, FERC issued Order 841, intended to allow access of energy storage resources to wholesale markets. FERC commissioners themselves proclaimed this to be an important step forward towards the development of a clean energy economy, and there were the predictable objections by some groups and endorsements by others. In essence, however, the commission ordered ISOs and RTOs to develop protocols and rules for participation of these resources, reasoning that the capacity and energy of these resources should be represented in the wholesale market in order to assure “just and reasonable” rates for customers.
Legal challenges to Order 841 focused on (among other things) whether FERC could apply market rules to procedures which had been applied under state rules (the lack of “opt-out” clauses, for instance). This was essentially a state authority vs. federal authority argument, and it found its way to the D.C. Circuit Court of Appeals in July of 2020. In its opinion, the Court cited that certain state rules and prohibitions in the wholesale market “directly affects wholesale rates” and therefore is within FERCs jurisdiction. The challenges were rejected.
FERC Order 2222
FERC Order 2222 was passed in September 2020 and extends this participation model to all distributed energy resources such as rooftop solar, retail demand response resources, micro-grids, aggregated DER, and others. The order instructs grid operators to create rules for distributed energy resources (DERs) to be aggregated in wholesale energy markets.
Order 841 opened the gate, Order 2222 removed the entire fence. “What does full participation of load resources, DERS, micro-grids, and the like in the wholesale market mean, and how will this change the market?”
DERs currently participate in the wholesale market, but nearly 100% in the form of demand response from a local utility or municipality. This utility can call on this capacity to lower its coincident peak (and thus reduce its RTO and ISO fees), to respond to system emergencies, to reduce its exposure to wholesale,prices if its load exceeds its resources, and to capture value in the market during scarcity conditions. These actions are discussed in a separate article, and have been in use for many years as markets have evolved.
FERC’s justification for integrating these resources into the wholesale market is to ensure the value thus presented can be fairly calculated into the market-wide wholesale prices. The capacity is freed to present itself and its costs to the entire market, and the market can in return calculate the marginal price signal for all resources and loads reflecting this additional capacity. In its authority to ensure “just and reasonable” rates for customers, FERC is foreseeing a time when these additional resources could exert a major influence on wholesale prices.
The effect of these actions is envisioned as a comprehensive, fluid energy supply landscape at the RTO and ISO level, with thermal power generation resources, energy storage resources, and distributed resources moving in and out of the space constantly, based on pricing signals and obeying technical restrictions of all resources.
Although the timeline for full implementation of all the concepts and mandates of FERC Orders 841 and 2222 is uncertain (but probably measured in years), the energy environment that will emerge will be vastly more complex and interactive than the current market. Energy professionals who witnessed the transition from old-style regulated markets to deregulated LMP markets should expect an even more transformative change, the effects of which will be long lasting and unpredictable.
Opportunities abound for innovation and creativity, at the customer level,
utility level, and even the RTO/ISO level.
Forward-thinking approaches and technological advancement will necessary. Thoughtful discussion of the possibilities represented by these changes in the industry are helpful in preparing for this vision of the future. Be prepared!
1. This is the first in a series of blogs that will explore the future of demand side resources and their expansion into the wholesale power marketplace. We will look at this subject from many angles, from the regulatory environment to technical and business aspects. My goal is to stimulate discussion and conversation on these topics.
2. The next article in this series will explore “A Day in the Life” of the fluid energy landscape of the future and paint a picture of what participation in that market will look like from the points of view of different players.