The Federal Energy Regulatory Commission (FERC) in September issued Order 2222, a final rule to remove barriers for distributed energy resource (DER) aggregators to participate in the wholesale capacity, energy, and ancillary service markets operated by regional transmission organizations (RTOs) and independent system operators (ISOs). The order, effective this past December, will create new opportunities for DER technologies, such as electric vehicles (EVs), rooftop solar, and behind-the-meter batteries, in the organized wholesale power markets. It is expected to have broad implications, ushering in the electric grid of the future and promoting more competition among electric power generators.
Order 2222 is an extension of FERC Order 841 issued in 2018, which amended FERC’s regulations to remove barriers to the participation of electric storage resources in RTO/ISO markets. Although the proposed rule underlying Order 841 had also considered DERs, FERC ultimately held that more information was needed and tabled final action on DER aggregation reforms. Thereafter, on July 10, 2020, the U.S. Court of Appeals for the D.C. Circuit upheld Order 841, holding that promulgation of the order was within FERC’s authority and that states cannot ban storage resources from participating in wholesale markets.
Based in part on the court’s ruling, FERC determined in Order 2222 that retail regulatory authorities cannot ban DERs from participating in the wholesale regional markets. FERC held it was unjust and unreasonable to mandate certain size and performance requirements as preconditions to participating in RTO/ISO markets. To remedy this issue, pursuant to its authority under section 206 of the Federal Power Act, Order 2222 requires each RTO/ISO to revise its tariff to include provisions that:
■ Establish DER aggregators as a type of market participant, and allow them to participate directly in RTO/ISO markets.
■ Allow DER aggregators to register DER aggregations.
■ Establish a minimum size requirement for DER aggregations.
■ Address a number of additional requirements (such as locational requirements, distribution factors, bidding parameters, and information and data requirements).
Under FERC’s order, DERs include any resource on the distribution system or subsystem, or behind a customer meter, including but not limited to, electric storage resources, distributed generation, demand response, energy efficiency, thermal storage, and EVs and their supply equipment. FERC found that allowing DERs to participate in wholesale markets would enhance competition, and in turn produce just and reasonable rates. FERC also found that DERs could rapidly respond to generation or transmission issues, alleviating congestion costs.
Order 2222 endorses the growing role that new technologies, such as distributed generation and EVs, play in the organized electricity markets. Given that the order requires RTOs/ISOs to provide a level playing field for DERs, it is expected that DERs and DER aggregations will increase in number and size. FERC determined that DERs should be able to realize their full value, allowing DERs that participate in one or more retail programs to participate in the wholesale markets, and to provide multiple wholesale services (with narrowly designed restrictions necessary to avoid double counting). The ultimate economics of DER aggregation participation in wholesale markets will depend on the rules implemented in each RTO/ISO.
Opening wholesale electricity markets to DER aggregations on a larger scale will cause new challenges for the power grid. These rules must address technical considerations such as bidding parameters and metering requirements, with coordination among the DER aggregator, the distribution utility, the regional grid operator, and the relevant retail regulatory authority. Additionally, given that the DER technologies at issue implicate state versus federal jurisdictional boundaries, it is likely that FERC’s order will be challenged on jurisdictional grounds, similar to prior orders on demand response and energy storage.
We expect that FERC, under a Biden administration, will continue with the implementation of Order 2222. A number of states, counties, and municipalities have adopted policies with an eye toward encouraging the use of EVs and other DERs. Increased use of DERs in the U.S. is expected to add to electricity demand, and could stress the transmission system if certain upgrades and considerations are not made. There are implications for EVs and their charging equipment that could benefit from access to wholesale power markets.
Interested parties should participate in the stakeholder discussions as the rules are being formulated. DER owners and aggregators that plan to have their resources participate in RTO/ISO markets should engage in this process, as there are separate stakeholder proceedings that will result in each RTO/ISO submitting a compliance filing to FERC. Market participants expected to be active in more than one RTO/ISO will need to be aware of potential variations among each set of market rules.
Each RTO/ISO must file the tariff changes needed to implement the requirements of the final rule by July 19, 2021. FERC indicated it will require each RTO/ISO to propose a reasonable implementation date, along with adequate support explaining how the proposal is appropriately tailored for its region and implements FERC’s final rule in a timely manner. This means that the new wholesale market rules likely will not be effective until 2022, after these rules are reviewed by FERC. ■
—Ken Irvin and C.J. Polito are partners at Sidley Austin LLP.