In a landmark order issued on September 17, 2020, the Federal Energy Regulatory Commission (FERC) adopted rules aimed at removing barriers to the participation of distributed energy resources (DERs) in the organized markets for electric energy, capacity, and ancillary services operated by Regional Transmission Organizations and Independent System Operators (RTOs).  Order No. 2222 builds on reforms previously undertaken by FERC and, once fully implemented, should be a major step toward opening up RTO markets to competition, facilitating new entry of resources, and fostering business model innovation.

Order No. 2222 envisions “aggregations,” which are groups of small DERs participating in the RTO markets as a single resource represented by their aggregators.  According to FERC, these aggregations will permit DERs to provide a variety of products and services that will compete with more conventional resources in the RTO markets.  FERC expects that this will, in turn, ensure that rates remain just and reasonable.

Which DERs Will Be Able To Participate?

FERC provides significant flexibility in terms of the individual DERs and DER aggregations that will be able to take advantage of the new rules.  Order No. 2222 and FERC’s new regulations define a DER broadly as “any resource located on the distribution system, any subsystem thereof or behind a customer meter.”  FERC seeks to foster a “technology‑neutral” approach by prohibiting RTOs from limiting the kinds of technologies that can join DER aggregations.  Technologies could include electric storage resources, distributed generation, demand response, energy efficiency, thermal storage, electric vehicles, and more.  FERC further envisions that a DER aggregation could consist of a portfolio of diverse resources and technologies.

FERC declined to impose (or permit RTOs to impose) a minimum size requirement on individual DERs.  Instead, Order No. 2222 requires that DER aggregations meet a minimum size specified by RTO rules, not to exceed 100 kW.  FERC did require each RTO to propose the maximum size for any DER participating in its markets through a DER aggregation, above which a DER would be required to participate on an individual basis.

FERC also provides flexibility in terms of the system location of DERs and DER aggregations, requiring RTOs to specify in their filings locational requirements that are “as geographically broad as technically feasible.”  Because FERC is interested in the participation of DERs in wholesale markets, such requirements are likely to address features of the transmission system (e.g., congestion and constraints) and markets that will enable DER aggregators to identify locations where DERs can provide the most value while integrating into existing planning practices and avoiding reliability issues.  In particular, Order No. 2222 recognizes the potential advantages and challenges of both DER aggregations that are limited to a single transmission node and those that are located behind multiple nodes, and FERC expects that RTOs will need to follow different approaches.

The Potential for Conflict with State Regulators and Distribution Utilities

Given the system location of DERs, Order No. 2222 also carries the potential for exacerbating jurisdictional conflicts between FERC, with authority over the transmission grid and wholesale sales of electricity, and state public utility commissions (PUCs), with authority over retail sales, distribution lines, and distribution utilities.  Despite these challenges, FERC, in essence, required most distribution utilities to allow DERs on their systems to participate in wholesale markets through DER aggregations.

In other ways, however, Order No. 2222 sidesteps potential controversy.  Most significantly, FERC does not attempt at this time to assert jurisdiction over the interconnection of DERs to distribution systems for the purposes of joining DER aggregations and participating in RTO markets.  FERC, therefore will not impose standard interconnection procedures or agreements, and DERs will remain subject to distribution utilities’ interconnection procedures and rules, as well as PUC jurisdiction and oversight.  This could require DER aggregators and project developers to navigate multiple regulatory frameworks.

Further, Order No. 2222 permits RTOs to craft market rules limiting the participation of DERs where those resources receive compensation through other programs (such as those offered by distribution utilities) for providing the same services as they would to the wholesale markets.  While Order No. 2222 thus identifies and addresses the possibility for such “double‑counting,” FERC nonetheless believes that DERs can participate in both wholesale and retail markets, and declines to prohibit this kind of dual participation.  FERC also recognizes the burden that compliance with Order No. 2222 could create for certain small utilities and provides an “opt‑in” mechanism that prohibits RTOs from accepting market bids from DER aggregations, including DERs located on these systems unless authorized by the relevant PUC (or another regulator).

These features of the new rules highlight the fact that fully realizing the promise of Order No. 2222 will require coordination between FERC, PUCs, RTOs, and distribution utilities.  To that end, FERC is requiring RTOs to adopt rules setting forth a process for distribution utility review of DERs, operational coordination, data sharing, and more.

Nevertheless, despite FERC’s efforts to craft a rule that respects the division between its own and the states’ authority, PUCs and distribution utilities are likely to challenge Order No. 2222 on the grounds that it intrudes into state authority.  These arguments could face an uphill fight, given the consideration and rejection of similar claims in July 2020 by the U.S. Court of Appeals for the D.C. Circuit in NARUC v. FERC, which upheld FERC’s landmark energy storage ruling, Order No. 841.

Moving Forward

Order No. 2222’s reforms will not occur overnight and may take years to realize the competitive benefits anticipated from increased participation of DER aggregations. First, FERC’s new rule requires that the RTOs implement these reforms by proposing changes to their tariffs within 270 days of the publication of Order No. 2222 in the Federal Register. On that schedule, we anticipate initial filings likely will occur during Summer 2021.  FERC then will act on these proposals, and RTOs likely will need to submit subsequent filings to comply with any revisions required by FERC.  Order No. 2222 itself also could be challenged, particularly on the jurisdictional grounds described above, requiring FERC to act on requests for rehearing and ultimately to defend the rule before the courts.

More importantly, FERC requires in Order No. 2222 that each RTO proposes a date on which these reforms will take effect in its markets.  Given the complexity of the revisions, certain RTOs may be required to undertake not only to their tariffs, but also their modeling and dispatch software, systems for settlement of charges, and more, the RTOs’ filings may not take effect in some instances for a year or more after being filed, i.e., Summer 2022 or later.

While implementation hurdles remain to be navigated, however, Order No. 2222 has the potential to provide the foundation upon which entrepreneurs develop and deploy new technologies, products, services, and business models.  In an industry long known for large, capital-intensive projects benefiting from economies of scale, DER aggregations have the potential to be financed and deployed quickly to meet existing or emerging opportunities.  Further, by unlocking new revenue streams for DERs, Order No. 2222 could create more value for existing DERs, such as consumer-located batteries, rooftop solar arrays, and electric vehicles, as well as the ability to define a business case for a wide variety of nascent technologies.  In that light, FERC’s new rules could prove to be a disruptive and transformative change to electric utilities and the electric industry broadly.