On September 17, 2020, the Federal Energy Regulatory Commission (FERC) adopted Order No. 2222, which paves the way for aggregated distributed energy resources to participate in the nation’s “organized” wholesale electricity markets, which operate in regions with Independent System Operators (ISO) and Regional Transmission Organizations (RTO). FERC predicts Rule 2222 will “usher in the grid of the future” by allowing distributed energy resources to compete on a level playing field with traditional resources, thus benefitting consumers and encouraging technological innovation.

Distributed energy resources, broadly defined to include resources like rooftop solar generation, demand response, energy storage, and energy conservation, are located on low-voltage local distribution systems or “behind the meter” on consumer properties, and therefore have generally been unable to compete directly in wholesale electricity markets with more traditional central station generation. With technologies now emerging that permit these small, distributed resources to be aggregated so that they function collectively more like a traditional generation plant, Rule 2222 lays ground rules that will allow these technologies to compete within organized wholesale markets on essentially the same terms as more traditional generation.

Key Takeaways

Key features of Order No. 2222 include the following:

• Distributed Energy Resources: FERC has defined “distributed energy resources” broadly, with the intent that the definition be technologically neutral. “Distributed energy resources” include any energy resource interconnected to a local distribution system or behind the meter on an electric consumer’s premises, and can include either a sink or a source of electric energy. The key requirement is that the resource can be reliably dispatched through an aggregator. Hence, “distributed energy resources” might include small generators like rooftop solar systems, energy storage resources like batteries, demand response, and any other resource that can either inject or withdraw power from the electric system at the direction of the aggregator.
   
• Market Participation Rules: Order No. 2222 requires each RTO and ISO to develop new rules permitting aggregated distributed energy resources to participate in the organized markets operated by these RTOs and ISOs. These rules must permit any distributed resource with a capacity of 100 kilowatts (kW) or more to participate in the market. Market rules will also ensure that these resources can be dispatched, that the resources can be identified by source and location, that they can be metered, and that the resources can be safely integrated into the transmission system operated by the RTO or ISO. The rule contemplates that aggregation software will make it possible to aggregate, meter, and control a large number of small distributed resources, potentially spread across a wide area. The rule also permits a single resource to act as its own aggregator, so it is conceivable that the owner of, for example, a rooftop solar array could take advantage of the rule to sell its output into the wholesale markets as long as it exceeds the 100 kW minimum size threshold and can meet the metering, bidding, and other requirements necessary to participate in those markets.
   
• Interconnection Rules: Rather than imposing federal standards for the interconnection of distributed energy resources, Rule 2222 requires distributed energy resources to comply with state and local rules governing interconnection on local distribution systems. The rule requires that aggregators file an application with the ISO or RTO to which they intended to deliver energy resources, and that the relevant state and local authorities receive notification of the application, including notification of the location of each aggregated resource, to ensure that those resources meet standards for the safe and reliable operation of the local distribution system to which they interconnect.
   
• Opt-In for Demand Response and Small Utilities: The rule permits small utilities – those with four million megawatt-hours or less in annual sales – to opt in. Those small utilities must receive notice of distributed energy resources on their systems that wish to aggregate and sell into wholesale markets and must approve the participation of those resources. Similarly, local distribution utilities retain the option of barring the participation of demand response resources on their systems from participating in an aggregation arrangement.
   
• Electric Vehicle Integration: Rule 2222 creates a path for a number of promising technologies. For example, it has long been recognized that the batteries of electric vehicles can be used as an energy storage resource. Such systems would be able to absorb excess electric power when, for example, wind power is produced during low-load periods, while injecting power into the system when it is needed for reliability or other purposes. Rule 2222 creates the regulatory framework to allow electric vehicle batteries to be aggregated and dispatched in this way and to participate directly in wholesale electric markets.
   
• Impact on Regions Outside an ISO or RTO: Rule 2222 governs only the organized markets in ISO or RTO regions, and therefore does not apply to regions without such organizations, chiefly the Northwest and Southeast. However, as with other FERC rules aimed at the organized markets, Rule 2222 is likely to influence market function in these non-RTO/ISO regions. Further, as the Western Energy Imbalance Market continues to expand both its geographic footprint and its scope of operations, Rule 2222 will lay the groundwork for participation of distributed energy resources in this new market.

Next Steps

As suggested by the fact that FERC Chairman Neil Chatterjee and Commissioner Richard Glick, who have regularly parted ways on controversial FERC actions, both supported Rule 2222, it is unlikely that the rule will generated significant legal controversy. This is particularly true because the most significant legal issue, the extent to which FERC can establish wholesale market participation rules that affect operations on local distribution systems, was recently decided in FERC’s favor by the D.C. Circuit. If any legal controversy arises, it will become apparent when Petitions for Rehearing of Rule 2222 are due, on October 19, 2020.

Further, Rule 2222 sets in motion a compliance process that will result in specific rules and tariffs governing the participation of aggregated distributed energy resources in each of the nation’s RTOs and ISOs. Rule 2222 becomes final 60 days after publication in the Federal Register and each ISO and RTO will be required to submit tariffs complying with Order No. 2222 within 270 days after publication in the Federal Register. Publication should occur in the next few days.

Those interested in the development of these rules should pay particular attention to the compliance processes in the ISO or RTO of interest.

Beveridge & Diamond's Renewable Energy and Infrastructure and Project Development and Permitting practice groups help clients through all stages in project development, from conception through planning, permitting, construction, and litigation. We represent infrastructure project developers, owners, and operators, including private developers, corporations, states, municipalities, and governmental authorities. For more information,  please contact the author.