Week Ending September 18, 2020

FERC Final Rule on DER Aggregation Approved in 2-1 Vote; No Opt Out for States

This Article Appears as Published in Foster Report No 3316
FERC Final Rule on DER Aggregation Approved in 2-1 Vote; No Opt Out for States

With much fanfare leading up to the vote at FERC, a final rule allowing aggregation of distributed energy resources (DER) to participate in organized wholesale power markets was approved by the Commission September 17 on a 2-1 vote, with Commissioner James Danly dissenting.

Danly did not comment on his vote during the open meeting. In his dissenting statement, he wrote that he believes FERC is exceeding its jurisdiction and wading into state authority on resource choices. FERC “should not encourage resource development by fiat,” Danly wrote.

Chairman Neil Chatterjee and Commissioner Richard Glick supported the rule and touted the benefits to consumers and competitive power markets, with enhanced visibility into resources on the distribution system and behind customers’ meters. Chatterjee had commented on the agenda item ahead of the meeting, and during the meeting he spoke about the growth in DER across the U.S. and how enabling participation at independent system operator (ISO) and regional transmission organization (RTO) markets will be a game-changer, just as a similar ruling on energy storage resources is viewed.

With the legal challenges to the storage order, Order 841, resolved by the U.S. Court of Appeals for the D.C. Circuit and the order upheld, FERC felt the time was right to move on the DER aggregation order (RM18-9), which was initially proposed in tandem with the storage rule. The new rule “shares a lot of DNA” with the storage order, Chatterjee said during a media briefing after the meeting.

That storage order was addressed on rehearing by FERC without the full support of former Commissioner Bernard McNamee, who objected to the intrusion on state regulatory authority. The final rule does not allow states to limit DER participation in wholesale markets. Given that policy call and the position of McNamee on the storage order, there was speculation that the Commission waited until McNamee left earlier this month to gain the votes needed to approve the rule.

Chatterjee and Glick said they did not know how McNamee would have voted on the new final rule, even though a draft version had been circulating among the commissioner’s offices since June. The 240-page order reflects a lot of input and work from FERC staff to work out technical details, Chatterjee said, indicating he did not have a substantive conversation with McNamee about how he felt about the final rule.

During a technical conference after a proposed rule was issued and during consideration of the final rule, the role of states was a frequent topic of debate, along with any requirements imposed on utility distribution systems, which are outside of FERC’s authority. The final rule does not include a mechanism for states or retail regulatory authorities to prohibit DER participation in organized markets, or an opt out provision.

The National Association of Regulatory Utility Commissioners (NARUC) is reviewing the order and will determine its next steps when that review is complete, a spokeswoman for NARUC said September 17.

The order addresses concerns about the effect on small utilities by establishing an opt in mechanism for small utilities, similar to the approach taken in demand response rules. Utilities that distributed 4 million MWh or less in the previous fiscal year could opt in under DER aggregation provisions.

State and local authorities retain jurisdiction and authority on distribution system interconnection rules for DER, FERC staff explained. That is a bit of a concern to Glick, who said during the media briefing that some states could use the interconnection process to block or restrict DER participation.

If that happens, however, DER owners could pursue litigation or some type of relief at the state level, Glick said. The order makes clear that states have jurisdiction on interconnection rules for DER, and “we have to hope states don’t use that authority to block participation in wholesale markets” he said.

The Commission concluded that current ISO and RTO market rules create barriers for DER participation, which can lead to grid operators dispatching more expensive resources to meet system needs and harm consumers. The rule will enhance competition and market efficiency and help ensure that ISO and RTO markets provide just and reasonable rates, FERC staff said during the meeting.

The rule defines DER as any resource on the distribution system, any subsystem thereof, or behind a customer meter. It allows DER aggregation for the purposes of participating in capacity, energy and/or ancillary services markets of ISOs and RTOs.

Dubbed Order 2222, the final rule will take effect 90 days after publication in the Federal Register. Within 270 days of the effective date, ISOs and RTOs must submit compliance filings and a plan for implementation of the final rule. Chatterjee said he does not want to speculate on the time it will take to implement the rule, noting that compliance filings with Order 841 are being addressed after that final rule on storage was issued some time ago.

When asked about the 2222 number on the order, Chatterjee said he has never stepped into the numbering discussion on FERC rulings, but did so here to pay tribute to his daughter, whose birthday is February 2, and his wife, whose birthday is October 2. He chose the 2222 designation to “honor the women in my life,” Chatterjee said.

Glick added that his son’s birthday is February 22, referring to the final rule as the “deuces wild order.”

During the meeting, Glick commended former Chairman Norman Bay for initiating the DER proceeding, and Chatterjee also praised his predecessors for getting the ball rolling on consideration of DER issues at FERC. In addition to Bay, Chatterjee mentioned former Chairman Jon Wellinghoff, a Democrat who served under former President Barack Obama, who has been “an informal advisor to me” and worked on DER issues.

Chatterjee defended the approach of the final rule, to respect state jurisdictional concerns. Under the Federal Power Act, it is incumbent on FERC to ensure just and reasonable rates and under the current market rules, ISOs and RTOs need to accommodate DER growth, he said.

FERC acknowledges the final rule’s effect on state and local authorities, and calls for coordination among grid operators, utilities, state and local regulatory authorities and DER aggregators, Chatterjee said.

Similar to energy storage resources that are seeing growing support after initial hesitancy, Chatterjee believes similar support for DER will grow as the power grid of the future reflects more diverse resources that include small wind and solar projects on utility customer facilities, energy efficiency, demand response and electric vehicle (EV) charging infrastructure. Because DER includes small projects that can be on utility distribution systems or behind customers’ meters, they need to be aggregated to satisfy minimum size and performance requirements of ISOs and RTOs. On individual level they are small, but when aggregated “their power is mighty” and they are poised for accelerated investment, Chatterjee said.

Just as Order 841 eliminated barriers for storage resources, the final rule knocks down barriers for the emerging technologies that can be included as DER, Chatterjee said. Estimates of the amount of DER available in the near future range from 65 GW to 380 GW, he said.

“By relying on simple market principles and unleashing the power of innovation, this order will allow us to build a smarter, more dynamic grid that can help America keep pace with our ever-evolving energy demands. I am honored to be at the helm of the agency as we bring this critical rule across the finish line and continue to navigate our nation’s energy transition,” Chatterjee said in a statement.

Under the rule, RTOs and ISOs will have to revise their tariffs to establish DER aggregators as a type of market participant, which would allow them to register their resources under one or more participation models that accommodate the physical and operational characteristics of the resources, FERC explained. The tariff provisions must establish a minimum size requirement for DER aggregations that does not exceed 100 kW, and they must address various technical and operational issues, such as locational requirements, bidding parameters, metering and telemetry, coordination between relevant parties and authorities, and market participation agreements.

The final rule was praised by renewable energy groups that include the Solar Energy Industries Association and the American Council on Renewable Energy (ACORE). By making DER such as rooftop solar and home energy storage available to participate in wholesale markets and expand the nation’s resource base, FERC is rightfully recognizing that any resource able to provide a defined service should be able to compete in the market, said Greg Wetstone, president and CEO of ACORE.

“Unfortunately, FERC is working against this principle in the nation’s capacity markets by continuing to erect barriers to the entry of new technologies” in PJM Interconnection and New York ISO, through minimum offer price rules, Wetstone said in a statement. “While today’s order on distributed energy resources follows in the forward-thinking footsteps of Order 841 on energy storage, no market can be free until arbitrary resource-specific price floors are eliminated,” he said.

In his dissenting statement, Danly said he disagrees with the encroachment on state authority for resource decisions, and that FERC directives are not needed to encourage development of economically viable resources. “I have greater faith in the power of market forces and in the discernment of the utilities and the States,” he wrote.

FERC is going too far into state authority with the final rule, and respect for the role of states would counsel against taking this step, Danly said, recounting the state authority on generation choices, transmission siting and retail sales and distribution under the Federal Power Act. “Each sovereign has a sphere of authority, and in each sphere, the relevant sovereign’s powers are supreme,” he wrote.

Perhaps states cannot or should not prohibit DER participation in ISO and RTO markets, but is not within FERC’s realm to make sweeping declarations about their jurisdiction over distributed generation, Danly continued. “Rather, the Commission’s jurisdiction over wholesale rates would ideally be vindicated, were it to collide with a state prohibition, through a challenge to a specific enactment or regulation by making arguments ‘armed with principles of federal preemption and the Supremacy Clause,’ ” Danly said, referring to a 2004 D.C. Circuit case involving Midwest ISO Transmission owners and FERC.

His preference would be to allow RTOs and ISOs to develop their own DER programs, asserting that if the promises of DER are what they purport to be, “the markets will encourage their development.”

By Tom Tiernan ttiernan@fosterreport.com

 

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