Insights from the era of FERC Order 2222

Insights from the era of FERC Order 2222

January 28, 2022

By: Connor Waldoch, Senior Manager, Policy & Regulatory Affairs

The growth of distributed energy resources (DERs) is rapidly accelerating nationwide, prompting the Federal Energy Regulatory Commission (FERC) to issue a landmark new order in the fall of 2020: Order No. 2222. DERs exist somewhere between traditional demand response (DR) and centralized generation; they’re sometimes able to participate in full energy and ancillary services, and often able to generate revenue via utility DR programs. As a result, this new resource class has struggled against ill-fitting regulatory schemes and market structures.

Significant strides toward reform have been made on the utility side, often driven by state policies like the VDER construct established in New York by the Public Service Commission. However, the progress in wholesale markets has been less consistent. Order No. 2222 aims to change that by reducing barriers to DER participation in wholesale markets and by requiring the Independent System Operators (ISOs) ISO and Regional Transmission Organizations (RTOs) to address issues of integration and coordination of these resources between their operators, the market, and distribution utilities.

Ultimately, the rule aims to enable DERs to compete in wholesale markets with traditional resources, continuing to drive innovation in this space in order to increase system reliability and lower costs for consumers. Order 2222 does not force a new resource mix on US energy markets. Rather, it acknowledges the existing shift in the nation’s resource mix and seeks to coordinate and standardize that ongoing transition. To date, the evolution of market products has not kept pace with the proliferation of small-scale energy generation and storage technologies.

Most ISOs/RTOs have recognized the growth of small, distributed resources and have either implemented, are in the process of implementing, or are considering market design changes. However, those design processes tend to rely on outdated snapshots of where technology was at the time design inputs were required, which fail to account for the rapid pace of innovation in this space. Traditional stakeholders continue to drive these proceedings, upholding design processes derived from the era of vertically integrated utilities, single owners of expansive transmission and distribution networks, and large central generators - each of which may retain preferential rights.

These individual ISO/RTO processes are inadequate to deal with the rapid deployment of small resources that can behave similarly to traditional generators. They are also ill-equipped to deal with the capabilities that network-connected electrical devices can bring to electricity markets, even as the use of these devices has exploded everywhere from residential homes to big box stores. This device uptake is fueled both by market forces as well as local, state, and regional policies intended to spur electrification and sustainable living standards backstopped by clean energy and distributed resources.

Energy market design needs to borrow a concept from modern urban design and go multimodal. Instead of centralized highways eviscerating local communities, modern urban planning looks to resuscitate walkable communities and present a range of transportation options, balanced against a pressing need to optimize environmental impact and equity in infrastructure.

The energy industry is undergoing a similar shift as interest in microgrids and hyperlocal resources grows. ISOs/RTOs have the ability to avoid the issues faced by cities and transportation planners - no one likes a heap of scooters blocking the sidewalk - by meaningfully engaging with FERC-directed market design. That way, not only can they ensure they are responsive to these shifting paradigms, they can also proactively enable and benefit from them.

Crucially, these resources will be deployed into ISO/RTO territories regardless of market operator action. Whether through policy-driven incentives or simple economics, as prices for solar generation, energy storage, and electric vehicles continue to drop, consumer uptake will continue its exponential growth trajectory. Market operators have an opportunity with Order No. 2222 to make sure that their markets have insight into the resources reshaping their grids and dramatically altering operating conditions. A failure to fully engage with this emerging resource class will only lead to further abstraction from “the grid on the ground” and may cost consumers in the future as reactionary changes would be required in lieu of timely adaptation.

This introduction is the first in a series of blog posts exploring these issues, the spaces between FERC’s order, stakeholder interests, and ISO/RTO implementations - as well as the anticipated friction associated with proposed implementations. We will be breaking things down along the parameters defined by FERC in the original order, discussing implementation filings along with responses, and sharing our insights about current operations along the way.

In our next post, we’ll talk about coordination: With whom? By what method? Under what constraints? Why communicate at all?

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