Distributed energy resources (DER) might pack a small punch when considered individually, but a recent order from the Federal Energy Regulatory Commission (FERC) could provide a path to greater DER participation in wholesale markets.
FERC Order 2222 opens the door for DER aggregations — groups of generating facilities, storage, demand response and energy efficiency options that individually might not have sufficient scale to connect to the transmission market — to have access to those wholesale markets. The lower aggregated limit to qualify may vary, determined by local distribution regulators; it cannot be lower than 100 kW. These aggregations represent a virtual construct, not a literal, physical network.
This order might not inspire an overnight development boom, attracting massive investment into the distributed generation space, but it is forward-looking. This is important because even if FERC 2222 does not result in immediate impacts, its effects will increase over time, providing a long-term platform for market engagement by smaller facilities.
What Are the Stakes?
Independent merchant generators interconnecting at distribution levels will continue to install and operate facilities under the Public Utility Regulatory Policies Act of 1978 (PURPA) in pursuit of wholesale contracts, but the most favorable rate of return and highest dollar-per-kilowatt in the near term probably will be retail net metered. This rate — which residential, commercial and industrial consumers pay for power — rolls up to cover the wholesale market rates, transmission wheeling charges, distribution wires and other infrastructure operations.
As local generation and storage costs continue to drop and electric rates increase, more consumers will be incentivized to self-produce. It is important to note that this decentralized grid concept does not traditionally acknowledge the costs for distribution wires, system protection, power quality management and microgrid power management — services often provided by electric distribution companies. In scenarios with high DER penetration, tariffs may need to include fixed fee designs, which can account for these services while remaining decoupled from metered consumption.
As DER penetration increases, an individual generator will find finite value for local, self-consuming energy production. The total achievable rate for kilowatt-hours at retail is determined by the amount of self-consumption the facility itself can achieve. Ideally, any additional generation flows to the grid and serves off-premises load for an avoided cost rate determined by local tariff. But what if there is no local load when the export occurs? What if other markets offer a better rate? FERC 2222 will permit contracted aggregations of these exports. Imagine a third-party service provider who contracts with hundreds of small commercial and residential sites in an agreement to bid some, or all, of their excess capacity into markets.
Waste Not, Want Not
The enhanced market access from FERC 2222 means more than lowering a barrier to participate financially. It also broadens the reach of supply, connecting curtailed or previously valueless supply with demand. Paired with FERC Order 841, energy storage market participants will be able to purchase and store intermittent generation and supply it later, broadening that supply’s market utility.
This might sound like a distant future or unrealistic grid, but California had over a terawatt-hour of curtailed generation in 2020 — wasted clean energy. Services like aggregation, microgrids, virtual power plants and market access should see more development because of this order.
Additionally, if the bulk system becomes less firm in the process of decarbonization, the ability to incentivize and dispatch flexible demand response or reduce baseload over the long term through contracted energy efficiency can pair well with variable generation. In that scenario, the language within the FERC ruling proposes that a one-time reduction in power usage could be bid into a market under a decades-long contract.
Electricity oversupply should be considered a market failure. If cheap surplus power is created, it should be matched with consumers in a free market. Demand should flow to the path of least resistance and balance this supply. DER aggregation under FERC 2222 doesn’t exactly create a new market, but it restructures how the players look. It creates an opportunity for small merchant or private generation producers to pool and sell in markets where they previously had no access.
Pursuing the Value Proposition
What we must understand is the value and utility of this energy. To what degree is it dispatchable? How does its value change locationally? Regional transmission organizations (RTOs) and independent system operators (ISOs) can assess this value and contract an aggregator’s services. Retail electric rates bundle the costs of power quality management and distribution assets. Will the distribution owner be owed any wheeling fees for maintaining the system between DER and transmission?
Distribution authorities should take a clue from the aggregation value FERC has highlighted and recognize where DER aggregates present non-wires solutions or investment deferments. System assessment of locational value will help identify where aggregate supply can be contracted to help with congestion, contingency or other temporary reliability support. Many distribution grid constraints only occur for a few hours of an 8,760-hour year. Contracting DER should, at a minimum, be a tool in this solution space.
Capturing more value from DER is a promising development, but it is worth noting that it doesn’t make things any simpler, especially at the distribution level. Managing distributed supply and demand resources requires more than financial incentives; electrical infrastructure upgrades and distribution modernization efforts are needed to facilitate these programs. FERC 2222 opens many doors, enabling a more sophisticated, flexible, higher-reliability system. Utilities need to begin preparing for the infrastructure changes that will be necessary to make this regulatory change work.
The transmission system can benefit from better access and the ability to connect DER to consumers, but do the system costs work in that direction? How will system coordinators evaluate the technical stability of these resources? What level of confidence will aggregated capacity attain? These are questions that FERC 2222 will bring to the fore as market forces look for ripe opportunities.
Hosting capacity analyses can help utilities identify feasibility and costs for DER interconnections. Learn more about this approach to streamlining a complex process.
