January/February 2021 | Vol. 26 No. 1

by Keith Bradley, Partner, Squire Patton Boggs

Investment in distributed resources has increased in recent years, and forecasters expect the trend to accelerate. Some estimates suggest the combined worldwide capacity of distributed resources will be more than 300 gigawatts by 2025¹. In its recent Order No. 2222, the Federal Energy Regulatory Commission (FERC) has taken a significant step to open U.S. markets to distributed resources.

Particular types of distributed resources have been operating at scale for years by this point. Rooftop solar has become commonplace in many parts of the country, so much so that in California it is approaching 10 percent of net summer generation². Demand response programs are increasingly popular, with more than 20 GW of enrolled capacity in 2019³. More varieties are on their way; distributed solar owners are adding on-site storage, two-way electric vehicle chargers, distributed solar thermal, and more.

The regulatory system and the wholesale market are racing to keep pace with these developments. State utility commissions have handled rooftop solar since FERC determined that net metering programs would not constitute FERC-jurisdictional sales.⁴ The net metering programs that many states and utilities have developed for these systems have been successful but also controversial as utilities, regulators, and customers debate how to allocate the costs. Multiple state utility commissions have engaged in study projects to explore how to bring distributed resources into the market.

Order No. 2222 cuts through many of these developments. FERC demands that aggregators of distributed resources must generally be able to sell into wholesale markets. There are many details to work out, such as eligibility requirements, the terms of participation, technical details about metering and telemetry, and process matters about applying for market access.

Regional Transmission Organizations (RTOs), Independent System Operators (ISOs) and state regulators will make decisions on these matters in the coming years. But FERC mandates that however those details play out for specific situations, distributed resources should be allowed to deliver energy to the bulk grid as a fundamental matter. This is a major change from net metering, in which a rooftop solar generator gets credit for delivering energy to the customer’s distribution utility. Under Order No. 2222, distribution networks will change from one-way  streets to two-way boulevards, delivering energy to  end customers and transmiting it, at scale, from those endpoints to wholesale markets.

This information is not wholly new, of course. There are already facilities interconnecting to the grid through distribution systems, such as industrial cogeneration facilities selling under Public Utility Regulatory Policies Act (PURPA). The FERC order contemplates a major expansion of “two-way distribution,” precisely because FERC is clearing the path for micro-scale resources to participate. The key concept is a distributed resource “aggregator,” which is a business that combines and manages a collection of distributed resources and sells them into the wholesale markets as an aggregate. The aggregate would be over 100 kW, the typical minimum size for a market participant in many existing tariffs, though the individual resources could be much smaller.

The FERC definition of a distributed resource further expands the scope of this wholesale opportunity. It covers any resource located on the distribution system: whether behind a customer meter or in front of it, and whether the resource is generation or some other form. Storage resources, unsurprisingly, are covered; combined assets, like a generator paired with a storage system, can also qualify.

Demand Response

Perhaps more controversially, distributed resources covered by the order may be able to include demand response. FERC determined years ago in Order No. 719 that RTOs/ISOs must enable demand response aggregations to participate in wholesale markets when state or local regulatory authorities allow that.

In the new order, FERC says the existing rules about demand response remain in place, such as the requirement that the relevant regulator permit participation and the technical requirements that RTOs/ISOs are allowed to impose. At the same time, a distributed resource aggregator will be able to include demand response assets in aggregation and bid them into wholesale markets through the new distribution resource channel.

FERC also says the pricing rule established a decade ago, in Order No. 745, for compensating demand response will still apply; at the same time it distinguishes Order No. 2222 participation from existing demand response programs and says RTOs/ ISOs may develop restrictions to keep a given asset from being compensated in both channels. How to handle demand response is likely to be a source of some confusion and debate in the coming tariff filings.

Role of Distribution Utilities

Distribution utilities will play a critical role in making this all work, but most of the details remain to be worked out. Distributed resources will need to interconnect through their distribution utilities to inject electricity into the bulk system,  but FERC is declining to exercise jurisdiction over that interconnection process. State regulators will be responsible for overseeing distribution interconnections, much as they are for net metering programs but now for a broader range of transactions that could include substantial energy injections.

Distribution utilities will have technical concerns, but FERC has not said much about how those will be addressed. It calls for a “review” process, in which a distribution utility will get a specified period of time to review participation by a given distributed resource aggregation before it begins sales. But FERC distinctly refuses to let the distribution utility decide whether the distributed resources can sell; at best, it appears, the utility can ask the RTO/ISO to remove a distributed resource from an aggregation or restrict its participation. The review processes are to be another feature of the forthcoming tariff filings.

To give a flavor of what FERC is expecting, the order suggests that perhaps an RTO/ISO should require that a utility’s request for restriction be supported  by an affidavit saying that sales from the distributed resource would pose a significant risk to safe and reliable operations.

Critically, all of this applies only to distributed resources connected to larger distribution utilities. Utilities that distribute less than 4 million megawatt- hours a year are not required to facilitate sales by distributed resources per se, though state regulators can decide to include smaller utilities in the Order No. 2222 system. Absent such an opt-in from the relevant regulator, a distributed resource aggregator will need to have only assets connected to larger utilities—those over 4 million MWh—and an RTO/ISO must not accept bids from an aggregation that includes customers of smaller utilities.

Questions and Challenges

The regulatory system is going to become more complex. Distribution systems are, of course, ordinarily regulated by state utility commissions, and distribution is beyond FERC authority. But Order No. 2222 says not just that FERC has authority to regulate wholesale transactions by distributed resources if those occur. FERC is also asserting that it has authority to clear  the path for distributed resources to come into the market. This assertion is not uncontroversial, and Commissioner James Danly dissented. We may well see litigation focused on this point.

At any rate, if the order stands, at least in its basic framework, distribution networks will be subject to two regulatory regimes. To go back to the analogy of a two-way street: It is as though the local police department watches traffic one way, and state troopers cover the traffic in the other direction. (And, of course, it’s even more complicated than that, because for the reverse traffic, FERC will regulate the transactions while not regulating the interconnections.)

Many questions remain unanswered, and the compliance filings that RTOs and ISOs must now handle will be complex and contentious. Questions include:

• How will distributed resource aggregators bid geographically dispersed resources into the markets, and how will distributed resources be dispatched?
• What technical requirements will distributed resources have to satisfy, particularly about metering and telemetry?
• Can a resource aggregator swap individual assets in or out of a resource aggregation, and how should that be coordinated with the RTO/ISO?
• How will distribution utilities upgrade their systems to handle distributed resource interconnections, and how will the costs be allocated?

Many of these questions will be answered by RTO/ ISO tariff filings that FERC has now ordered. Many of them will remain for state regulators to work out with distribution utilities.

Tariff filings in response to Order No. 2222 are due October 2021. This is the start of a fascinating journey for distributed resources regulation. ei

Mr. Bradley served as Senior Advisor to the General Counsel of the U.S. Department of Energy (DOE) from 2014 to 2017.

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¹ Jeff St. John, “5 Major Trends Driving the $110B US Distributed Energy Resources Market Through 2025,” Greentech Media, June 22, 2020, https://www.greentechmedia. com/articles/read/5-takeaways-on-the-future-of-the-u.s-distributed-energy- resources-market