What Does the Landmark FERC 2222 Ruling Mean for U.S. Power Markets?
Traditionally, the regional wholesale electricity market has been the province of large power plants, with distributed energy often facing major barriers to entry. This is, however, changing. There is growing awareness that our power grids need to be more resilient and increased consumer demand for sustainable and renewable energy. Developing the grid of the future means moving away from legacy systems in ways that don't leave consumers in the dark. That’s where the recent FERC 2222 ruling comes in.
What Is the FERC 2222 Ruling?
On Thursday, September 17, the Federal Energy Regulatory Commission (FERC) issued Order 2222. This is a final order that allows distributed energy resource aggregators to compete in all regional wholesale electric markets.
This upholds previous orders that allowed distributed energy resources to compete, but it also extends them to aggregate resources. This allows different technologies to be bundled, including energy storage, on-site renewables, generators, and other microgrid technologies. Very small providers no longer have to compete separately, and aggregated systems can include multiple technologies. The rule does have a maximum size for individual providers. It's now much easier to satisfy the minimum size and performance requirements in competitive markets.
Markets will now have to move to set up participation models, which must adhere to three rules:
- A minimum size requirement of no larger than 100kW
- Proper focus on technical considerations such as locational value
- Advanced metering, telemetry, and data requirements to help move towards a smart grid
This rule builds off of a DC Circuit Court ruling, which affirmed FERC's jurisdiction over wholesale markets. It does limit participation in the capacity markets — that is to say, the purchase of electricity ahead of use — and does leave control over integrating these systems into the grid to grid operators and utilities.
What Are the Limitations of the FERC 2222 Ruling?
There are a few limitations to the rule, aside from the minimum size requirements. For one, the rule does not allow grid operators to accept bids from customers of a small utility unless local retail regulations allow it. It also respects the ability of regulators to prevent demand response being bid into the market by aggregators.
There are also significant challenges for grid operators, utilities, and regulators. State regulators and utility groups have opposed similar rules in the past, which is part of why there is an opt-out mechanism for small utilities. Small utilities might face burdensome compliance regulations otherwise. (The definition of “small utility” being used here is an organization with annual sales below 4 million megawatt-hours). States and utilities will also be able to oversee the interconnection of individual aggregators, which can affect grid operations.
Because of this, full implementation is likely to take time. The order will go into effect in 60 days, but regulators and grids will have 270 days to create their implementation plans. Some grid operators are still working on the previous order, which allows distributed energy providers access to the grid. Additionally, DERs will still have to abide by different rules for connecting to distribution systems. Project developers might still have to navigate multiple regulations, especially if they are located on regional borders. We will need high levels of cooperation to make this work. The order might also be challenged in court. However, historically, the courts have sided with FERC. It is likely to be several years before the full potential is realized.
What Will Change for Consumers?
Ideally, this rule will allow for lower costs due to increased competition and electricity being transmitted shorter distances, which reduces waste. Consumers of larger utilities may also be able to enter into aggregator agreements that allow them to sell excess production from solar and other personal power systems back to the grid in a more effective and reliable manner. This may be of greatest benefit to small farmers and landholders who may be using agrivoltaics and small-scale solar farming to increase the value of their land.
Consumers will start to have more opportunities, such as vehicle-to-grid access, to help reduce energy costs and make better use of power. In the future, it's likely that distributed energy aggregators will begin to solicit homeowners, encouraging the option of retail solar and wind and accelerating the development of the smart grid.
It may also increase consumer choice as consumers can start to leverage more power in the system. The growth of consumer participation as energy providers should also increase education and understanding of how the power grid works and how they can best be used. This may help keep utilities from exploiting customers. The increased competition is a good thing, as long as we take steps to ensure that the grid remains reliable. It will support the development of local energy markets. This will help businesses become 100% renewable and access local resources (again, this reduces waste, as there is inevitably power loss with transmission).
Some consumers, of course, may not notice that anything has changed, especially those who are not able to support power systems (mostly renters).
Where Are the Opportunities for Investors With the FERC 2222 Ruling?
Policy is starting to finally lead technology in this area. For example, vehicle-to-grid is an emerging technology. It allows drivers to make use of their vehicle's battery when it's sitting idle. Technology may soon allow people to use a plug-in electric vehicle as a backup generator during short outages. Alternatively, they could store solar power during the day and release it at night (when most people are not driving). This kind of technology could also be integrated into an aggregator system. With California moving to ban the sale of new gasoline-powered vehicles by 2035, the state may be the best place to invest in vehicle-to-grid technology.
This means cleantech companies don't have to focus on fighting to get regulation to use this new technology. They may finally be able to pull ahead within an existing regulatory framework. The battery gold rush caused by previous FERC orders allowing limited market opportunities may happen again with this order.
The ability to aggregate together multiple types of energy generation provides a particular opportunity to consumer cooperatives. Cooperatives won't have to limit themselves to only customers with solar panels. Instead, they can also bring in other forms of local power generation.
This also encourages investment in new technologies. There are remaining barriers, particularly for PJM's and NYISO's capacity markets, but the barriers are starting to fall.
Another key area for investment is smart grid technologies. Smart meters, smart EV chargers, and other technologies that make the grid more intelligent are already growing. They will be essential to proper integration of the kind of aggregated distributed energy sources the order is allowing for and encouraging.
Software developers have an opportunity here to develop new algorithms to improve two-way metering where users draw power from the grid and then send it back later. It's finally possible to start to envision a world in which every building has smart meters and some form of power generation or storage capacity.
This also means that it's worth considering investing in cybersecurity. Smart grids are vulnerable to hackers. So utilities and aggregators will need to invest in cybersecurity technology, cyber risk management, and training. As DER starts to be integrated on a large-scale, even individual consumers will have to start to worry about being hacked. They'll need education about how to properly and adequately secure devices. Blockchain may become an integral part of securing the power grid and tracking energy transactions. It could even support lower minimums in selling electricity to the grid.
Finally, investors should consider smart buildings with distributed energy generation "baked in" from the point of construction. Large buildings in the future might have integral solar and battery storage systems designed to ensure that they can be part of the grid. These buildings might also support power self-sufficiency. Companies such as Blueprint Power are making this a possibility, both for new buildings and for retrofits. They're using smart building technology to support local power generation. Consider investing in systems that support this at both the infrastructure and software levels.
What Do DERs Need to Do to Thrive?
All of this will only work if aggregators can establish themselves and thrive. A key element of this is establishing consumer trust. Individual consumers who have small-scale technologies — including grid-enabled water heaters, electric vehicles, and residential batteries, as well as the traditional solar panels — need to know more about the benefits of joining an aggregator or cooperative.
Aggregators will also need coordination — not just with utilities and grid operators, but with each other to ensure a more cooperative ecosystem. This is all very new territory, and it will take time for the new grid to develop. However, this order very much opens the door to the development of a true smart grid.
Currently, the smart grid is in its infancy. We still need legacy power sources to ensure the grid's stability and resilience. However, the growth of distributed energy aggregators may help us finally move away from heavy infrastructure and fossil fuels. However, this will require a lot of cooperation and consideration of cybersecurity and customer trust.
One can envision a future in which everyone is both an energy consumer and an energy supplier. For right now, though, the FERC 2222 ruling is likely to accelerate the development of distributed energy. Also, it should help improve competition and grid resilience in the next few years. Do you have your own ideas about how FERC's newest ruling will change things? Let me know about them.