Some of you may recall the clarion call of summer with announcements of 31 flavors of ice cream available at a Baskin Robins near you, and if not, I just sorely dated myself. This year we can expect to see something similar as we await the unfurling of new tariff proposals for distributed energy resource (DER) market participation.
FERC Order 2222 requires our nation’s grid operators this summer to file their proposed tariffs for allowing DERs to participate in the country’s organized capacity, energy, and ancillary services markets. FERC intended for the order to apply to DERs on an electric utility’s distribution system, a subsystem of the utility’s distribution system or behind a customer meter. Further, the resources may include distributed and intermittent generation, demand response, energy efficiency, thermal and electric storage, or electric vehicles and their charging equipment. It’s purely a guess, but who’s to say there won’t be 31 variations or more of new DERs participating in our wholesale markets when all is said and done?
During the signing announcement of Order 2222, FERC Chairman Neil Chatterjee suggested that the United States could see 65 gigawatts of DERs come online over the next four years. Wood Mackenzie has projected that the cumulative distributed energy resource capacity in the United States will reach 387 gigawatts by 2025 (see: United States distributed energy resources outlook: DER installations and forecasts 2016-2025E - Executive summary | Wood Mackenzie). These projections are occurring with the backdrop of the COVID 19 pandemic, which led to a crash in electricity demand in 2020, and projections that demand for electricity will not return to 2019 levels until 2025. Further, the agency believes even long-term demand growth will average little more than 1% until 2050.
Given these lackluster projections for electricity demand growth, how, when, what and where will Order 2222 inspire the rapid growth in DERs proponents are forecasting? FERC apparently believes the how is due to the attributes of DERs and aggregations of DERs. Chatterjee stated they can be developed faster, sited more strategically and, in some cases, respond more rapidly to changing grid conditions and needs. Most will agree it is hard to bet against the advances we’ve seen in supply and demand side energy resources in recent years and the potential that may exist when we aggregate these resources to achieve greater economies of scale. However, the determinants of success, particularly the where and when, may rest upon the rules adopted by the ISOs and RTOs to implement the order.
Energy experts characterize Order 2222 as a logical extension of the 2018 Order 841, which contains rules for batteries and other energy storage systems to participate in wholesale markets. Those rules were adjudicated and are still in the process of being implemented. With its much broader scope, Order 2222 may take longer to fully implement than some would hope. However, FERC’s victory in an Order 841 challenge confirmed that it has jurisdiction over distribution level resource participation in wholesale markets. Nonetheless, the new DER order adds a level of complexity for utilities, grid operators, and state regulators, which will now have the mind-boggling task of integrating the rules for operating behind-the-meter, low-voltage distribution level and bulk power market assets. Clearly, there are arguments that the timing of final rules for participation of DERs in our wholesale markets will be accelerated or delayed based on our experience with Order 841. We simply know the festivities are set to begin this Summer.
Turning now to the “what” or the type of resources Order 2222 may incentivize, Wood Mackenzie believes the DER mix will transition from nonresidential load management, which made up two-thirds of all U.S. DER capacity in 2015, to solar, electric vehicle infrastructure and residential load management such as grid-interactive appliances. This is likely due, in part, to the assertion by the North American Electric Reliability Corp. (NERC) that the need for demand response in North America will remain flat at around 35 gigawatts through 2025.
Then what drives the investment in up to 387 gigawatts of DERS? One answer may simply be 100 years of pent-up demand by the public to choose their own flavor of energy, capacity, and ancillary services. Another possibility may be congestion relief or other economic factors. Even during a time of limited (or nonexistent) growth in demand, congestion likely is occurring all over the U.S. A study conducted by Grid Strategies, LLC found that congestion costs reported by RTOs/ISOs cost the U.S. over $5 billion in 2018 (transmission-congestion-costs-in-the-u.s.-rtos.pdf (watt-transmission.org) ). Extrapolated to the entire U.S., the firm estimates that congestion raised prices by $8.3 billion.
We can only make educated guesses right now about the implementation details of Order 2222. The expectation held by many is that lots of new energy, capacity, and ancillary service flavors, maybe 31, will be coming to a market near you to meet customer innovation demands, drive down congestion costs and reduce market inefficiencies.
