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FERC’s DER Framework: A Critical Puzzle Piece To a Reliable, Renewable Power System Through Customer Technologies

October 2020

Today’s technologies could empower electricity customers to cut harmful emissions and contribute to a reliable grid while reducing bills—with a few taps on a smartphone. Some barriers to this vision are being eliminated as the agency overseeing the U.S. electricity grid recently finalized a framework that will help modernize a regulatory system built around last century’s power plants. Meanwhile, recent outages in California from a perfect storm of extreme conditions highlight the importance of these reforms and needed complementary actions.

Crowdsourcing power plants

Solar panels, electric vehicles, water heaters, home battery systems, and smart thermostats are products customers purchase for household use, but these and other distributed energy resources (DERs) can act like power plants when coordinated and deployed on the grid. Smartphone apps could help customers optimize flexible electricity use—like water heating or battery charging—to soak up cheap wind and solar generation when plentiful. Technology could also reduce flexible consumption when demand is high and electric grid operators resort to less efficient and more polluting power plants. Over time, DERs could displace some of the least efficient power plants and help bring more wind and solar generation online by balancing their variability. Flexible demand in the U.S. is a resource estimated to reach 200 gigawatts—or roughly 400 coal power plants—by 2030.

Distributed energy resources are everywhere—but how to find them?

Technologies capable of facilitating flexible demand exist today, but customers need incentives, information, and a convenient way to provide grid services. For example, DERs recently helped California’s grid avoid prolonged rolling outages as it suffered through the highest August temperatures since 1985. More than 4,000 megawatts previously invisible to the grid operator materialized after Governor Newsom declared a state of emergency. Most of this response consisted of voluntary, unpaid actions from numerous smaller customers. Ideally, better communication and interaction with grid-enabled customer devices would reduce the need for drastic measures and incentivize efficient actions when electricity is scarce. Providing customer devices with real-time prices and grid conditions and automating responses based on customer preferences could help avoid power outages and higher electricity rates. Indeed, these are some of the recommendations California may take in the aftermath of the recent events.

FERC offers a carrot to bring out the wholesale value of DERs

A recent order from the Federal Energy Regulatory Commission (FERC) can help overcome barriers to small DERs providing paid grid services in the wholesale markets. Unlike most retail rates, wholesale market prices reflect real-time grid conditions. The new order facilitates DER market participation by allowing third parties and utilities to aggregate and manage smaller resources. And attracting these resources to wholesale markets make them visible to the transmission grid operator, which can help during emergencies.

FERC Order 2222 requires its regulated grid operators (Regional Transmission Organizations and Independent System Operators) to revise their wholesale electricity market rules to enable DER aggregations above a minimum size threshold to participate. The order defines DERs to include any resource located on the distribution system or behind a customer meter. Examples are batteries, solar panels and other distributed generation, energy efficient devices, thermal storage like water heaters, and electric vehicles. DERs also include demand response programs, which pay customers to curtail consumption when the grid is stressed.

Market participation rules were largely tailored for large power plants until FERC issued orders to facilitate demand response and energy storage resources. California’s grid operator pioneered DER aggregation, which FERC approved in 2016. Order 2222 builds on these rules and requires FERC-regulated grid operators to extend participation rules to aggregations of any mix of small generation, storage, or demand response resources.

But for FERC’s framework to work, grid operators and stakeholders must hash out critical details to eliminate physical, financial, and coordination-related obstacles to DERs. Many of the details entail coordinating state, local, and federally-regulated entities. They must determine how DERs can interconnect to the local lower-voltage system to access markets organized by high-voltage transmission system operators and how DERs can provide services to both the transmission and distribution systems without being compensated twice for the same service. DERs can receive instructions from transmission grid operators, but distribution utilities can override the transmission system operator, and the DER owner would pay any penalties for not fulfilling its commitments to the transmission system. Successful DER participation rules, therefore, require the transmission and distribution systems to work together.

Past experience: the devil is in the details

Past experience with similar rule reforms show that the details can make or break the case for new resource participation. For example, DER resources have not yet used California’s DER aggregation program, preferring instead to participate through demand response or net energy metering programseven though these participation rules do not include the full suite of services allowed by the DER program. The interconnection process has been easier for demand response participation compared to that for DERs. Further, resources had to choose between participating in net energy metering programs or wholesale markets and so opted to stay with the former. In addition, the rules for what counts toward “capacity” and when the resource needs to be available were more favorable for demand response over DER aggregations. FERC has applied some of the lessons learned from California’s grid operator, which will also revise its rules consistent with FERC Order 2222.

Small but mighty in numbers

The impact from the FERC orders enabling demand response aggregations to participate in wholesale markets is also illustrative. Like DERs, demand response resources can range from larger reductions in energy use—from big-box chain stores adjusting HVAC or industrials delaying energy-intensive processes—to thousands of smaller residential customers turning down their air conditioners. Demand response from larger commercial and industrial customers is easier to organize than aggregating many smaller residential customers—but often more expensive to deploy because it could involve delaying production and sending workers home. Most of this demand response is therefore reserved for emergencies, and demand response today is rarely deployed. But there is a vast reservoir of less expensive—but more difficult to organize demand response—that could be economically deployed more regularly: technology-managed water heaters, pool pumps, electric vehicle charging and smart thermostat programs. Tapping into these lower cost demand-side resources requires upfront investments in technologies that can inform, measure and potentially automate customer response (while allowing customers to override any automated actions). These resources can help even out daily variations in wind and solar generation, enabling the grid to cost-effectively accommodate more renewables. And, in a step up from voluntary conservation calls during heat waves, these resources also would be compensated for providing emergency services.

FERC’s order can help wholesale electricity market rules catch up to new technology developments, but for DERs to realize their full potential, barriers to their ability to provide transmission services need to be eliminated as well. Customers, utilities, and state and local regulators all play an important role in achieving this vision of a sustainable, reliable and modern grid. Some jurisdictions may believe that they are not anywhere close to the situation California saw this past August. But with climate change, weather patterns can be more extreme and less predictable, and we’re all in that same boat. Thus, it can't hurt to work together, get the details right, and start early.

Thank you, Solar Tribune, for your coverage of this and other wonky but important clean energy topics!

More to come! For now, here are some older but still relevant blogs.