Given the state of US politics, it’s safe to say that very few people are paying attention to the Federal Energy Regulatory Commission (FERC) right now — even fewer than usual, I mean.
However, in its quiet and nerdy way, FERC just did something that could help drive a paradigm shift in US energy markets, making them cleaner, smarter, more flexible, and more resilient. In short, the agency proposes to give distributed energy resources (DERs) — batteries, solar panels, smart energy-management software — access to markets where they can compete directly with big power plants. That could open up huge new sources of investment, enabling DER markets to scale up quickly.
I know everyone has limited patience for non-Trump stuff right now, so I’ll keep it short. First, some quick background.
About half the US gets power from competitive energy markets
About half of US power utilities, representing about 60 percent of US electricity demand, are "deregulated," which means they don’t own any power plants. Instead, they procure power for their customers from wholesale power markets.
Those markets are overseen by regional transmission organizations (RTOs), or sometimes independent system operators (ISOs). (The difference between the two is unimportant.) RTOs administer auctions in which power producers bid to provide energy. They make sure that reliability is maintained, everyone follows the rules, and markets operate smoothly.
There are nine regional power markets in the US, and thus nine RTO/ISOs:
FERC created RTOs and is the boss of them.
Distributed energy is scaling up to be a serious player
Traditionally, energy markets have been pretty simple. There’s a bunch of power plants, they bid power into the system, and those who meet the "clearing price" sell their power. The clearing price rises as demand peaks during mid-day — that’s when the "peaker plants" come online. Their power is expensive.
Meanwhile, distributed energy technologies have been rapidly procreating, swarming around on the ground like the first little mammals in the age of dinosaurs.
There’s a wide range of DERs: generation, like rooftop solar; storage, like home or EV batteries; and smart software/devices/appliances, like the Nest thermostat.
Until fairly recently, DERs were too widely dispersed, poorly tracked, and small in scale to play a role in wholesale energy markets. To participate, they needed to be more trackable, predictable, and controllable.
That’s starting to happen. In particular, it is now possible to aggregate large numbers of DERs into "virtual power plants." By using information technology to coordinate the behavior of a large number of distributed devices, an aggregator can effectively make them behave like a single, large, predictable source.
"Virtual power plant" is somewhat too modest, however. DERs do more than generate energy. They can also store it. They can shift electricity demand in response real-time grid conditions. They are smart power plants, which can to some extent serve as both controllable supply and controllable demand.
One of the best ways to scale up DERs is to give aggregators access to wholesale energy markets. That’s where the big money and long-term contracts are. If aggregators can participate in those markets, it could give distributed energy a rocket boost.
Which brings us to last week’s FERC ruling.
FERC to RTOs: get ready for distributed energy
FERC has already taken some steps to open power markets to DERs. For instance, a couple of years ago it issued Order 745, which said that RTOs have to treat demand-response aggregators the same way they treat power plants. (That order was quite controversial; it went all the way to the Supreme Court, which ruled in favor of FERC.)
Last week, however, FERC went further, proposing a new rule that would represent a huge step forward for DERs.
The details are somewhat technical, but here’s the short version.
For every different kind of source that participates in energy markets, RTOs develop a "participation model," which FERC defines as "a set of tariff provisions that accommodate the participation of resources with particular physical and operational characteristics."
That’s a complicated way of saying that every source participates in markets based on rules designed for that source.
The new rule is in two parts. The first part instructs RTOs to come up with a participation model for electricity storage. The second instructs them to come up with a participation model for DERs.
FERC is telling all the RTOs that they have to allow distributed energy into their markets.
Part of doing that means recognizing the different value streams ("unique attributes") that these resources provide the grid. Different DERs provide a wide range of different energy services. There’s electricity, of course, but there’s also frequency regulation, capacity, storage, demand response, and more. (You don’t need to know what all these are; suffice to say, they help make the grid more stable and resilient.)
To develop a participation model for DERs, RTOs will have to detail what those value streams are and what they’re worth. Since the value of DERs is an extremely hot topic right now among utilities, that process should be quite interesting to follow.
Some RTOs are ahead of the game on this. CAISO, in California, already has special tariffs set up for "Non-Generator Resources." But in other regions of the country, markets for distributed energy and storage have been hampered by lack of structured access to larger markets.
This rule is going to open that up. It could help kick of a fundamental shift in the way power markets work. Where a few large generators now dominate, soon there may be hundreds, thousands of resources of every size and nature bidding into those markets. Rather than relying on physical scale, DERs will rely on intelligence, on smart, responsive software that links them together and gives them virtual scale. It’s going to be fascinating.
Ha ha, you thought this post was Trump-free
The proposed rule now enters a 60-day comment period, after which it will be scrapped, amended, or issued as an Order.
As the mathematicians among you will note, 60 days is just a few days shy of the beginning of the Trump administration. So there’s some chance this thing could get on the books before Trump takes over.
Right now, two of the five FERC commission seats are open. Presumably Trump will nominate people to those seats, and it’s a good bet that whoever he nominates will be a) a big believer in old-school central generation, b) hostile to distributed energy, and c) quickly confirmed by the Senate.
Even if Trump got busy, though, that will still leave the commission with a 3-2 majority of Obama appointees. That means the rule is probably a safe bet to pass. But if November 8 taught us anything, it’s that anything can happen.
If the rule does become an Order and DER markets accelerate, it will be a huge source of optimism and positive news for climate hawks, in an era when such news is likely to be difficult to come by. Thanks, FERC.