Smooth Clean Energy Rollout Faces Limits in Power Market Policy

Seventeen months ago, the Federal Energy Regulatory Commission promised “a new day” for a wide array of consumer energy products: rooftop solar, controllable thermostats and water heaters, electric vehicles, and backup generators that could compete with power plants in the energy markets.

The landmark order creating a rule for distributed energy resources—small-scale power generation or storage technologies—was crucial for grid operators to manage increasingly large amounts of renewable energy while facing extreme weather events and cyberattack threats, supporters said.

But now, FERC is weighing proposals that could curtail the rule’s reach and possibly its full potential to ensure a smooth transition to zero-carbon grid.

Grid operators’ proposals to comply with the order are going “off the rails,” said Jon Wellinghoff, a former FERC chairman who is now chief regulatory officer at Voltus, a San Francisco-based company that aggregates distributed energy resources. In December, Voltus asked FERC to convene a conference and hash out major issues, including whether it’s ceding too much authority to state regulators.

“We’re seeing monopoly, anti-competitive forces from generators, transmission owners and distribution utilities that are trying to incorporate into compliance plans barriers” to distributed energy resources, Wellinghoff said.

The rule prompted a regulatory tug-of-war that bubbles up in broader debates over a carbon-free power grid, energy experts say. That’s because federal and state regulators bump elbows on matters of electric policy: FERC ensures a just and reasonable wholesale power market, while states oversee the retail market and local distribution utilities.

Later this month, FERC will sit down with state utility regulators in Washington to discuss ways to ease transmission line bottlenecks that threaten renewable energy development.

‘It Might Get Messy’

FERC’s wholesale market rule is fodder for states and utilities to appeal, challenge, or test the legal bounds of that relationship, said Caileen Gamache, a partner at Norton Rose Fulbright US LLP in Houston and Washington, D.C.

“One of the stickiest issues in this order is around the threading of the jurisdictional needle, and I think it might get messy in the compliance filings,” said Gamache, who represents solar, storage, and other distributed energy project developers.

“It might be a long road with some heartache between here and there,” she said.

It’s already been a journey.

The U.S. Supreme Court in 2016 upheld the right of demand response to participate as an energy product in wholesale markets. In a 6-2 decision, the court overruled concerns from power plant owners and found FERC could regulate the wholesale market even when it has indirect consequences on retail market conditions.

The ruling set the stage for FERC to open up the markets even more.

Hiding in Plain Sight

The role of customer-facing energy products on the broader power grid has long been a thorny regulatory and technical question. Traditional power generation and delivery is ubiquitous, seen in smokestacks, long-haul transmission towers and neighborhood power lines and transformers.

The rising popularity and falling costs of smart home appliances, the internet of things, rooftop solar, and demand response—when customers are paid to drop consumption—put a twist on the power system.

Distributed resources “can hide in plain sight in our homes, businesses, and communities across the nation,” said Neil Chatterjee, then the Republican FERC chairman, announcing the 2020 order. “But their power is mighty.”

Total U.S. capacity could reach as much as 387 gigawatts by 2025 on rising popularity of electric vehicles, residential energy efficiency, rooftop and community solar installations, Wood Mackenzie projects. That’s more than one-third of the total U.S. power plant capacity in 2020, according to the Energy Department.

Distributed resources “are coming—whether regulators want them to come or not,” said Kenneth Schisler, senior vice president of regulatory affairs for CPower Energy Management, a Baltimore-based aggregator of distributed energy resources for the commercial and industrial sector.

‘Where the Tension Lies’

By opening the wholesale market, FERC correctly wants to elevate those products as broader grid resources, said Schisler, who previously chaired Maryland’s state utility commission. The wholesale power market involves generation plants selling to utilities, which then sell directly to consumers on the retail market.

Bundled together, the resources can stabilize the grid, allowing a smooth connection of more renewable generators that depend on sun and wind, said Jeff Dennis, managing director and general counsel for Advanced Energy Economy, a Washington trade association advocating for distributed energy resources.

Electric vehicles can game out this scenario. When EVs are off the road, plugged in, and fully charged, they could return battery power to the grid, Dennis said.

School bus depots, during the school day or overnight, could dispatch power during times of cloud cover or weak winds or could back up the system during a storm-caused outage.

“The question is to what extent are distribution utilities going beyond reliability and safety in an effort to control or manage the market,” Dennis said. “I think that’s where the tension lies.”

Limiting The Scope

Regional grid operators want to limit the geographic scope of bundled resources in the market and impose metering and data-reporting requirements that supporters say are burdensome and unnecessary.

Electric distribution utilities—which operate in the retail power market overseen by state officials—want flexibility, too, citing their legal responsibility to maintain safety and reliability of local grids, grid operators say.

This month,PJM Interconnection LLC, the nation’s largest grid operator, proposed limiting distributed energy aggregations to a single pricing node. Those are tiny geographic areas that number more than 10,000 across the operator’s footprint, which tracks the flow of power to 65 million people in 13 states and Washington, D.C.

That would make companies struggle to bundle enough resources for the market, particularly in rural areas, Schisler and others said.

PJM also pledged to give utilities 60 days to review proposed groupings. PJM would retain the final say over the matter—a provision that could lead to federal and state clashes, Gamache said.

In the Northeast, ISO New England Inc. proposed deferring to distribution utilities the complicated issue of measuring and crediting power from multiple devices that sit behind a customer’s meter.

A FERC spokesperson declined to comment on whether it would approve Voltus’ request to convene a technical conference.

Cooperation Needed

PJM declined to comment and ISO-NE didn’t respond to a request for comment. Trade groups representing utilities and state commissioners didn’t respond to requests for comment.

The Electric Power Supply Association, a trade group of power generators that challenged demand response in the 2016 Supreme Court case, declined to comment.

“This will not succeed without the cooperation of the utilities,” Katherine Hamilton, executive director of the Advanced Energy Management Alliance, a Washington trade association representing providers of distributed energy resources that counts Walmart and Google among its members.

“Utilities need to be able to come to the table and not just say, ‘Oh, this isn’t going to work,’ and pocket-veto it,” Hamilton said.