Distributed energy resources (DERs), like rooftop solar, electric vehicles, and water heaters, can make money and derive other benefits for their owners by selling energy and other grid services in regional electricity markets. These resources are typically smaller in scale than other energy resources, but can have big impacts on local governments’ clean energy goals, especially through aggregation.

Federal Energy Regulatory Commission (FERC) Order Number (No.) 2222, which took effect in 2020, requires regional grid operators to enable DERs to offer any services they are capable of providing through aggregation. This may reduce barriers to aggregated DER participation in certain FERC-regulated markets, ultimately offering local governments more ways to generate revenue from wholesale electricity markets and meet their clean energy goals more quickly.

FERC and regional grid operators are currently in the process of finalizing region-specific market rules to comply with the order, which will determine the extent of the market opportunities for DERs.

A new WRI paper finds that local governments may be well-suited to benefit from these emerging DER market opportunities, and provides guidelines and pathways for local governments interested in learning more about these opportunities. Building on past WRI research, the paper lays out how local governments can own, operate, or contract for large aggregations of DERs that may be flexible or predictable in their use profiles, and ultimately leverage DERs’ valuable attributes in wholesale electricity markets for revenue and bring more clean power to their residents.

Key Findings:

  • FERC Order No. 2222 may offer opportunities for local governments to optimize value from distributed energy resources they own or contract for services. Local governments’ clean energy, electrification, and resilience goals may expand DER deployment. These DERs may include government owned or contracted solar and storage resources, fleets of electric school and transit buses and municipal vehicles, and electrified buildings. They could be able to reach the 100-kW minimum size requirement either individually or when aggregated, and may have electricity demand profiles that are predictable, flexible, or complementary to other demand profiles on the system. These characteristics are valuable in wholesale electricity markets because they can provide services that improve grid reliability, efficiency, and flexibility. Further, these DERs may generate revenues beyond existing market opportunities, such as for demand response and energy storage.
  • Market participation pathways and revenues will depend on the ownership of these DERs. Local governments may participate directly or through third-party aggregators if they own the resources. Utilities and private entities that own government-contracted DERs would be responsible for optimizing the DERs’ value, but local governments could negotiate more favorable contract terms for themselves with better knowledge of potential DER market revenue streams. Under either ownership scenario, local governments could work together to pool expertise, share staff, and increase negotiation leverage with their utilities or third-party vendors and aggregators.
  • Regional rule development will determine whether participation in wholesale markets is economically worthwhile compared with existing markets or retail programs. Retail net metering and demand response programs are common retail market programs. Many DERs can participate in wholesale markets under demand response rules. New rules for DER participation in wholesale markets, however, may not be useful if DERs’ benefits are not worth the costs compared with existing options. In particular, a more stringent locational requirement for DERs to be aggregated across a single node together with a minimum aggregation size could make the DER participation model less workable than that for demand response. Granting distribution utilities the ability to review and potentially reject DER aggregations without sufficient guardrails and dispute resolution mechanisms could also unreasonably prevent local government DERs from participating. Additionally, participation models need to account for DERs’ ability to offer multiple services at a time and compensate them for it, as this capability enables them to revenue stack and earn multiple revenue streams.
  • There are many ways that local governments can help ensure that rules at the regional and state levels enable optimal participation by their DERs. Ideally, public comments should be submitted in the official FERC record so that FERC may rely on them to support decision-making. Many comment due dates related to DER market participation have passed, but if there are good reasons to comment late, within a reasonable period, FERC may exercise its discretion to accept them. Local governments could also write letters to submit into dockets on which FERC has not issued a final order. In addition, they could speak directly to federal and state decision-makers where ex parte rules do not apply (e.g., in rulemakings and Notices of Inquiry, but not in contested cases at FERC). Local governments could also engage with regional grid operators, utilities, and federal and state regulators on how regional market rules as well as state and local rules impact their ability to participate. While most regional grid operators’ Order No. 2222 compliance processes are wrapping up, there is an outstanding related petition for a FERC technical conference. FERC has also issued a Notice of Inquiry to revisit whether states and regional authorities should be allowed to ban third-party demand response aggregators from participating in their territories. FERC has yet to issue final orders on these proceedings as of the date of this writing.