FERC Opens Wholesale Markets to Distributed Energy Resources
By IG Partner, Bobby Howard
The title quote from Chairman Chatterjee is in reference to the growing influence on the electrical grid of distributed energy resources (DERs), such as rooftop solar, behind-the-meter batteries, and electric vehicles. According to FERC (Federal Energy Regulatory Commission, the ultimate energy regulatory body in the US), 65-380 gigawatts of DERs could be added to the US grid over the next four years, a function of a complete “flip” at the global level of new generation capacity from large centralized (big power plants, major transmission infrastructure) to more local, decentralized generation.
Centralized vs. DER Annual Capacity Additions, World Markets: 2020-2030
Source: Guidehouse Insights
On September 17, 2020, FERC approved milestone rule No. 2222 which fully opens wholesale markets for DERs. This rule will provide a variety of benefits, such as lowering costs for consumers through enhanced competition, greater grid flexibility and resilience, and more innovation within the electric power industry. However, the rule’s greatest impact may be in accelerating the decarbonization of the electrical grid and mitigating the effects of climate change. The rule does this by addressing three of the major impediments to large-sale clean energy integration: grid constraints, complex and expensive permitting, and unit economics.
To date, only large, centralized generators have been able to take advantage of the benefits of wholesale market participation. These projects inject huge amounts of power in the grid at a single point, causing stress to the system that occasionally requires expensive new infrastructure to manage. These projects also physically impact a massive land-area, thousands of acres for a single solar project, tens of thousands for wind, necessitating robust and time-intensive permitting and approvals processes. By unlocking the power of nimble DERS, renewables will be naturally sited where the grid needs them most, in a way that minimally impacts wildlife and the environment.
The third impact, economics, has made rapid progress the last decade at the very small (residential) and very large (utility-scale) sectors. Standardized systems, state and local incentives have improved economic returns at the residential level (primarily for solar), and utility-scale projects have benefited from massive economies of scale. Both sectors have grown rapidly due to major cost declines in solar panels and wind turbines.
The segment that will be impacted the most from FERC rule 2222 is the middle-market, i.e. commercial, industrial, and municipal projects. These projects lack standardization and have less economies of scale, but they do have some of the largest consumption, utility bills, and grid-impact to match. Greater access to wholesale markets will benefit asset owners and project developers in this space.
While continued innovation and regulatory changes to the electrical grid will be needed to meet global carbon reduction targets, FERC rule 2222 is a step in the right direction, and further establishes distributed energy resources’ role in our clean energy future.