Over the past half-decade, the Federal Energy Regulatory Commission has consistently won court battles upholding its authority over states to set the rules for how distributed energy resources can play in wholesale energy markets.
Now FERC is being asked to put that authority to a new use: ending a decade-old provision allowing individual states to opt out of letting demand response companies enlist customers to turn down their energy use to support the power grid.
The request comes from nonprofit environmental law organization Earthjustice on behalf of demand response aggregator Voltus. It asks FERC to declare that the demand response regime overseen by the Midcontinent Independent System Operator has created “unduly discriminatory and preferential” rates for customers in the 15 states served by the transmission system MISO manages.
That’s because MISO has seen 12 of those states opt out of allowing “aggregators of retail customers,” including third-party demand response providers Voltus, Enel X, CPower and others, to compete against utility demand response programs, said Kim Smaczniak, managing attorney of Earthjustice’s clean energy program. That, in turn, has left much of MISO with a utility-controlled demand response regime that’s proven to be both more expensive and less reliable than those run by grid operators in states that have let third parties compete, she said.
Tuesday’s complaint filed with FERC also asks the regulator to reverse the state opt-out rule, created by Order 719 a decade ago, for the country’s other independent system operators and regional transmission organizations that oversee electricity markets for about two-thirds of the country.
That’s important, because not getting rid of it could undermine the much broader distributed energy market opportunities envisioned by FERC, Smaczniak said. Last month’s Order 2222 orders grid operators to create rules for distributed energy resources (DERs) to be aggregated in wholesale energy markets, without an option for states to opt out.
“But if the aggregations do include demand response, the opt-out can apply,” she said. States that have lost court challenges to FERC’s authority may use that avenue to bar DER aggregations that contain even a slight amount of load reduction or flexibility, she warned. “There’s no reason to expect it not to happen.”
Why demand-side resources are gaining grid power
FERC Order 719 was issued in 2010, back when the line between state and federal authority over behind-the-meter and distributed energy assets was far less clear, Smaczniak said. But a string of court cases has since cemented that authority, including the 2016 U.S. Supreme Court decision upholding FERC’s authority to order that demand response be compensated equivalently to generators and other energy market participants.
FERC’s authority was strengthened by this summer’s decision by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit to reject a challenge from utility groups and state utility regulators against FERC Order 841, which opens up wholesale markets to batteries and other energy storage assets.
Order 2222 expands this authority to DERs including multiple technologies, once again with no state opt-out. It does call for cooperation with state regulators and distribution utilities, however, to ensure that wholesale market actions don’t disrupt distribution grids or interfere with retail electricity rates.
Proponents such as FERC Chairman Neil Chatterjee argue that batteries, electric vehicles, backup generators and other DERs are a fast-growing grid resource that must be integrated into grid operations. Experience in active demand response markets like those run by mid-Atlantic grid operator PJM shows that tapping existing load flexibility can deliver grid capacity at significantly lower cost than building new power plants.
Leaving Order 719’s state opt-out in place makes little sense given the changes that have come since it was enacted, Smaczniak said. It makes even less sense when Order 2222’s reforms could be “utterly destroyed by having this arbitrary carve-out for certain pieces of equipment that [can be deemed] demand response.”
Midwest energy markets ripe for demand response
MISO actually has up to 11 gigawatts of demand response, said Voltus CEO Gregg Dixon. However, it comes in the form of utility programs that offer generous “interruptible rates” for large commercial and industrial customers that are almost never called upon to reduce load, he said.
When they are needed for emergencies, as they were during the 2019 polar vortex, they haven’t performed very well, he added. About half of the interruptible load in Michigan was unavailable during a cold snap that idled power plants. Problems like these have driven MISO to launch reforms to improve reliability.
In short, MISO’s system yields demand response at higher prices and lower reliability than do markets like PJM’s, which has no states opting out of it, Dixon argued. What’s more, the large scale of MISO’s existing demand response bidding into capacity markets drives down prices that might otherwise rise to encourage investment in more efficient, flexible resources, he said.
Voltus is providing demand response in the few MISO states that allow it, including Illinois, a small portion of Michigan’s market and in a pocket of east Texas, he said. But other states have barred third-party aggregators for years, while others have taken quick action to prevent them from entering the market when they’ve tried.
In 2019, Louisiana state regulators barred non-utility participants after Voltus submitted applications to aggregate customers in the state, despite data indicating that its lower-cost and higher-reliability resources could shave about $130 million per year in excess capacity costs, he said.
If FERC chooses to agree with Earthjustice and Voltus and do away with state opt-out for demand response, “You’ll get more megawatts in the market that will perform better and are less expensive,” Dixon contends. The same benefits could drive demand response development in the states served by grid operator Southwest Power Pool (SPP), which like MISO is facing increased congestion and transmission bottlenecks from rising levels of wind and solar power in the states it serves.
Major corporations are also pushing grid operators to open more energy market opportunities for demand response and renewable energy. Google has become a member of SPP and MISO to advocate for energy policies that will help it achieve round-the-clock carbon-free energy for its massive data center fleet, and Arkansas-based global retail giant Walmart, which has joined SPP, is making major investments in clean energy and building energy management.
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