Scaling distributed energy resources through aggregation in wholesale markets is promising but continues to prove challenging

• Allow DERAs to participate directly in RTO/ISO markets and establish DER aggregations as a type of market participant

Subsequent clarifications by FERC in Orders 2222-A (from July 2021) and 2222-B (June 2022) address some key concerns around the original Order- such as how smaller utilities may opt-in to participate in ISO/RTO markets leveraging DER assets within their service territories and whether states can block demand response program participation in wholesale markets and how Order 2222 interacts with Order 719- which first opened demand response resources to participation in wholesale markets in 2008.

As with any market overhaul or transformation, continuing to ensure quality, consistency, and appropriate transparency of information that is vital to maintaining a fair market in which participants are confident. ISO/RTOs are working to better understand how they retain existing and future participant confidence in their ability to efficiently measure and verify DER aggregations’ participation relative their commitments when selected into the market to provide energy and ancillary services and how they ultimately compensate and settle with DERAs. Quality of data, especially meter data, has been central to understanding how settlements will work with DER aggregations and how DERAs ultimately compensate those who have their DER assets operated through a DER aggregation. DERAs coordinate their assets using a varying set of networks and communications protocols. To better accommodate DERAs as market participants, the California Independent System Operator (CAISO) is exploring additional means for customer and market participant communications channels beyond its existing Energy Communications Network, use to enable and manage CAISO-to-customer communications and customer-to-customer communications, and its Public Key Infrastructure, which is used to keep communications confidential and secure. The need to standardize how DERA data is received, subsequently define how these standards translate to requirements for ISO/RTO and market participants’ operations and information technology infrastructure, and implement the corresponding technical solutions is not a small feat by any means. Such work and the lengthy timelines and complex technical interdependencies associated with this undertaking that may result in further delays of full Order 2222 compliance, especially while ISO/RTOs are continuing to fulfill their obligations to keep day-to-day energy market operations afloat.

Over the last three years, the six ISO/RTOs are in various stages of submitting their initial compliance filing with FERC- with mixed results. Several of these filings include considerations around technical details, as outlined above, and difficulties coordinating across states and with distribution utility stakeholder- many of whom hold different stances. This is an initial testament to the complexity of undertaking the transformation required by Order 2222.

ISO/RTO Market Service Territories (Courtesy of Sustainable FERC Project)

CAISO, Independent System Operators of New England (ISO-NE), and New York Independent System Operator (NYISO) are generally thought to be furthest along in their compliance processes. Their initial filings have required the following modifications, but all have enabled some level of DERA market participation:

CAISO: Initial filing was found to be largely compliant with key clarifications to be made around opt-in small utilities (those which sold less distributed less than four million MWh of electric power in the previous fiscal year), coordination with distribution utilities, and amendments to timelines for phasing in DER resources. CAISO’s filing, through several rounds of iterative amendments, were accepted by FERC in May 2023.

ISO-NE: After initial filing in February 2022, FERC declared that ISO-NE compliance status is partial with key gaps in accommodation of behind-the-meter participation of energy storage resources and an ancillary services market that does not adequately accommodate key DER operational characteristics and participation in energy markets for aggregations spanning multiple transmission nodes. Furthermore, measurement and verification telemetry requirements were deemed burdensome.

NYISO: The initial filing was found to be largely compliant with Order 2222 and was accepted in June 2022. In its ruling FERC directed NYISO to make some additional key modifications to its proposed tariffs by clarifying coordination with distribution utilities, the definition of a small-utility and subsequent updates to the criteria for small utilities to opt into market participation when applicable, limits on DERAs provision of similar services in both market, and coordination and with distribution utility programs. Additionally, NYISO requested a deferral of full implementation of all FERC 2222 provisions until the end of 2026.

Midcontinent Independent System Operator (MISO), Southwest Power Pool (SPP), and PJM Interconnection (PJM) each requested filing extensions into the first half of 2022 for initial submission of their compliance filings. They are therefore operating on later compliance timelines.

MISO: MISO submitted its compliance filing in April 2022 and has not yet received a response from FERC at the time of writing. While that filing noted 18 market modifications, MISO noted that it is undertaking two major IT system overhauls to core market operations systems on which full integration of DERAs into market operations would be dependent. Additionally, MISO noted its existing communications channels do not support DERAs and distribution utilities and would need to be expanded to encompass these entities.

PJM: After submitting its compliance filing in February 2022, PJM had its proposal to allow DERAs to provide ancillary services and capacity across multiple transmission nodes approved and its contrasting proposal to limit aggregations to provide energy services at only a singly transmission node rejected by FERC. This was similar to a revision required of ISO-NE by FERC in its initial filing. PJM operates across 13 states and the District of Columbia and more than 20 distribution utilities, which compounds the complexity of achieving full FERC 2222 compliance, with key regulators noting the extent of state-level regulatory and legislative groundwork to be laid to enable PJM’s full compliance with Order 2222. This feedback from state regulators was called out explicitly in FERC Commissioner Mark Christie in his concurrence statement pertaining to PJM’s partial compliance status.

SPP: Like MISO, SPP submitted its compliance filing in April 2022, and its filing is arguably the lightest on details in outlining concrete actions to facilitate compliance. SPP prominently notes a lack of authority to enforce cooperation and coordination in working with distribution utilities. SPP has called out where it has updated how it defines a market resource but does not further specify how that definition enables DER aggregation and market participation. Furthermore, there is no management testimony included in the compliance filing. This may result in a series of back-and-forth filings that could prolong SPP’s timeline for full market integration of DERAs.

While a great deal remains to be decided, enacted, and implemented by each of these six ISO/RTOs, there is also still a great deal of ambiguity in how market operators will establish and technically oversee new and amended tariffs to meaningfully achieve the objectives initially outlined in Order 2222. This ambiguity emerges in parallel with continued rapid advancement of DER assets and management technologies over the last decade- which include:

• efficiencies in solar photovoltaic (PV) efficiency,
• advances in battery chemistries that have led to increased energy density of batteries,
• development and application of smart inverters and the ability to remotely control DER assets,
•  a market with a growing increasing plethora of software that can optimize performance and coordinate DER assets, and
• similar software advances in the demand response and load management segment of the market (e.g. building energy management systems).

As these advances continue, all six ISO/RTOs will need to create appropriate market rules that are reflective of constantly changing DER capabilities while also technically enabling and facilitating the full participation of DER resources at parity with more conventional bulk generation assets. As of now, full implementation of Order 2222 will take place by the end of 2026 based on existing compliance filings.

At the heart of the concept of DER aggregation is the technical orchestration and operation of these assets through DER management systems (DERMS) as virtual power plants (VPPs).  The concept of aggregated resources- as centered in Order 2222- is not novel and has been around since the 1970s according to the US Department of Energy’s (DOE) recent September 2023 report entitled The Pathways to: Virtual Power Plant Commercial Liftoff. Development of this report was led by the DOE’s Loan Program Office, and it comes just months after Obama-era former FERC chairman Jon Wellinghoff stated “…we need to do some heavy lifting at the federal government…”. Wellinghoff now leads regulatory policy at a DER services company. In this ‘liftoff’ report, the DOE notes that it believes between 80-160 GW of DER capacity coordinated as VPPs will be added to the grid by 2030- whether it is intended to participate in wholesale markets, vertically integrated utility resource portfolios, or through other mechanisms and incentive programs. This builds upon the estimated 30-60 GW of such capacity already in operation and which mostly takes the form of aggregated demand response.

VPPs as participants in wholesale markets will participate and provide much of their market-based value through what have colloquially been termed as the ‘Four Ss’:  

While stand-alone resources can provide many of these services at a much smaller scale, scaling up the sheer size of these resources and expanding their capabilities through heterogeneous resource aggregations are where these resources will not only bear significant cost savings that will allow them to participate in markets at parity with existing resources. Furthermore, aggregation presents a new set of revenue generation and incentive opportunities to end customers who will be more empowered to enroll their DER assets in a VPP coordinated by a DERA.  Over the last decade, demand response programs, net metering incentives, and other distribution-level opportunities for individual assets ushered in an era of energy ‘prosumption’- the ability of consumers to provide and produce value to the markets from which they would otherwise only consume services. Access to wholesale market participation through a DERA provides new ways to benefit from DER asset adoption- whether that comes in the form of solar, storage, and- in the longer term- a vehicle-to-grid enabled electric vehicle and compatible charger. Technology-specific targets outlined at the state-level and accompanying state and local incentives, which are likely to be further bolstered by Inflation Reduction Act tax credits and Infrastructure Investment & Jobs Act grant opportunities, provide the promise of further accelerating the customer adoption of DER assets and therefore the level of penetration that DER aggregations- as enabled through VPPs- can make into power markets.

According to the Solar Energy Industry Association, annual residential solar PV installations alone in the five-year window between 2018 and 2022 grew from roughly 1.5 GW of annual installed capacity to nearly 4 GW of annual installed capacity- with more than half of that in California alone.

VPPs have already been called upon by wholesale market operators and have subsequently played critical roles in abating the worst outcomes of resource constraints amid major heat waves. In September 2022, during a six-day window residential DER installer and DERA Sunrun noted that its batteries delivered more than 500 MWh of peak power in CAISO territory to help stave off rolling outages spanning 18,000 residential battery systems. Earlier, in August 2020, dispatch of demand response resources with the assistance and coordinated customer communications from California’s three distribution utilities helped to limit the duration of rolling blackouts as similar heatwaves across the West Coast constrained the ability to import power from nearby states. This serves as a testament to value of CAISO’s Demand Response Auction Mechanism (DRAM) program which was established in 2014.

The Electric Reliability Council of Texas (ERCOT) operates its market within the Texas interconnection, which is islanded and wholly contained within the state of Texas, and therefore is not subject to Order 2222 compliance.  Nevertheless, the value of DER aggregation has been recognized, and a pilot program has been developed to enable these programs to operate in the market. The unique structure of the Texas market, including meter-level settlement processes, somewhat paints a picture of reduction in complexity of coordination can facilitate the participation of these resources in a wholesale market. The Aggregated DER Pilot Program was approved by the ERCOT board of directors in October of 2022- mainly in response to the February 2021 outages amid uncharacteristically frigid conditions which rendered several key natural gas-fired bulk system generators unable to serve load due to frozen gas pipelines. Here, DER participation in wholesale markets is being piloted to bolster reliability- at first through a pilot program that will test how 80 MW of flexible aggregated resources to understand how these resources can successfully participate in wholesale market through two key phases. In the first phase, ERCOT seeks to understand how these resources can participate within ERCOT and the DSP’s existing operating parameters. This builds upon ERCOT’s Emergency Response Service program which creates a funding structure that allows ERCOT to make use of DERs to abate the negative impacts of extreme conditions.

The DOE noted in its recent report- The Pathways to: Virtual Power Plant Commercial Liftoff – that it sees five crucial “imperatives” to VPPs commercial “liftoff”:

1. Expand DER adoption with equitable benefits
2. Simplify VPP enrollment
3. Increase standardization across VPP operations
4. Integrate of VPPs into utility planning and incentives
5. Integrate into wholesale markets

Through this lens, scaling of VPPs to participate as DERAs in wholesale markets involves simultaneous, coordinated bottom-up and top-down approaches. From the bottom-up, having consumer adoption of DER technology scale across socio-economic bounds in a way that is digestible and makes benefits of participation in a VPP clear to the end consumers is critical and requires additional layer of market consolidation and clear divisions of responsibility. 

In the current technology environment, there are DER OEMs looking to build software, and, conversely, DER management software platform developers looking to have their own hardware out in the field that operates with their platforms. As these DER technology and service providers find their strengths and better understand their weaknesses, it is likely that partnerships will streamline the specific roles played by DERAs, the DER management software providers, and the DER technology OEMs at each stage in the customer DER adoption sales cycle and in the operation of VPPs in the wholesale market. From the top-down, more specifics, clarity, and technical guidance from ISO/RTOs will help drive DER technology market consolidations and help aggregators identify whether the scale of opportunities to participate in wholesale markets pencil out financially relative to distribution system opportunities and incentives (e.g., non-wire solutions). This will drive how DERAs ultimately structure the ‘prosumer’ benefits needed to attract and scale their VPPs and recoup investments in customer acquisition and market costs. This top-down guidance will not happen in a vacuum, and each ISO/RTO will be tasked with continuing to working closely with the proper state regulatory bodies, the various distribution utilities with whom it will need to coordinate planning, and industry advocacy and community stakeholder groups. As implementation of compliance measure are phased into market operations, there is likely be to some level of volatility caused by accompanying unknowns. Over time, technical innovation, policy updates, and corresponding market adjustments will iteratively push bounds of what can be done to sustain and improve on the delivery of expected benefits from DER participation in wholesale markets.