FERC Order 2222 opens wholesale markets to distributed energy resource aggregators

Friday, September 18, 2020

U.S. electric utility regulators have issued an order requiring the nation's regional organized wholesale electric markets to allow participation by portfolios of solar projects and other distributed energy resources. The Federal Energy Regulatory Commission's Order 2222 finds that existing regional electricity market rules are unjust and unreasonable in light of barriers that they present to the participation of DER aggregations in these markets, and requires regional grid operators to revise their tariffs to accomodate distributed energy resource aggregators. While further process and uncertainty remain ahead, FERC Order 2222 should facilitate the development of distributed energy resources by removing barriers to electricity market participation.

As defined by the FERC, distributed energy resources (DER) encompass a variety of types of technology when installed on the distribution system, a distribution subsystem or behind a customer meter. Typically less than 10,000 kilowatts in capacity for each installation, DER technologies include solar photovoltaic systems and other distributed generation or intermittent generation, electric storage, electric vehicles and their charging equipment, thermal storage, and other consumer-side measures like demand response and energy efficiency. The U.S. is experiencing significant growth in the number and size of DERs installed on the system, due to factors including federal tax incentives and state incentives, as well as considerations of reliability and utility rate design.

Through Order 2222, issued on September 17, 2020, FERC has now found "that existing RTO/ISO market rules are unjust and unreasonable in light of barriers that they present to the participation of distributed energy resource aggregations in the RTO/ISO markets, which reduce competition and fail to ensure just and reasonable rates." As a result, the Commission adopted a final rule requiring regional transmission organizations and other organized wholesale market operators to establish DER aggregators as a type of market participant, to allow them to register their DERs under one or more participation models that accommodate the physical and operational characteristics of those resources and to participate in the regional organized wholesale capacity, energy and ancillary services markets. Order 2222 allows DERs to aggregate together to satisfy minimum size and performance requirements that they might not meet individually.

The boundaries between federal and state jurisdiction over DERs arise as a matter of federal law, and have occasionally been tested -- most recently in connection with FERC Order 841, governing storage. As noted by the Commission, its Order 2222 final rule "builds off the DC Circuit Court’s recent ruling on Order No. 841, in which the court affirmed the Commission’s exclusive jurisdiction over the regional wholesale power markets and the criteria for participation in those markets." Order 2222 prohibits state regulators from broadly excluding DERs from participating in regional markets, but gives state retail regulatory authorities some power by creating a "small utility opt-in", as well as respecting states regulators’ current ability to prohibit aggregators from bidding retail customers’ demand response into regional markets. Regarding interconnection, Order 222 explains that "state and local authorities remain responsible for the interconnection of individual DERs for the purpose of participating in wholesale markets through a DER aggregation."

The final rule largely tracks a 2016 proposed rule developed by FERC staff, with some changes. The regulator appears excited to take this step. According to a fact sheet issued by the Commission under the title, "FERC Order No. 2222: A New Day for Distributed Energy Resources", Order 2222 "will help usher in the electric grid of the future and promote competition in electric markets by removing the barriers preventing distributed energy resources (DERs) from competing on a level playing field in the organized capacity, energy and ancillary services markets run by regional grid operators."

Order 2222's final rule will take effect 90 days after its publication in the Federal Register. Grid operators will then have 270 days within which they must submit to FERC a compliance filing and a plan for timely implementation of the final rule. While Order 2222 and federal laws place some constraints on what the grid operators may propose, each regional transmission organization or independent system operator has some leeway to develop and propose solutions it views as tailored to its own markets and needs. This feature of federalism will likely result in some diversity in terms of regional designs, to be considered through regional stakeholder discussion and the Commission's regulatory processes.

CFTC subcommittee report on climate risk

Wednesday, September 9, 2020

An advisory subcommittee of the U.S. Commodity Futures Trading Commission (CFTC) has released a report, Managing Climate Risk in the U.S. Financial System. Calling itself the first of-its-kind effort from a U.S. government entity, the report finds that "climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy" and that "U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks". The report offers 53 recommendations to mitigate the risks to financial markets posed by climate change.

CFTC's mission is promoting the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. Structurally, CFTC's organization includes several Advisory Committees, created to provide input and make recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets.

These committees include the Market Risk Advisory Committee, which "advises the Commission on matters relating to evolving market structures and movement of risk across clearinghouses, exchanges, intermediaries, market makers and end-users. It examines systemic issues that threaten the stability of the derivatives markets and other financial markets, and makes recommendations on how to improve market structure and mitigate risk." The Market Risk Advisory Committee itself includes several subcommittees, including the Climate-Related Market Risk Subcommittee which is composed of over 30 representatives of financial system participants.

On September 9, 2020, the Climate-Related Market Risk Subcommittee unanimously voted to adopt and release its report, Managing Climate Risk in the U.S. Financial System. The report describes various ways in which climate change and related risks represent threats to the U.S. financial system. As summarized in a press release by the subcommittee, the report finds that:
Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy;

Climate risks may also exacerbate financial system vulnerability that have little to do with climate change; including vulnerabilities caused by a pandemic that has stressed balance sheets, strained government budgets, and depleted household wealth;

U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks;

Existing statutes already provide U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now;

Regulators can help promote the role of financial markets as providers of solutions to climate-related risks; and

Financial innovation is required not only to efficiently manage climate risk but also to facilitate the flow of capital to help accelerate the net-zero transition and increase economic opportunity.
The report presents recommended actions, including establishing an economy-wide carbon price, incorporating climate-related risks into all relevant federal financial regulatory agencies' mandates and strategies, requiring bank and nonbank financial firms to address climate-related financial risks through their existing risk management frameworks in a way that is appropriately governed by corporate management, enhancing climate risk disclosures for various time horizons, and coordination with other regulators to support the development of a robust ecosystem of climate-related risk management products.

Every member of the subcommittee voted to release the report on behalf of the panel, but not all participants expressed endorsement for all of the report's findings. In addition, the report may be influential as a matter of policy, but it is not formally binding on CFTC, and may represent a different perspective than that of the Commissioners or the agency itself.