When Will FERC Order 2222 Unlock Opportunities for Distributed Energy Systems?

Eric Bloom, Managing Director,?Atlas Energy Intelligence

When?FERC Order 2222 was passed in September 2020, it was hailed as a potential breakthrough for the energy transition. For those who have not been following this story closely, FERC Order 2222 directs the large, multi-state grid operators known as?independent system operators (ISOs)?in the U.S. to reform their market rules to enable all sorts of distributed energy resources, from individual thermostats to large energy storage systems, to participate in wholesale markets. In other words, it could be one of the key drivers of a grid that is optimized on the demand and supply sides in real time in ways that unlock innovation, reduce costs, and integrate large volumes of clean energy resources.

The timing of Order 2222’s implementation has significant implications for energy solutions providers such as demand response aggregators, building energy management system (BEMS) vendors, and others in this space. The good news for these companies is that implementation of Order 2222 is underway. The bad news is that much of its promise may not be fully realized in certain regions until several rounds of review and litigation work their way through the regulatory process and the rules are implemented.

A Regional View of the Implementation Timeline

To consider the rollout of Order 2222, we need to look nationally as well as regionally since implementation is driven primarily at the individual ISO/RTO level. There are six ISO/RTOs where FERC Order 2222 will come into play: ISO-NE, NYISO, PJM, MISO, SPP, and CAISO, as shown on the map below.?These six regions represent over 70% of the U.S. according to EPRI, so FERC Order 2222 has the potential to drive changes in market operations for well over half of the electricity produced and consumed in the country. (Other regions operate outside the jurisdiction of FERC and are therefore not required to comply, though the footprint of Order 2222 could expand if new regions develop or join ISOs/RTOs as is being discussed for sections of the western U.S.)

Map of Wholesale Electricity Markets in the U.S.

(Source: Federal Energy Regulatory Commission)

Within these six regions, the ISOs can be divided into two main camps:

Near-Term Compliers:?CAISO?and?NYISO?had been pursuing market structures to allow a wide range of distributed energy resources to participate in the market even before the implementation of Order 2222, and therefore these ISOs foresee few major changes in rules in order to comply. The fact that they have a head start on the development process may also signal smoother sailing in terms of FERC reviews as well, though?some stakeholders have pushed back on certain measures as expected, and unforeseen issues can always arise as FERC works through the review. New market rules based on Order 2222 will likely go into effect in these regions at the end of 2022 at the earliest.

Longer-Term Compliers:?The other four regions are behind for various reasons. One is that these regions, in contrast to CAISO and NYISO, represent multiple states wherein each state’s input is sought, and competing priorities can delay the development of a region-wide approach; these regions were all granted extensions of 8-10 months over the original July 2021 deadline for this and other reasons, so they are at least that much further behind the near-term compliers. New rules in these regions are unlikely to be in effect until the second half of 2023 or later.

FERC Order 2222 Compliance Filing Deadlines

(Source: Atlas Energy Intelligence)

The next question for all regions is whether their proposals are accepted by FERC outright or sent back for revisions before the rules can be implemented and markets created. If additional rounds of review are required, actual implementation of FERC Order 2222 could be set back months or years in certain regions or for certain types of distributed energy resources.

FERC Order 841: A Cautionary Tale

The case of FERC Order 841, a measure that aimed to unlock opportunities for energy storage in these same markets, holds some clues to how the future may unfold. That order, first issued in Feb. 2018, is in some cases still working its way through rounds of litigation and review over three years later. That said, there are several key differences between Orders 841 and 2222. For one, Order 841 was?held up by a petition for review from NARUC in 2019?that was?ultimately denied in 2020; so far, Order 2222 has not been subject to any such delays and the fact that Order 841 was upheld clarifies that such efforts are within FERC’s jurisdiction, which may thereby discourage similar attempts to fight it. Still, FERC Order 841 did have some market impacts in the first year or two after being issued, with ISO-NE and NYISO emerging as leaders in implementing rules that have enabled energy storage resources to participate in their markets. By contrast, MISO has filed several requests to defer compliance and the timeline for implementation is still unclear over three years after the initial order was issued.

Looking to the Future

With respect to Order 2222, the timeline for full market uptake may similarly stretch across several years. CAISO and NYISO seem best positioned to proceed with implementation in the near term, building on market reforms that have already been implemented, while the other four ISOs could see implementation as soon as 2023 or as late as 2024/2025, depending on the course each takes in terms of litigation and reviews. There remains one unresolved question –?the role of demand response in Order 2222?– which is being reviewed under a separate notice of inquiry that will take into account stakeholder opinions, particularly on the question of whether states should be able to opt out of allowing demand response resources to participate in wholesale markets.

For energy solutions providers, the schedule for Order 2222 implementation will continue to require patience as the proposed rules work their way through the system. The timing also has important implications in terms of the energy industry’s ability to engage demand-side loads to solve the pressing challenges of affordability and reliability as the U.S. continues to experience extreme weather events and grid disruptions and integrate renewable energy resources, so many in the industry hope for a swift implementation process. The actions of FERC and other industry stakeholders in the coming months will clarify the timing of when of Order 2222’s promise will be fully realized, and we will provide updates as efforts progress.?