The glowing reviews and legal/trade press headlines would have one believe that DER Aggregation under Order No. 2222 will soon transform the electric industry, as DERs too small to participate directly in RTO/ISO markets will flock to third-party DER Aggregators who will sell wholesale services to organized markets. Will DER owners leap at the chance to participate in wholesale markets? The near-term answer lies in footnote 95 of Order No. 2222, leaving net metering (NEM) untouched and the (Solar Power World) map below. The map shows us four RTO/ISO states (NY, MI, IN, IL) where DERs cannot participate in “traditional” NEM, i.e., where the meter runs backward or excess power over the billing period is compensated at the retail rate). Depending on NEM compensation in such states, perhaps DER Aggregation is a meaningful option. There is a direct connection between DER participation in an aggregation and the economics of traditional (full retail compensation) NEM, the subject of NERA’s Petition for Declaratory Order. That connection has been ignored by most articles extolling Order No. 2222. (Disclaimer: Steptoe represented the New England Ratepayers Association in filing its PDO in Docket EL20-42.) The true potential of Order No. 2222 is unlikely to be met unless FERC changes the colors on the map below by asserting its full jurisdiction over wholesale power sales, whether those sales are made under PURPA’s exemption for sales from small QFs or FPA Section 205.
A basic example of the economics of traditional NEM is illustrative. Presume that in California, a large 24-hour-a-day retail business owner has installed 100 kV of solar panels on its roof and signed up for traditional NEM. In hours that its solar output exceeds its on-site consumption, the owner “banks” kWh and the NEM customer can consume the kWh at largely no cost for in other hours (i.e., at night). That means that in the hours it is producing excess energy the NEM customer is earning the retail price of energy, between $.15/kWh and $.20 kWh in California. Is a DER Aggregator going to able to offer this NEM customer $.15/kWh from earnings in the wholesale market for its excess power (requiring wholesale prices above $150/MWh)? Even adding some solar-charged storage to the site likely will not change the math significantly. Will the DER Aggregator need to ensure it can control the output of the former NEM customer in a manner not required under NEM, requiring the former NEM customer to pay for additional equipment to join an aggregation? The DER Aggregator presumably needs to be paid a share of the revenues earned by its DERs, as it will need to have 24/7 employees to participate in CAISO. How will this impact the revenues being paid the former NEM customer? In a traditional NEM environment, DER Aggregation will almost never make economic sense for DER owners that can qualify for NEM – wholesale prices are rather unlikely to beat retail prices.
Oddly, in Paragraph 42 of Order No. 222, FERC presumes that a DER Aggregator could be permitted to aggregate NEM customers, which would be true if the load serving entity (LSE) offering NEM is the DER Aggregator. Indeed, Order No. 2222 may have its biggest impact on LSEs that can better monetize the excess power produced by traditional NEM customers through aggregation. Whether LSEs will do so may depend in large part on existing RTO/ISO treatment of energy injected into the distribution system by DERs on NEM tariffs today and the cost of the necessary control and visibility equipment required for market participation by the LSE as DER Aggregator. But, it is rather difficult to understand how a DER Aggregator other than the LSE could aggregate and resell services produced by a NEM customer while the NEM customer receives the retail rate from the LSE (by credit or allowing the meter to run backward) for services, which retail rate includes energy, ancillary services, and transmission. Aside from a clear case of double compensation, the result would further exacerbate the cost shifting impacts of traditional NEM. The notion that FERC or a state would allow a NEM participant to receive the retail rate for excess power from its LSE as well as additional compensation for the same excess power is contrary to the public interest.
Is there evidence that NEM discourages DER Aggregation participation? In California, where the investor-owned utilities’ NEM tariffs remain generous, the CAISO adopted DER Aggregation four years ago. Third-party (non-LSE) aggregators seem to have not found a means to beat the NEM “price.” As California reforms NEM for the third time, DER Aggregation may become more economic than NEM, but this result would require a significant reduction in NEM compensation.
There are a few states that only permit traditional NEM for the smallest DERs (often 10-20 kV), but nearly half of states with net metering policies authorize net metering for systems up to 1 or 2 MW in capacity. In light of Order No. 2222, and to some extent Order No. 841, 100 kV effectively will be minimum size for any DER to participate directly in wholesale markets. To the extent the few states with under 100 kV NEM maximums for traditional DERs also include RTO/ISO member utilities, DER Aggregation may prove a viable option. Today, however, that is not an extensive number of states, as states with the most generous NEM policies are those whose utilities are typically in RTO/ISOs as the map illustrates. DER Aggregation also may be appealing in those states with caps on traditional NEM, assuming such caps are not lifted.
DER Aggregation is an option for stand-alone storage DERs that often cannot qualify for NEM because they are not renewable. But, stand-alone DER (i.e., small) storage may not yet be sufficiently economical to survive on market revenues without tax policy changes. Order No. 2222, however, could prove to be a source of revenue for stand-alone storage entities whose business model is such that wholesale market revenues are an add-on, such as large electric vehicle fleets that earn other revenue (airport rental cars centers, EV municipal transportation parking hubs).
In sum, some DER Aggregation is likely to occur in the near-term, but aggregation may be limited by the better economics of traditional NEM. Could DER Aggregation fulfill the grand potential FERC envisioned? Yes, if FERC grants the next NERA-like PDO. Otherwise, FERC needs to await individual states reaching the conclusion that traditional NEM is unsustainable after a certain level of DER penetration occurs or states enforcing caps on traditional NEM.