FERC Order No. 2222 Explainer: Facilitating Participation in Electricity Markets by Distributed Energy Resources[i]

[i] Disclaimer: To facilitate understanding and discussion, this document simplifies and summarizes Order No. 2222, issued on September 17, 2020, in Docket No. RM18-9-000, https://www.ferc.gov/sites/default/files/2020-09/E-1_0.pdf, as well as Order No. 2222-A, issued March 18, 2021, https://www.ferc.gov/media/e-1-rm18-9-002, and Order No. 2222-B, issued June 17, 2021, https://www.ferc.gov/media/e-4-061721.  Please read the orders for specific details and requirements.

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Q.  What is FERC Order No. 2222?

A.  The Federal Energy Regulatory Commission (FERC or Commission) issued Order No. 2222 in 2020, with updates in 2021.[ii] The main goal of Order No. 2222 is to better enable distributed energy resources (DERs) to participate in the electricity markets run by regional grid operators. The term “DERs” covers a wide variety of resources, including electric battery storage systems, rooftop solar panels, products like smart thermostats that enable one to reduce power usage, energy efficiency measures, thermal energy storage systems such as ice storage, or electric vehicles and their charging equipment. Such DERs may be in your home, business, church or other non-profit organization, community center, local government office, or even a shared solar facility.

Since DERs can be small in comparison to traditional resources like power plants and may be widely dispersed, the output of several or many DERs would often need to be combined together so that there is a “bundle” of sufficient size for market participation.  This bundle is called an aggregation, with the aggregator being the direct participant in the regional energy market. An aggregator, for example, may be able to bring together dozens of small DERs and use their output to participate in the market, then share compensation back to the individual DERs. This is easier to administer than having thousands of individual DERs participating directly in the market.

So, that’s the concept and goal of Order 2222—to facilitate DER participation in the regional electricity markets through aggregations. However, before we move too fast, let’s begin with some more background and explain why Order 2222 could create opportunities for you.

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Q.  Why might FERC Order No. 2222 be important for you?

A.  Perhaps you have installed or are considering installing solar panels on your home, church or community building, or business, maybe with a battery storage unit. Or perhaps you have or are considering a smart thermostat or installing a control switch to control the heating, ventilation, and air conditioning (HVAC) in your home, since this usage can constitute a large and increasing part of your home energy bill. Or maybe you are considering installation of one or more electric vehicle chargers in one of these settings. These can all be types of distributed energy resources, which include relatively small electricity generators or other devices distributed throughout the electric grid, including on a utility’s distribution system or behind a customer meter. DERs can be contrasted with traditional power plants, which send power far and wide across the electricity grid.  

You may already be familiar with state, local, or utility programs that encourage the use of DERs. One common program is solar net metering, where your utility bill is reduced each month by the amount of solar produced on your roof. Other common programs called “demand response” require you to take actions such as allowing small automatic adjustments to your outdoor switch or smart thermostat during times of peak electric need. These state, local, and utility programs are important and will likely continue, and because of Order No. 2222, you may soon have new opportunities to earn money through participation in electricity markets overseen by FERC. 

For example, the solar unit on your home or community center may soon be able to provide energy to the electric grid and receive compensation as a result of Order No. 2222. However, you would have to live in an area with what is called either a “regional transmission organization” or “independent system operator” (collectively referred to as RTOs/ISOs, or for convenience here, just “RTOs”).  Please see the shaded U.S. map below for RTO areas.  Note that Order No. 2222 does not apply in the Texas ERCOT area because ERCOT is not within FERC’s jurisdiction. ERCOT has its own pilot program that seeks to accomplish DER integration in its markets. For more information about aggregated distributed energy resources in ERCOT, you can contact the Public Utility Commission of Texas.[iii] If you live in one of the other shaded RTO/ISO regions highlighted in this map, your home-based, community-based, or other DER may already be able or may soon be able to participate in a regional energy market run by the RTO pursuant to Order No. 2222.

The participation of your DER in an RTO regional energy market would typically be indirect. The direct market participant would be a DER aggregator.  The DER aggregator would combine the output of your DER with several or many others to build an “aggregation” of sufficient size. The aggregator could then share market compensation with each participating DER according to the terms of a contract.

The above diagram provides an example of how DER aggregations can work in practice.  To the left of the diagram is a single component DER, presumably relatively small in output, such as a solar panel, electric storage, or electric vehicle charging equipment. In the middle box, such resources are brought together by a DER aggregator who ensures that the aggregation or bundle of DER resources is large enough to meet the market rules. Operating as a combined unit, this aggregation becomes the direct market participant. The component DER provides energy products like megawatts (MW) or megawatt-hours (MWh) to the DER aggregator, who bundles those energy products together and delivers them to the regional market (RTO market).  The money flow for compensation would go in the reverse direction: from the RTO market back to the DER aggregator, and ultimately back to each individual DER and its owner.

In addition to earning money, participation in electricity markets with your DER may help you play a part in reducing fossil fuel emissions from power plants, maintaining electric reliability, meeting state energy and emissions goals, and lowering the overall cost of electricity in your area. 

Before we go further, we are going to need some more background on FERC, electricity, and RTOs.[iv

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Q.  What is FERC and what does it do?

A.  FERC is an independent federal agency. Its work is organized into proceedings that are known as dockets, with decisions made through “Orders” approved by a majority vote of the FERC commissioners. Order No. 2222 was such an Order made by FERC as part of a rulemaking docket, where FERC sets new rules for the entities that it regulates.

FERC’s responsibilities include (but are not limited to) regulating the wholesale sale of electricity in interstate commerce, regulating the interstate transmission of electricity, natural gas, and oil, reviewing proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines, and the licensing of hydropower projects.  This explainer focuses on FERC’s oversight of wholesale sales of electricity, as this is one area of FERC’s authority on which it acted in Order No. 2222. 

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Q.  What are wholesale sales of electricity? 

A.  Wholesale sales of electricity are distinct from the transactions that you may have been involved in, where you purchased electricity for your home or business from a utility, which are referred to as “retail sales.” The utility’s sale of electricity to you is a retail sale of electricity, that is, a sale to an end-use customer. Wholesale sales go back a step, to the producer of the electricity. In some parts of the United States, your utility also produced the electricity that it sold to you through utility-owned power plants. In many circumstances in other parts of the country, the utility must first buy the electricity from third-party-owned power plants and other resources (including DERs) and then sell it to you for use in your home or business. Generally, when a power plant, DER, or other electricity resource sells power to the utility, that is a wholesale sale of electricity because the utility intends to take that electricity and resell it to customers. Unlike retail sales, which are sales to an end-use customer, wholesale sales are sales (in this case, to a utility) for resale. In most of the country, wholesale sales are considered to be in interstate commerce and thus under FERC jurisdiction because they occur on an interconnected multistate grid.[v]

For purposes of this topic, FERC, through Order No. 2222, is seeking to enable aggregators of DERs to make wholesale sales into organized electricity markets run by RTOs. For many users who own or control DERs, this would put them in the position of simultaneously remaining a retail end user that buys electricity from a utility while also being a part of a DER aggregation that is making wholesale sales of electricity.

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Q.  What are these RTOs that you keep referring to, and what are the organized electricity markets?

A.  The RTOs manage the grid in much of the country, with the territory map shown above. RTOs are non-profit corporations that have independent authority, overseen by FERC, to operate the transmission lines owned by the utilities in their region reliably and safely. RTOs do not own the transmission infrastructure (lines and poles and other equipment); rather, the utilities in the RTO region continue to own it but give operational control to RTOs.

RTOs administer several kinds of wholesale electricity markets, including those involving standard electric energy products (energy markets), those involving the capability or availability to produce power (capacity markets) and those dealing with targeted products to produce power at the most crucial times for the system, called “reserves,” or to maintain system functions like voltage (ancillary service markets). So, for example, DERs consisting of solar panels may produce electric energy that could be sold in the RTO energy market through an aggregator, while other types of DERs like an energy efficiency resource might be part of a capacity market aggregation. You can learn more about the types of regional energy markets in FERC’s Energy Primer (see endnote iv). 

Order No. 2222 is seeking to facilitate participation and competition in any of the RTO markets as long as qualifications are met. DER aggregations would have the opportunity to earn the same compensation as other types of resources that participate in RTO markets, such as power plants.

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Q.  How does FERC Order No. 2222 enable Distributed Energy Resources (DERs) to participate in electricity markets?

A.  In order to enable many small DERs to participate in electricity markets that have a lot of rules and requirements, FERC is reducing barriers to the participation of DER aggregations of DERs. Individually, small DERs might not be large enough to participate in regional electricity markets. Grid operators need aggregations to be of a sufficient size in order to efficiently manage the market and the electric grid and not overburden their systems. When combined into an aggregation, the output and activity of several or many DERs can satisfy minimum size and performance requirements for participation established by the RTO.   

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Q.  What are the current barriers to DER participation in these markets and how did the Commission direct RTOs to reduce barriers in complying with Order No. 2222?

A.  Barriers to DER participation exist because RTOs’ market rules were designed for traditional resources, like power plants, and not DERs.  The current barriers revolve around the RTO’s minimum size and performance requirements, which would prevent individual DERs or certain technologies from participating and/or could impose a heavy cost burden for market participation by a small DER. In Order No. 2222, FERC stated that the reforms that it adopted will remove the barriers that such requirements currently pose to the participation of DERs in the RTO markets. FERC thus required RTOs to establish rules that specifically allow DER aggregations to participate directly in RTO markets, to include rules related to minimum size requirements (i.e., aggregations can be as small at 100 kW), locational requirements (i.e., areas within which DERs can be aggregated), and metering and telemetry requirements. FERC also required RTOs to establish coordination requirements between the RTO, the DER aggregator, the distribution utility, and the local regulatory authority. FERC stated that these coordination requirements should not create undue barriers to entry for DERs and aggregators, while recognizing the role of distribution utilities and state and local regulators in ensuring the safety and reliability of the local distribution system.

In summary, up until now, RTO market rules have been primarily designed for traditional large-scale energy resources. By having a DER aggregator organize the aggregation and make the required arrangements with the RTO, Order No. 2222 expands market access for aggregations of small-scale DERs.

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Q.  Why do you say that I may be able to participate in markets now, or may be able to participate in markets under Order No. 2222 in the next several years?  What is the status of compliance with this Order?

A.  Order No. 2222 built on, in part, programs that already existed in some RTOs that facilitated market participation by certain DERs, in some cases through aggregation.[vi] Some DERs thus already had the ability to participate in certain RTO markets before Order No. 2222 was issued or implemented. For the most part, though, DER participation in RTO markets will require RTOs to upgrade systems and develop participation rules and standards to include in their set of governing rules called “tariffs.” Order No. 2222 requires RTOs to submit those proposed tariff changes to FERC for review before final approval. All RTOs have submitted compliance plans for FERC’s consideration.

The compliance filings by RTOs deal with several challenging topics, including but not limited to:

• The degree to which each DER in an aggregation would need to be geographically close to the others or feed their output into the same location on the RTO grid, called a “node”;
• The rules for simultaneous participation by a DER both in retail programs offered by a distribution utility (such as solar net metering, community solar, and utility demand response programs) and in wholesale markets through an aggregator, with the goal of avoiding duplicative compensation for the same services; and
• Metering and communications requirements so that the output from DERs can be captured as accurately as necessary to ensure appropriate compensation and facilitate RTO planning and reliance on DERs.

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Q.  What are the anticipated timelines for implementation of Order No. 2222 in the various RTO territories?

A.  The discussion below includes the timelines as proposed by the RTOs, although in some instances certain parties are pressing for implementation sooner.  The information here is as of Spring 2023.

• California ISO Corp. (CAISO) is the furthest along toward implementing Order No. 2222. The CAISO compliance filings are being made in FERC Docket No. ER21-2455.[vii]  FERC accepted CAISO’s proposal that part of its filing take effect concurrently with the date of FERC’s action on the proposal, which was in June 2022. While FERC accepted CAISO’s proposal that the other part of its filing take effect in November 2022, CAISO has since asked FERC for a two-year delay.
• New York ISO, Inc. (NYISO) compliance filings are being made in FERC Docket No. ER21-2460. FERC recently approved a NYISO motion to delay full implementation of Order No. 2222 until no later than 12/31/2026,[viii] although the same motion notes that NYISO is seeking to allow participation by DERs and aggregations in its markets in 2023 pursuant to a prior initiative. 
• For ISO New England Inc. (ISO-NE), the proposed implementation timeline is 2026 for participation in the energy and ancillary services markets, with steps toward capacity market implementation already underway, possibly leading to participation of DER aggregations in the forward capacity auction to take place in 2024. The ISO-NE compliance filings are being made in Docket No. ER22-983. 
• For Southwest Power Pool, Inc. (SPP), the proposed implementation date is the third quarter of 2025. SPP’s Compliance Filings are being made in Docket No. ER22-1697.
• For PJM Interconnection, L.L.C. (PJM), the proposed implementation timeline is 2026 for participation in the energy and ancillary services markets and, for the capacity market, the 2026/2027 Delivery Year Base Residual Auction that will be run in November 2023.  PJM’s compliance filings are being made in Docket No. ER22-962.
• For Midcontinent ISO, Inc. (MISO), the proposed implementation date is October 1, 2029. MISO’s compliance filings are being made in Docket No. ER22-1640.

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Q.  How will I find out about opportunities to combine with other DERs to form an aggregation?

A.  As Order No. 2222 is implemented in your area, you should expect that for-profit and perhaps non-profit business entities will arise and offer aggregation services so that small DER owners can participate in electricity markets. Some local governments or utilities may also seek to develop DER aggregations. As the implementation dates noted above arrive, you may well want to discuss aggregation opportunities with a knowledgeable person at your utility (perhaps a person with whom you have discussed your solar panel installation or other DERs) or the company from whom you purchased DER equipment.

Please note that if you are already participating in state, local, or utility programs like solar net metering or a demand response program with a smart thermostat, you may already be receiving compensation for operation of your DER, and Order No. 2222 permits some restrictions on participation and compensation in the wholesale markets if a DER receives compensation in a retail program. It is also possible that Order No. 2222 may create additional opportunities for you even with such current program participation. Again, you may want to contact your utility or the DER company you dealt with when installing your DER as the Order No. 2222 implementation date for your area approaches. As with any business arrangement, you should weigh all your options carefully before signing on with an aggregator for your DER and compare competing offerings if several are available to you.   

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Q.  How can I find out more about Order No. 2222 and the opportunities it creates?

A.  This explainer was developed by FERC’s Office of Public Participation, with input from other FERC offices.  You can contact the Office of Public Participation by e-mail at opp@ferc.gov, by phone at (202)502-6595, or online at FERC.gov/OPP for additional information and assistance.