What the Supreme Court decision on FERC Order 745 means for demand response and DERs

Legal certainty will allow grid operators to focus on integrating DR into their market structures

Just how big was the Supreme Court's decision on Order 745? Depends on who you ask.

Former Federal Energy Regulatory Commission (FERC) Chairman Jon Wellinghoff called it the “biggest consumer energy story of the day, and perhaps the decade,” over at the Renewables+Law blog at Stoel Rives LLP, where he co-chairs the energy team. Wellinghoff headed FERC when it issued Order 745, and later said the decision was “a vindication for markets.”

California ISO's Jill Powers, on the other hand, said during a webinar with the Peak Load Management Alliance that “we don't believe there's much implication.”

And analysts at GTM say the decision is likely to add tens of millions of dollars to the size of the demand response market this year – but that's a scaled-back estimate, down from a potential $200 million boon had the decision come much earlier.

The biggest immediate impact from the Supreme Court's decision to uphold FERC Order 745 is certitude – organized markets which had plans on hold will now move forward with integration of demand response resources. A broader integration of products and services is likely, and markets like PJM Interconnection, which already have significant demand response, could see a bump in activity.

The decision

The Supreme Court ruling, at its base, affirmed FERC's role in regulating demand response resources in wholesale markets. FERC Order 745, issued in 2011, stipulated that demand response providers must be compensated for reducing electricity load at the same rates as if they met that demand with generated electricity. 

A group of generators filed suit against FERC soon after, claiming that the order encroached on the exclusive right of states to regulate retail power markets. In the summer of 2014, a three-judge panel at the D.C. Circuit Court agreed with them last year, vacating the order in a move that GTM estimated at the time could have cut demand response growth rates in half

The Supreme Court last month disagreed. In a 6-2 decision with Justice Samuel Alito recusing himself, the nation's highest judicial body ruled on Jan. 25 that FERC acted within its powers enumerated under the Federal Power Act (FPA) in issuing the order.

Justice Elena Kagen, who delivered the majority opinion, wrote that FERC is within its powers to regulate the wholesale market even when it has indirect consequences on retail market conditions. 

"It is a fact of economic life that the wholesale and retail markets in electric­ity, as in every other known product, are not hermetically sealed from each other," Kagan wrote. "To the contrary, transactions that occur on the wholesale market have natural consequences at the retail level. And so too, of necessity, will FERC’s regulation of those wholesale matters."

If FERC had attempted to directly influence retail market conditions, that may have constituted an overreach. But, Kagan wrote, "When FERC regulates what takes place on the wholesale market, as part of carrying out its charge to improve how that market runs, then no matter the effect on retail rates, [the Federal Power Act] imposes no bar."

"And in setting rules for demand response, that is all FERC has done," she continued. "The Commission’s Rule addresses—and addresses only—transactions occurring on the wholesale market."

Little change for some

While officials from organized markets throughout the U.S. welcomed the decision on FERC Order 745, most indicated that they were already pursuing new demand response programs despite the legal uncertainty.

“I don’t think it opens any new markets directly," Brett Feldman, a senior analyst with Navigant Research, said, "but it allows RTOs to move forward with plans to make market changes and allow greater access.”

California and PJM both already have significant demand response programs, and New England's plan had been paused but is now on track for 2018 integration.

“The big thing is that the alternative decision would have had much worse adverse effects than the positive impact of this decision,” Feldman said.

Feldman also spoke during the PLMA webinar alongside officials from New England ISO, PJM and CAISO. The sense was not of new opportunity, but a return to plans which had already been set in motion.

CAISO's Powers said that the state is continuing to make enhancements to demand response participation. California has already been pushing ahead with the integration of a wide range of resources, and in its latest auction, saw participation from a variety of demand management providers, from traditional DR to aggregated storage and electric vehicles.

Last month, the state's investor owned utilities revealed winning bids in the state's first auction to consider demand response as a capacity resource, with utilities acquiring more than 40 MW from a wide range of vendors.

The state's Demand Response Auction Mechanism was designed to allow a diverse mix of bidders, from customer battery storage to electric vehicles, to participate in wholesale markets for demand management as long as they could amass 100 kW of energy reduction.

“Even in this time of uncertainty, we've moved forward with enhancements,” Powers said. “We're very pleased [with the ruling] but it hasn't had an impact of what we're moving towards and at this point we don't see major implications for us.”

Pete Langbein, who manages demand response operations for PJM, said the market's existing rules will remain in place.

“We could expect a potential uptick in the activity we have, especially in the energy market,” he said. But even with the uncertainty, PJM included demand response in a transition auction held last summer at FERC's direction and capacity delivered from demand response in the region still rose 1% to 11,084 MW in 2015.

New England fits the model of a market where Order 745 uncertainty led to a delay. ISO New England in 2011 had put forward market rules to integrate demand response, but a June 2017 target date has been pushed back to 2018 (interim participation began in 2012 to a limited degree).

The Supreme Court's decision “puts us back on track,” said ISO New England's Doug Smith. He called it a “relatively massive undertaking,” to put in place systems that will clear demand response offers the same as a generator.

'Full throttle from here'

But if the immediate impacts will be muted for large markets, that's not to say growth isn't on the horizon.

"This brings a lot of trust to demand response as a product, resource and market,” said Elta Kolo, an analyst with GTM Research. “In the upcoming auctions in both in CAISO and PJM, you're going to see increasing numbers. Maybe people were hanging back this past year because of this uncertainty, but you're going to see go full throttle from here.”

GTM, which had predicted a potential $200 million bump to the demand response market had the decision landed earlier last year, said it expects a growth rate of around 5% to 7%, which translates this year into an expansion somewhere south of $100 million. 

“We're starting to see increased participation from a wide range of resources,” said GTM analyst Andrew Mulherkar.

“Everyone wants to think this is a really intense time, but things are sort of continuing as business as usual for now, just with a little more trust. It's going to take a couple of months to gain momentum," Kolo said, adding there is the potential to see “both increased residential participation,” and a “broader variety of resources participating" in future demand response markets.

That's the key to former Chairman Wellinghoff's opinion on the decision. The impact isn't so much immediate as long-range and inclusive. And as auspicious the decision was for demand response providers, it could be even better news for vendors of distributed energy resources. 

"FERC has jurisdiction over — in my opinion, and this [Supreme Court] opinion confirms it — any distributed energy resource behind the meter that has the ability to provide some product or service on the wholesale side of the meter," he said. "That would include distributed generation, rooftop solar PV, battery storage, demand response or any kind of controls that could modify loads that provide a whole array of services."

The market will see a "tremendous expansion of demand response products, and also of other behind-the-meter products like distributed generation and energy storage," he said.

"Demand response is just one piece of the revenue for a lot of these providers," said GTM's Mulherkar. The Supreme Court's decision was not a huge decision for the market, he added, though the downside was far greater than the potential upside.

"I think there was a little lack of understanding in the broader stock market as to what the likely outcome would have been. But certainly the headline caused a lot of investors to jump."

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Filed Under: Efficiency & Demand Response Regulation & Policy
Top image credit: Flickr; Tim Sackton