FERC Order 745 and clean tech: really, this is not boring!

When the words “FERC Order” are uttered, most people’s eyes either glaze over or worried frowns appear as they wonder if they need to understand the conversation. Let’s try to figure out what this order means for the clean tech world in words we can all understand.

First, here’s the summary of Order 745:
SUMMARY: In this Final Rule, the Federal Energy Regulatory Commission (Commission) amends its regulations under the Federal Power Act to ensure that when a demand response resource participating in an organized wholesale energy market administered by a Regional Transmission Organization (RTO) or Independent System Operator (ISO) has the capability to balance supply and demand as an alternative to a generation resource and when dispatch of that demand response resource is cost-effective as determined by the net benefits test described in this rule, that demand response resource must be compensated for the service it provides to the energy market at the market price for energy, referred to as the locational marginal price (LMP). This approach for compensating demand response resources helps to ensure the competitiveness of organized wholesale energy markets and remove barriers to the participation of demand response resources, thus ensuring just and reasonable wholesale rates.

So, what does this all mean and how will it impact clean technology investment and deployment? With the Energy Policy Act of 2005, Congress recognized the importance of demand response; this Order 745 is the result of a proactive effort by FERC Chairman Wellinghoff to ensure that demand response—and everything it enables—is treated as an energy resource. Over 150 commenters— Independent System Operators (ISO’s), Regional Transmission Operators (RTO’s), environmental organizations, citizen groups, regulators, utilities, DR providers—filed with opinions and arguments on all sides of the issue. The FERC decided to take a stand on its jurisdiction and assert that it does in fact have the authority to set the compensation level for demand response in organized wholesale energy markets, and that the Commission can and should regulate the market rules under which an ISO or RTO accepts a demand response bid into a wholesale market.

FERC acknowledges in this order that “a market functions effectively only when both supply and demand can meaningfully participate.” Smart grid aficionados have been saying all along that a smarter grid allows the supply and demand sides to interact seamlessly and in perfect balance to the benefit of everyone on the grid. This order now puts a value on that delivery.

Demand response has for the past few decades consisted of utilities having direct load control capabilities (the ability to switch off air conditioners, for example, during really hot days) and/or having the ability to call large customers to reduce load on the system. The consumers in these cases received some benefit—a one-time credit for the summer or perhaps a special time of use rate (in the case of large consumers in particular) that reduced the price or issued a credit during curtailment times. In all of these cases, the utility was very much in control of the demand response action and of the monetary benefit accruing to that action. The utility function for demand response programs will not go away and that jurisdiction will remain with the states. But now the consumer has the ability to participate—with or without the utility as the enabler—in the larger wholesale energy markets.

What this means is that a variety of entrepreneurs and technology solutions start-ups will have a chance to create value for their product and consumers will have the ability to make choices in the energy markets. The Order states, “Effective wholesale competition protects customers by, among other things, providing more supply options, encouraging new entry and innovation, and spurring deployment of new technologies.” For example, a business with a solar rooftop system and a storage battery can use that energy during high peak demand times, getting credit for production as a generator. Energy efficiency (as negawatts) will have value as generation. And owners of clean (but perhaps dynamic) generation can choose when to consume that clean power, which will appear as ‘demand response’ to the wholesale grid operator, who will now pay the full wholesale price of generation for that demand response. The Order allows owners of clean tech to fully monetize their investment for the first time.

“Disruptive” technologies—microgrids and electric vehicles, for example—will begin to have value in the energy markets. Buildings will become resources as well as loads. Energy storage becomes even more relevant in the mix. Systems—electric, gas, telephone, water—that need electricity—will become intertwined into one system that can function as a virtual power plant.

In addition to spurring innovation, wholesale demand response will increase reliability, lower the cost of energy production, and increase competition from generators. The Independent System Operators and Regional Transmission Operators have been offering a variety of market tools around demand response for a number of reasons depending on the system; now this Order ensures that innovators and consumers will be adequately and consistently compensated.

Demand response is physically equal to generation, perhaps providing even greater flexibility because a plant will not need to be fired up or a new resource built simply to handle peak loads. In addition, environmental and social benefits can be mitigated since peaking plants are often aging, dirty and inefficient. Real time reliability impacts can be even higher with demand response than with increased generation, significantly affecting the bottom line for data centers and other consumers with critical loads that require 100% reliability.

Now, as long as demand response actually delivers negawatts and meets a net cost benefits test, it will be compensated in the same manner as generation. Demand response is a cost-effective alternative to building new generation which can help balance the system, allow new resources (that were not even previously considered resources) to be compensated, and engage consumers, putting them in the decision-makers seat.
When both supply and demand—producer and consumers—can actively participate in the system—we have a truly smart grid.