On November 17, 2016, the Federal Energy Regulatory Commission (FERC) published a Notice of Proposed Rulemaking (NOPR) proposing to develop compensation models and participation rules for energy-storage devices and distributed energy resources (DERs), including behind-the-meter resources, controllable devices, and electric vehicles in structured wholesale markets (FERC Docket No. RM16-23). This NOPR is the first step in establishing the market terms and conditions for the purchase of energy, capacity, and other attributes from renewable, energy storage, and efficiency resources at the distribution level, as well as behind the customer's meter. The rulemaking process announced by the NOPR will impact future financing arrangements for projects located within organized electric markets throughout the country, and also may influence the development of procurement and pricing in states outside of the organized markets.

Given its breadth, depth, and consequences, this NOPR requires robust involvement and advocacy from companies planning to deploy and finance DERs, such as rooftop solar, battery storage, and electric vehicles. Year-end deals, the holidays, and political developments will dominate much of the time leading up to the February 13, 2017, deadline for comments to the NOPR, but affected companies should not miss this opportunity to help shape market compensation models and participation rules.

The NOPR should serve as a call to action to members of the DER industry. Without effective advocacy, the DER industry may lose its best chance to have stacked revenue streams recognized and built into regional compensation regimes. Further, these compensation model revisions will impact the future availability of long-term power purchase arrangements (PPAs), thus challenging many of the assumptions that underlie the current financing options that have supported DER development.

Analysis

In many respects, this NOPR sets the next stage for market development following the successful deployment of DERs in the organized markets after the U.S. Supreme Court affirmed FERC's market revisions set forth in Order No. 745 in EnerNoc v. FERC. Organized market operators (CAISO, MISO, SPP, PJM, NYISO, and ISO-NE) are regulated by FERC, which sets the bounds for the tariffed rules, programs, and compensation algorithms. FERC often delegates the development of detailed rules to the organized market operators, who in turn reach decisions through separate stakeholder processes conducted by existing members, including incumbent utilities and their generating affiliates.

Impact. Over the past decade, procurement of DERs, and more recently, energy storage, has been driven by state programs that are backed by a fixed-price long-term purchase arrangement with a load-serving entity—and FERC's proposal to move DERs into the wholesale markets will influence state procurement programs and the availability of long-term fixed-price contracts. Through the NOPR, FERC proposes federal involvement in the pricing and sale arrangements for DERs for all transactions in front of a customer meter, including the export of power from behind-the-meter resources. FERC has proposed to open the competitive electric markets operated by the organized market operators to DERs, but has not included an analysis as to whether this will reduce the options for DERs to enter into the long-term contracts that have become the backbone to securing financing. This action by FERC has the potential to fundamentally alter the manner in which DERs are developed, financed, and deployed.

Opportunity. Effective advocacy will ensure that FERC does not take action at this critical juncture in the industry that has the unintended consequence of halting the deployment of DERs. DERs now have the opportunity to educate FERC as to whether the industry is prepared to shift to market-based procurement and deployment. With effective advocacy, we expect that DERs can assist FERC in issuing standard rules to ensure that DERs, including energy-storage and behind-the-meter resources, are not improperly precluded from receipt of stacked revenue streams. Without standard participation models, each organized market likely will develop different participation models through separate stakeholder processes, some of which may preclude certain categories of DER resources from market participation, including those sited at a host location that employs net metering. Action by FERC can provide certainty and predictability in an efficient manner and ensure that DERs are not drawn into a multi-year war of attrition within each of the organized electric markets.

Threat. When FERC issued Order No. 1000 in 2010, it delegated to each individual organized market operator the duty to create qualification standards and compensation mechanisms to enable independent, third parties to participate in a competitive process to own and construct new transmission projects. Six years later, the opportunities for competitive, independent, transmission development are just now beginning to emerge. There is a risk that the development and deployment DERs, including energy storage, will face similar setbacks if FERC delegates its authority on these matters to the individual organized market operators that will develop participation and compensation models through their existing stakeholder processes. There is also a risk that the incumbent utilities and thermal generators that dominate the stakeholder processes will advocate for draconian rules and compensation models that effectively reduce the market demand and market price by precluding DERs from achieving maximum market penetration. Attempting to preserve the rights of DERs through each separate stakeholder development process would require extensive resources—resources that the DER community may not be able to mount.

Accordingly, parties that are interested in developing, owning, operating, and investing in renewable technologies—including distributed solar, energy storage, controllable devices, and dispatch optimization software—should get involved with FERC to advocate for a standard set of participation and compensation models that will control each of the separate organized markets. To remain viable, the industry must advocate for a baseline of market participation and compensation that ensures barriers are not erected that will prevent DERs from receiving compensation for the true value of their resources to consumers and the grid. If FERC is not encouraged to set uniform rules across organized markets and the implementation is left to each organized market, advocates will be forced to participate in at least six separate stakeholder processes, many of which require in-person attendance and operate on a two- to three-year development cycle. In other words, it is far more efficient to mount the resources to advocate and assist FERC in developing fair and consistent rules that will extend to each of the organized market operators.

The issues that will benefit from effective advocacy from affected companies include, among others:

• Technical Specifications Enable Participation. FERC has left it to advocates to define the markets in which the resources are technically capable of participating. Advocates will benefit from informing FERC as to DER capabilities and values, and encouraging FERC to set uniform rules across all organized markets for technical specifications, as this uniformity will prevent technological discrimination that could substantially foreclose market value (i.e., requiring all storage resources to satisfy four-hour performance requirements in order to participate in markets).
• Protecting Dual Use. In projects selected through competitive utility procurements, it is not uncommon for utilities to seek to preclude resources from engaging in demand-charge management arrangements on both a physical and virtual basis—from serving and getting paid both by host customers and the grid operator. Similarly, there has been resistance to other stacked-value compensation models. Without effective advocacy, organized market stakeholders may work to erect barriers that prevent entities that provide demand-charge management from participating in other energy, capacity, and ancillary service markets and earning other stacked-value revenues. DERs, even when also providing demand-charge management, can deliver multiple values and should be allowed to participate in an open market. Without effective advocacy before FERC, DER's advocates may be forced to expend substantial capital in each stakeholder process to protect against such draconian restrictions that limit compensation for value.
• Ensuring Operational Control over Resources. While FERC has required each organized market operator to allow electricity storage resources to participate in the competitive markets, it has sought comment as to whether the resource owner should have control over the state of charge of the participating device. Without effective advocacy, any resources participating in the organized energy, capacity, or ancillary services markets may yield certain operational control elements to the organized market operator. Such a result could foreclose resources with dual-use arrangements, such as demand-charge management, from stacked revenue streams.
• An Impact on Project Financing. The ability to project finance DERs is essential to their rapid deployment, and project finance of energy storage in particular has been slow because value stacking is not recognized and paid for by grid operators in any way that lenders can credit. Despite the challenges they have faced in financing these disruptive technologies and installations, DERs, largely funded by independent entrants to the electricity market, bring a renewed challenge to the monopolistic nature of electricity generation and transmission. To maintain the viability of DERs, FERC needs to be educated on the impact of its proposal on DER project-financing arrangements, as opposed to the balance-sheet financing with which FERC is familiar. FERC's market reform proposals could reduce or eliminate the market for long-term PPAs. While it can be expected that the financing community will respond to the market dynamics with the creation of new structures and product offerings, DERs must ensure that the viability of the industry is not threatened by the shift away from fixed-price, long-term purchase arrangements.

For the past decade, the WSGR energy and infrastructure practice has been active in supporting for the development and deployment of renewable energy technologies connected into transmission and distribution grids across the country, as well as smaller deployments located behind commercial, industrial, and residential meters.

If you have any questions about the NOPR, its opportunities, or its implications, please contact Todd Glass or any member of the energy and climate solutions practice at Wilson Sonsini.