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Key Takeaways: Achieving Low-Cost Decarbonization Through Power Markets, Infrastructure and Grid Operations



McDermott hosted Rob Gramlich, Founder and President of Grid Strategies, LLC, on July 16 for a discussion of low-cost decarbonization strategies for the electricity sector. We framed the discussion around 2020 US Presidential Candidate Joe Biden’s recently announced goal of getting to zero carbon emissions from the electricity grid by 2035.

Here are three takeaways from our conversation:

1. Three Areas of Change. Rob highlighted three areas where improvements can be made to substantially increase the deployment of wind and solar resources: Power markets, grid infrastructure and grid operations. With respect to power markets, Rob emphasized that regional transmission organizations (RTOs) can play a bigger role in achieving very fast dispatch over large geographic areas. With respect to infrastructure, he emphasized that new transmission lines will be required to reach the best wind and solar resources, but also that many of those new lines can be built on existing rights-of-way. And with respect to grid operations, he emphasized that there are technologies and operating practices that can help us improve the efficiency of the grid.

2. Flexible FERC. Rob suggested that under a new Democratic administration, FERC would likely prioritize flexibility in pricing design and in FERC’s interactions with states. He emphasized the importance of a flexible design for the pricing of “capacity” services and suggested that a Biden administration would likely be supportive of state level efforts to promote renewable energy.

3. Transmission Costs vs. Electricity Costs. Rob suggested that over the next ten years transmission costs will become a greater share of the overall cost of electricity, but that building out transmission would help bring that overall cost down.




Highly Anticipated FERC Rule Removes Barriers to Electric Storage

On February 15, the Federal Energy Regulatory Commission (FERC) issued a much-anticipated order designed to remove barriers to electric storage resource participation in organized wholesale electricity markets. The order—dubbed Order No. 841—creates new rules that require each regional transmission operator (RTO) and independent system operator (ISO) to revise its tariff to establish a “participation model” consisting of market rules that facilitate the participation of electric storage resources in the RTO/ISO markets. Order No. 841 will make it easier for electric storage resources to participate in wholesale power markets and access the accompanying revenue streams.

Each RTO/ISO must file its tariff changes to implement Order No. 841 within 270 days (i.e., by November 12, 2018). FERC will review the filings and must approve all tariff changes. Each RTO/ISO will have an additional one year from the filing date to implement its new tariff provisions.

FERC defined an electric storage resource as “a resource capable of receiving electric energy from the grid and storing it for later injection of the electric energy back to the grid.” This definition encompasses a variety of technologies including batteries, flywheels, compressed air and pumped hydro. It also explicitly includes resources located on a distribution system or behind the meter, as well as resources located on the interstate transmission grid, and opens the door to participation in RTO/ISO markets for smaller storage resources.

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Divided Court of Appeals Panel Vacates FERC Order 745 on Compensation of Demand Response

FERC’s Order No. 745 requiring independent regional grid operators  (RTOs and ISOs) in limited circumstances to compensate providers of state-authorized demand response services in the same amounts that they compensate electricity generators was vacated in a May 23, 2014 decision by the majority of a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit in Electric Power Supply Association v. FERC.  Siding with challengers — principally electricity generators — Judge Brown writing for the two-judge majority held that FERC exceeded its Federal Power Act (FPA) jurisdiction over electricity wholesales and intruded impermissibly on retail jurisdiction reserved to states by “lur[ing]” retail customers into the wholesale markets of regional grid operators with “rich” incentives to reduce retail purchases and consumption whenever a net benefit accrues to the wholesale market in the form of lower market-clearing prices in the wholesale market.  Even if it had not vacated the rule based on this jurisdictional conclusion, the majority said it would have reversed the rule on an alternative ground urged by challengers.  According to those challengers, the rule also was arbitrary and capricious by requiring that demand response providers under limited circumstances be compensated at the same locational marginal price or LMP paid to electricity generators.

In a forceful dissent (running nearly twice as long as the majority opinion), Senior Circuit Judge Edwards disagreed with both the jurisdictional vacatur and the threatened reversal of the rule prescribing LMP payments in some circumstances on arbitrary and capricious grounds.  Demand response services at least arguably did not fall under the FPA reservation to states of all sales other than wholesales since demand response involves no sale at all, but rather a foregone sale or “negawatt.”  The court therefore, according to the dissent, should have deferred to FERC rather than presume greater expertise in interpreting the agency’s jurisdictional statute.   In addition, the dissent agreed with FERC that direct participation of demand response resources in wholesale markets entrusted to FERC improves the functioning of those markets in three ways:  (1) by reducing peak demand and system imbalances, it lowers clearing prices; (2) it mitigates the market power of generators (particularly pivotal suppliers); and (3) enhances system reliability by lowering demand in response to system emergencies. Incentivizing demand response that offers net benefits to wholesale markets through LMP payments is not unlike the capacity payments that the court found FERC could regulate in Connecticut Dept. of Public Utility Control v. FERC, even though ensuring adequate capacity in wholesale markets could incentivize, among other investments, investments in generation, which is regulated by the states.  Therefore, FERC was acting well within the parameters of its wholesale jurisdiction and the court’s precedents.

The disagreement between the majority and dissent on the LMP payments was even more pronounced.  Long the preferred method of pricing electricity in organized electricity markets, LMP is the marginal value of an increase in supply or a reduction in consumption at each notional location (node) within an [...]

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