FERC 102: FERC’s Role in Grid Decarbonization

The Federal Energy Regulatory Commission (FERC) regulates the interstate sale of wholesale electricity (see “FERC 101” to learn more). While FERC is an economic regulator with little direct influence on environmental policy, FERC’s actions do have implications for environmental outcomes. This explainer discusses how FERC’s decisions affect the environment and how the agency can leverage its authority to enable electric grid decarbonization.

Several FERC rulings have the potential to enable grid decarbonization. These include the issuance of orders that have enabled demand resources (like demand response that reduces electricity consumption during certain peak times) and distributed resources (like rooftop solar, batteries, and grid-connected water heaters or electric vehicles) to participate in wholesale markets. Another order formally acknowledged the role of carbon pricing in wholesale markets.

Demand-side Resources

In recent years, FERC has issued orders that have enabled demand-side resources to participate in wholesale markets. Demand-side resources include those that can adjust electricity consumption in response to changes in supply or market price as well as those that generate electricity at the distribution level and displace energy from the larger grid.

Resources that can adjust or shift energy usage in time are particularly useful for a decarbonized grid with variable electricity supply. Grid operators today predominantly match electricity supply with demand. However, as many states, and potentially the federal government, push for grid decarbonization and a higher penetration of renewable resources, grid operators will have to rely increasingly on flexible demand that can be shifted in time to accommodate variable supply.

Several notable FERC orders have created opportunities to improve demand-side flexibility. Order 719, which was issued in October 2008, eliminated barriers for demand response resources, which reduce demand when called upon during certain peak hours, to participate in organized wholesale markets and earn revenue for the services they provide to the grid. Order 745, issued in March 2011, subsequently built on Order 719 and required wholesale markets to compensate demand response resources at the energy market price.

FERC also issued similar orders that directed RTOs to remove barriers for other innovative energy resources like energy storage (Order 841) and distributed energy resources (Order 2222) to participate in organized wholesale markets. These orders enable other distributed resources, like behind-the-meter solar or aggregations of electric vehicles or grid-connected water heaters, to earn revenue through the energy, capacity, and ancillary service wholesale markets.

Allowing energy storage and other distributed resources to participate in wholesale markets can enhance system flexibility and reduce emissions. As discussed in a Resources blog post, Order 2222 could enable decarbonization in a few ways:

• Allowing distributed resources to participate in wholesale markets enables them to provide grid services to help balance intermittent renewable generation. Electric vehicles, for example, can charge when renewables supply is high.
• If distributed resources like solar participate in wholesale markets, that gives grid operators better visibility into generation at the distribution level, which could enable operators to make better use of distributed resources.
• Allowing aggregations of resources like electric vehicles and water heaters to participate in wholesale markets can facilitate electrification and reduce emissions from fossil fuel use by vehicles and buildings.
• Allowing these resources to participate in organized wholesale markets enables them to earn compensation for supplying a variety of wholesale services, which increases their value and encourages further deployment, which could further reduce emissions. 
  
  

Carbon Pricing

In April 2021, FERC issued a policy statement that clarified the Commission’s stance on incorporating a state-determined carbon price into the regional energy markets. It stated that incorporating such a carbon price into wholesale markets would be within the Commission’s authority.

This statement also affirms that if a state were to propose pricing carbon, FERC would be receptive to such a proposal and would likely allow a state-determined carbon price to be included in FERC-regulated wholesale markets. While the statement itself does not propose a carbon policy, it paves the way for states to put forth such proposals. Including the price of carbon in wholesale electricity markets is an efficient way to reduce emissions from the power sector.

While FERC has made some decisions that are expected to improve grid flexibility and the integration of renewables, other decisions have jeopardized the advancement of clean energy resources in certain markets.

One notable example is the minimum offer price rule (MOPR) order that FERC issued in December 2019 for PJM, the grid operator for utility territories that overlap with thirteen mid-Atlantic and mid-Western states plus the District of Columbia. The MOPR order, which was issued in response to a complaint from a natural gas generation company that state subsidies (such as payments for renewable energy credits created by state Renewable Portfolio Standard policies) were suppressing market clearing prices in the region’s capacity market, required any resources receiving an “out-of-market" payment to bid at or above a certain price in the capacity market.

Since most resources that receive outside payments are clean (either renewables or nuclear), the rule was expected to limit the participation of these resources in the capacity market and could lead to coal plants and other fossil generators being kept online. As noted in our Resources blog on the matter, in addition to discouraging the deployment of clean resources, the MOPR would also result in consumers paying double for some state-sponsored capacity. In April 2021, PJM proposed to reverse this rule and the PJM board voted to approve the new plan in July 2021. As of this writing, FERC approval of this new plan is still pending.

FERC also ruled that in the markets operated by the New York Independent System Operator (NYISO), energy storage and renewable resources cannot be exempt from the NYISO’s buyer-side mitigation rules, which require all new resources in certain areas be subject to a minimum offer price floor in the capacity market, similar to PJM’s MOPR, thus making it more difficult for these resources to compete in the market. These rules, however, apply to all new resources, not just renewables, and are only applicable in certain areas of the state. However, they can still be detrimental to renewables, as a large portion of new resources is likely to be renewables or storage.

Transmission Planning

FERC must approve transmission rates and cost allocation for new investments, which can influence which transmission lines get built. One of the most notable FERC orders affecting transmission is order 1000, which was issued in 2011 and changed how transmission owners approached transmission planning and cost allocation.

Order 1000 changed transmission processes in a few ways. It opened access to transmission lines by allowing non-incumbents to propose new lines, required transmission providers to participate in a regional planning process in order to better reflect public policy needs for transmission expansion, and required transmission providers to include cost allocation in regional planning processes and standardize cost allocation methods for new transmission lines in the region.

The success of order 1000 at improving the efficiency of transmission expansion is under debate. While some argue that the order has succeeded at improving regional planning, or that not enough time has passed to adequately assess its success, others claim that the regional planning process has created additional obstacles for transmission owners and has had unintended consequences. For example, Commissioner Glick has argued that Order 1000 creates a perverse incentive to build smaller lines rather than larger lines due to the competitive bidding process, which is only required for large lines and thus makes building smaller lines easier by comparison. Larger lines that span across regions could help bring renewable energy from resource-rich areas to often distant load centers, enabling grid decarbonization. 

Oversight of Gas Pipelines

Another important role that FERC plays is overseeing the construction and operation of natural gas pipelines. FERC reviews and approves certificates of public convenience and necessity for the construction of pipelines.  These reviews are done on a case-by-case basis and weigh benefits versus costs. Costs include local considerations such as environmental concerns and impacts on local residents, such as the use of eminent domain to obtain land for pipeline siting.

Once pipelines are operational, FERC regulates the interstate sale of natural gas like it does the sale of electricity.

FERC’s decisions regarding approval or disapproval of natural gas pipelines can have long-lasting effects on greenhouse gas emissions. Natural gas pipelines are a long-term investment, and approval could lock-in dependence on a carbon-emitting fossil fuel source for years. In other cases, pipeline approvals could decrease emissions, at least in the short-term, if the availability of gas reduces the use of coal for electricity generation, for example. In March 2021, FERC issued an order that creates new standards for evaluating the greenhouse gas emissions from pipeline projects, indicating that FERC will consider these impacts in pipeline approval going forward.