This explainer discusses how the Federal Energy Regulatory Commission's (FERC) decisions affect the environment and how the agency can leverage its authority to enable electric grid decarbonization.
Date Aug. 12, 2021 Authors Kathryne Cleary , Karen Palmer , and Todd Aagaard Publication Explainer Reading time 6 minutesThe 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.
This explainer is part of RFF's Future of Power Explainer Series, which outlines the fundamentals of electricity markets and policy to convey how electricity systems function today and how they may evolve in the future with decarbonization efforts.
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.
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:
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.