The growth of distributed energy resources (DERs) has increased the urgency of finding solutions to new complexities introduced by rising penetrations of variable renewables.

There is "growing interest in a more decentralized electric grid and new types of distributed resources," the North American Electric Reliability Corporation's (NERC) 2019 Long-Term Reliability Assessment reported. At lower penetrations, DERs "may not present a risk," but as penetrations increase, "the effect of these resources can present certain reliability challenges that require attention."

Those challenges are driving power system stakeholders to rethink resource adequacy (RA).

"As the power system's resource mix changes, the resource adequacy analysis used to determine reliability needs becomes more nuanced and more complex," said Derek Stenclik, an energy consultant focused on power grid planning and resource adequacy. "There is a better way to evaluate risk and reliability in a power system."

Aggregated distributed solar, storage and demand response that make load and generation more flexible can offer customized solutions to reliability needs, power system authorities said. Aggregation can also avoid unnecessary resource buildouts or capacity procurement — if market participants are appropriately compensated and any barriers to entry are removed.

But that may only be possible if the sector exchanges an outdated concept of capacity markets for a new kind of reliability.

Qualifying for capacity markets

Wholesale electricity markets use capacity markets, RA measures and reserve margins in order to ensure NERC reliability standards are met, but DER aggregators have trouble qualifying.

Capacity market prices are set through forward auctions, and generators bid a price "equal to the cost of keeping their plant available," according to Resources for the Future (RFF). When bids match the needed capacity, all generators that "cleared" the auction are paid "the bid price of the last generator used to meet demand," which is typically higher than the energy market price and "essentially a reward" for being available, according to RFF.

Sunrun became the first and thus far only DER aggregator to qualify for a capacity market in ISO-NE's market in February 2019, bidding through a participation pathway available to DER aggregators and other generators who can meet certain market obligations.

Unlike other markets' participation models, which limit behind-the-meter resources' compensation to demand response load reductions, the developer will also be compensated for exported energy, said Sunrun Policy and Storage Market Strategy Director Chris Rauscher. But because the rules of this participation pathway were not designed for DER aggregations, qualifying was difficult for Sunrun and is likely the reason other DER aggregators have not qualified since.

Several gigawatts of new DER, including 8 GW of electric storage and 35 GW of distributed solar, is expected to be added to the bulk power system by 2024, NERC found in 2019. Because this consumer-driven growth of DERs could come without the visibility and control that system operators and planners are used to, grid operators will need to "evolve with the desires of customers and policy makers" or "become less relevant," a 2019 Brattle Group paper concluded.

NYISO is leading that evolution, Electric Power Research Institute Senior Technical Leader Erik Ela told Utility Dive.

DERs emerge as a resource adequacy tool

Wholesale markets are still grappling with how to utilize the unique attributes of DER aggregation and ensure barriers to participation are lowered.

DERs are "already contributing toward meeting peak demand on the distribution system, and that is what resource adequacy is," Ela said. The challenge is aggregating different technologies and determining how they should be valued and managed, he added.

In 2016, the Federal Energy Regulatory Commission initiated a rulemaking to target barriers that energy storage and aggregated DERs face in capacity, energy and ancillary service markets, but the resulting 2018 Order 841 was limited in its scope to storage. The commission concluded in its order that more information was needed about DER aggregations.

Driven by stakeholder pressure, NYISO developed a participation model for aggregated DERs in capacity markets that compensates load reductions and exported generation, and creates a "peak load window" for resources with "duration limitations," Ela said.

But other grid operators have not moved ahead with similar participation models for DER aggregations.

"The level of information that is needed [to reliably integrate DER aggregations] is not yet fully understood," MISO testified after a 2018 FERC-led technical conference on DER aggregations. And "there is less clarity" about DER use cases at the wholesale-level.

MISO has begun using DER aggregations in demand response programs, spokesperson Brandon Morris said in an email. But it does not have "market products specific to distribution-located generation" and creating such products is "not currently a focus."

---

"Though it is technically possible, no system operator has implemented a practical participation model that addresses both the load and generation capabilities of DER aggregations."

Ted Ko

Vice President of Policy and Regulatory Affairs, Stem

---

At PJM, "DER is growing in importance," Joseph Bowring, president of the PJM Interconnection's independent market monitor, Monitoring Analytics, acknowledged. "The challenge will be to integrate wholesale and retail market designs and rules," he said in an email.

ISO-NE will not use Sunrun's DER aggregation until 2022 and now only uses aggregated DERs for demand response, ISO-NE spokesperson Matthew Kakley said in an email.

CAISO also allows DER aggregations to participate in its markets as demand response tools to reduce loads, but not as generation, spokesperson Anne Gonzales said in an email. Utilities in California use DER aggregations through the state-authorized Demand Response Auction Mechanism (DRAM) to meet part of their resource adequacy must-offer obligations.

The grid operator is currently developing another model — the Distributed Energy Resource Provider participation model — that will allow DER aggregations "to offer wholesale market services comparable to other generating resources," Gonzales said.

"Though it is technically possible, no system operator has implemented a practical participation model that addresses both the load and generation capabilities of DER aggregations," said Ted Ko, vice president of policy and regulatory affairs for Stem, a smart storage provider, which has aggregated storage participating in the CAISO DRAM.

When FERC develops a final rule for DER aggregations, it should follow a set of "principles" for participation, Ko wrote in his comments following the 2018 technical conference. DER aggregations should be allowed full participation, not be denied participation without proven risk of market distortion or threat to reliability, and rules should enable "multiple uses" of DERs with "multiple market values" as load reduction or generation, he argued.

---

"Power system operators who become familiar with the new flexible resources' variability can use them to change the need for capacity markets and big reserve margins."

Pat Wood III

Former FERC Chair

---

Perhaps most importantly, aggregations should be "treated as a single resource, with the ISOs designing rules and processes at the pricing node level of granularity, not individual sites," Ko wrote.

The DER aggregation regulation pursued in FERC's 2016 rulemaking and 2018 proceeding "is still sitting there," former FERC Chair Jon Wellinghoff said. But "the recent circuit court decision on Order 841 made clear FERC has jurisdiction to implement market rules that can deliver a flood of consumer-owned flexibility to the system."

New technologies could "enable consumers to participate in wholesale markets individually and give retail aggregators a new opportunity to supply wholesale markets," Wellinghoff added.

DER aggregation may be an important factor in moving away from capacity markets, former FERC Chair Pat Wood III agreed. "Power system operators who become familiar with the new flexible resources' variability can use them to change the need for capacity markets and big reserve margins," he said.

Rethinking RA

RA analysis is "the quantitative work to determine the procurement needed to serve load and protect reliability," Stenclik said. "Historically, serving load meant serving peak load, but with the pandemic and extreme weather events and changes in consumer usage, reliability threats are no longer always at peak load."

Flexible loads and flexible generation can shave and shift peaks with distributed renewables, storage, demand response or managed electric vehicle charging, Stenclik added. To do that effectively, "the power sector must understand this new flexibility well enough to rethink its approach to RA and metrics like outage rates, and methods of analyzing reliability must evolve."

Five new principles can "ensure that enough resources are available for modern power systems, regardless of the technologies," according to Stenclik's just-published paper. The paper is one of the first efforts to develop such principles — "really important work," according to Ric O'Connell, executive director of power market and regulatory proceedings consultant GridLab.

The first principle says that DER, the technologies that manage it, and advanced rate design can make demand more responsive to price signals. That "may shift the resource adequacy planning challenge away from reliability needs toward economic considerations, as customers determine and differentiate which loads matter most."

Second, as NERC foresaw in 2017, DER penetrations on distribution systems are reaching high enough levels that RA analysis must include both near- and long-term planning, the paper said. And analyses and planning approaches that include long-term forecasts of costs, benefits and risks must become "the new gold standard" for RA analysis.

---

"Many states have very aggressive clean energy goals or mandates, but the markets are not structured to accommodate aggregated DERs and other resources needed to meet them."

Chris Rauscher

Policy and Storage Market Strategy Director, Sunrun

---

Third, changing demand makes conventional RA metrics for estimating outages too narrow, the paper said. New metrics should quantify outages' "frequency, duration, and magnitude in MW and MWh" to "put the emphasis on individual, rather than aggregate, event characteristics." That will lead to mitigations with "appropriately sized" resources and "avoid over-procurement."

Perhaps the paper's most important principle is that "there is no such thing as perfect capacity," Stenclik said. Different resources address different needs. Batteries can serve short-duration shortages, but demand response or pumped hydro storage may be better for long-duration outages. RA analyses should recognize "there is no perfect resource" and "all resources have limitations."

Finally, the economic or financial aspects of reliability should be transparently assessed to ensure that "customers are not being asked to pay more for reliability than it is worth," the paper said.

Because today's power system is complicated, applying the principles will be complicated, Stenclik acknowledged in his paper.

For example, forecasting any one individual's potential to supply capacity "is impossible," Stenclik said. But aggregated data "can assess behavior across masses of customers and derive uncertainty ranges for aggregated DER availability through the law of large numbers to normalize behaviors and make RA more predictable."

The need to use aggregated DERs for RA will grow in importance, according to Sunrun's Rauscher. "Many states have very aggressive clean energy goals or mandates, but the markets are not structured to accommodate aggregated DERs and other resources needed to meet them," he said.

ISO-NE planners have inconclusively modeled multiple new approaches to reliability, including shifting RA to states, imposing a carbon price, creating a clean energy capacity market, and using an energy-only market, Rauscher said. "No matter how the paradigm changes, it is absolutely necessary to harmonize wholesale markets with the reality of the state laws already in place."