David Beckstead
Womble Bond Dickinson, Boston
david.beckstead@wbd-us.com

Distributed energy resource (DER) is a general term to describe a number of technologies which function outside the traditional bulk power market structure. The prototypical examples of DERs include rooftop solar, stand-alone battery storage, fuel cells as back-up power, and electric vehicles (EVs).

Several factors are driving the uptake of DERs in the United States, requiring new laws, regulations and contractual structures to address new and emerging realities.

Context: issues with the power grids

Power grids in the United States were developed in a period when vertically integrated utilities were the norm, and most electricity generation occurred at power stations running on fossil fuels. Although the market liberalisation that is characteristic of modern wholesale power markets precedes the influx of renewable energy deployment over the past two decades, the introduction of intermittent wind and solar power at scale has exacerbated certain problems being experienced by US power grids.

First, the timeline for generators to interconnect to the grid is often measured in years, depending on the project’s specific location. The Federal Energy Regulatory Commission (FERC) has attempted to alleviate some of the burden encountering generators by mandating that transmission providers assess interconnection requests in clusters rather than on a first come, first served basis.^[1] The FERC has also required transmission providers to impose penalties for generators who withdraw from the interconnection queue in a bid to reduce the number of speculative projects.

Second, the FERC and Congress are both taking steps to improve transmission planning and permitting across the US, which is seen as necessary to unlock potential solar and wind potential throughout the country. Earlier this year, the FERC issued Order No 1920, which requires transmission providers to develop long-term regional transmission plans with a 20-year horizon.^[2] Although the order is being challenged, there appears to be strong consensus among regulators and law-makers that improvements to the transmission planning and permitting processes are needed. Indeed, as of the time of writing, the draft Energy Permitting Reform Act was making its way through the Senate hearing process, with apparent strong bipartisan support. The proposed law would strengthen the FERC’s hand to issue construction permits for transmission projects that are in the national interest, while simultaneously requiring regional transmission organisations and independent system operators (RTOs/ISOs) to submit joint interregional transmission plans with their neighbouring RTOs/ISOs.^[3]

Permitting reform, building out the transmission network, and improving the interconnection process have all been identified as factors inhibiting the expansion of power grids. Although law-makers and regulators have been taking appropriate actions to address these concerns, it will take time for improvements to be seen on the ground.

Increasing demand for power

Electricity demand in the US is set to increase significantly in the short- to mid-term. This is being driven by a number of factors, including the electrification of transport as well as the heating and cooling of buildings. Another area of growth for power demand will come from the build out of data centres, due to forecasted use of cloud services and artificial intelligence (AI) applications.

In addition to aggregate electricity demand increasing, new applications will result in further demand for power on a localised basis where it may not be efficient to rely entirely on the grid. For instance, if a large facility such as an airport or a distribution centre were to electrify their ground transport fleet, this would entail load demand which the local distribution grid may be unable to accommodate without significant upgrades. Similarly, a data centre designed to develop and run AI applications for software providers and other technology companies will have a major impact on the grid where the project is located. DERs consequently appear to be a logical solution to overcoming these technical hurdles.

DERs: to promote or not to promote?

While DERs often provide localised solutions and environmental benefits to their users, policy-makers must evaluate whether it is appropriate to promote their widespread adoption, as this may negatively affect grid infrastructure. In the case of rooftop solar, many states have adopted net metering policies to encourage deployment on residential buildings. Although the specifics of each state’s policy may vary, the crux of net metering initiatives entail that building occupants will be compensated for surplus solar power which is not locally consumed and is exported to the grid. If compensation paid by the local electricity utility is equal to the retail rate, then payment to the building occupant can be set off against amounts due to the utility, thus having the effect of reducing consumers’ electricity bills.

Critics of net metering policies argue that building occupants with rooftop solar systems receive the benefits of grid connection (ie, guaranteed reliable power supply) but pay less for other charges traditionally levied by utilities for the operation and maintenance of transmission and distribution grids. In effect, therefore, ratepayers who do not have rooftop solar systems will need to pay more for costs related to grid upkeep. As more rooftop solar systems come online, the number of ratepayers paying for grid upkeep falls, thus increasing their individual charges.

Another concern arising from the over-deployment of solar power (including ground-mounted and utility scale projects) is the so-called ‘duck curve’, which derives its name from the shape of the cost curve when plotted on a graph. In essence, when solar power production peaks during daylight hours, most or all the power supplied to retail consumers by utilities could be generated by solar power facilities, depending on the level of solar penetration in a given location.

However, the precise time of day when solar power systems begin generating less energy is in the late afternoon and early evening, which typically coincides with peak demand for electricity; this entails that non-solar power plants need quickly to ramp up to match demand, although they may not be in use for much of the remainder of the day. This necessity for ‘peaker’ capacity is usually met by natural gas-fired power stations, which can ramp-up quickly to dispatch power to meet peak demand. In short, therefore, policies designed to increase deployment of solar power appear favourable at first blush, since they lower carbon emissions, increase energy independence, and can potentially result in long-term cost savings for some consumers. However, as the experience in some US states such as California has shown, a high penetration of solar power mapped onto existing infrastructure and regulatory framework can have unintended negative consequences.

The California Public Utilities Commission (CPUC) introduced regulations in late 2022 and 2023 to adjust the methods by which homeowners and occupants of multi-family housing units with rooftop solar would be compensated. The amended mechanisms are designed to compensate owners of solar systems based on the value to the grid of the electricity being supplied. A full review of these regulations is beyond the scope of this short article, but the net effect has been that the owners of stand-alone rooftop solar systems will be compensated less generously than they had been under the previous net metering regime. As a result, the CPUC has been criticised for enacting policies that are detrimental to the local rooftop solar industry, as many residential projects will no longer be economically attractive under the new regulations. Indeed, the new net metering policy in California has been identified as a factor in SunPower’s recent filing of Chapter 11 protection under the United States Bankruptcy Code.^[4]

A reasonable solution to averting some of the negative consequences of widespread rooftop solar deployment would be to mandate or encourage the installation of home battery storage. Although battery costs have dropped significantly in the past few years, they may still be prohibitively expensive in some locations. In order to encourage the deployment of home batteries that are grid-connected, investor-owned utilities in Massachusetts, Rhode Island and Connecticut have initiated programmes whereby consumers will be paid capacity payments for permitting their home batteries to be dispatched during peak hours. The specific terms vary by programme, but in essence, the utility pays the homeowner a fee for the right to use the batteries during certain hours of the day, consequently potentially alleviating some of the need for additional peaker capacity.^[5] Increased deployment of home batteries should improve grid resilience and permit greater penetration of rooftop solar projects.

While rooftop solar has been the prototypical example of distributed power generation, large-scale and firm power generation will be needed to supply electricity to large load customers, such as data centre operators. An application is currently pending with the FERC to approve the interconnection agreement for a proposed data centre to be co-located with a nuclear power station in Susquehanna, Pennsylvania. Moreover, the FERC recently announced that it will convene a technical conference in the autumn of 2024 to consider issues relating to co-located large loads at generating facilities, which may pave the way for greater clarity for forthcoming regulations.^[6]

Final thoughts

DERs are clearly emerging as a technical solution to allow for speedy deployment of new and emerging technologies, particularly with the aim of facilitating the energy transition to decarbonised electricity resources. Furthermore, DERs have the potential to accommodate the anticipated increases of load growth over the coming decades.

The American federal structure allows for diverging policies to address local preferences and concerns. In the context of the application of DERs, the legal and regulatory landscape is varied, complex and ever-changing. Lawyers who are practicing in this area need a deep understanding of regulatory structures as well as new and emerging technologies to advise their clients properly.