The D.C. Circuit Court of Appeals upheld the Federal Energy Regulatory Commission's approval of a tariff amendment that prohibits companies from bidding Energy Efficient Resources in capacity auctions, dealing a blow to energy efficiency providers seeking to participate in electricity markets.
The court ruled Feb. 10 in *Affirmed Energy, LLC v. FERC* that FERC acted within its authority when it approved PJM Interconnection LLC's decision to restrict Energy Efficient Resources from participating in capacity auctions. The decision was not unanimous, with Circuit Judge Pan filing a partial dissent.
Affirmed Energy LLC challenged FERC's approval of the tariff amendment, arguing the commission improperly allowed PJM to exclude EERs from the capacity markets. Energy Efficient Resources are projects that continuously reduce electrical consumption, and providers had been permitted to bid these resources as commitments to supply electricity rather than reduce consumption.
The case centers on how electricity markets should treat energy efficiency measures in capacity planning. PJM Interconnection, which manages the electrical grid across portions of 13 states and the District of Columbia, runs capacity auctions where it purchases commitments to supply electrical capacity to its grid. These auctions are critical for ensuring adequate power supply during peak demand periods.
Under the previous system, FERC had permitted PJM to allow EER providers to bid their projects at capacity auctions. If PJM accepted an EER provider's bid, the provider could bid the same project at up to three additional auctions. PJM justified this approach partly to offset a four-year lag between when EER projects became operational and when they could participate in the markets.
The regulatory dispute highlights ongoing tensions over how electricity markets should value energy efficiency resources. Proponents of EER participation argue these resources provide reliable capacity benefits by reducing overall demand, making them functionally equivalent to traditional power generation for grid reliability purposes. They contend excluding EERs from capacity markets undermines policy goals of promoting energy efficiency and reducing greenhouse gas emissions.
Opponents, including some traditional power generators, have argued that EERs create market distortions and complicate capacity planning. They maintain that energy efficiency measures should be treated differently from power generation resources in capacity markets, as they operate through demand reduction rather than supply addition.
The case drew significant attention from energy industry stakeholders, with Monitoring Analytics LLC and PJM Interconnection intervening as respondents supporting FERC's position. Seth P. Waxman of WilmerHale represented Affirmed Energy, while FERC was represented by its own attorneys led by Senior Attorney Jared Fish.
Circuit Judge Karen LeCraft Henderson wrote the majority opinion upholding FERC's decision. The court found that FERC reasonably concluded PJM's tariff amendment was appropriate for managing its capacity markets. The majority opinion likely examined whether FERC's approval was arbitrary and capricious under the Administrative Procedure Act, the standard typically applied to challenges of federal agency decisions.
However, Circuit Judge Pan's partial dissent suggests disagreement on at least some aspects of the majority's reasoning or conclusion. Partial dissents often indicate a judge agrees with the ultimate outcome but disagrees with certain legal reasoning or believes the majority went too far or not far enough in its analysis.
The decision has broader implications for how regional transmission organizations across the country treat energy efficiency resources in their capacity markets. While the ruling directly affects PJM's territory, other RTOs may look to this precedent when considering similar policy questions about EER participation.
For Affirmed Energy and other EER providers, the ruling represents a setback in efforts to expand market access for energy efficiency resources. These companies will need to explore alternative revenue streams or seek regulatory changes at FERC to restore their ability to participate in capacity markets.
The case also reflects FERC's evolving approach to energy efficiency under different administrations. The commission's treatment of EERs in capacity markets has shifted over time as policymakers balance competing priorities around market efficiency, environmental goals, and grid reliability.
Industry observers will be watching to see whether Affirmed Energy seeks further review, either through a petition for rehearing en banc at the D.C. Circuit or a petition for certiorari to the Supreme Court. However, the Supreme Court rarely reviews utility regulatory cases unless they present significant constitutional questions or conflicts between circuit courts.
The ruling comes as electricity markets continue evolving to accommodate new technologies and resources, including distributed energy resources, battery storage, and demand response programs. How regulators treat these emerging resources in capacity markets remains an active area of policy development and litigation.
For now, the D.C. Circuit's decision affirms FERC's authority to approve restrictions on EER participation in PJM's capacity auctions, establishing precedent for similar regulatory decisions affecting energy efficiency resources in wholesale electricity markets.