Independent power producer Calpine Corp. (NYSE: CPN), on Oct. 16 filed at the Federal Energy Regulatory Commission one objection to a Sept. 25 tariff filing made by the California Independent System Operator (CAISO) about bid cost recovery (BCR) rule changes.
The CAISO filing proposed various modifications to the CAISO Tariff intended to incentivize resources to submit economic bids in the real-time market on which the CAISO can increasingly rely, in place of out-of-market dispatch decisions, to balance its system in light of increased presence of variable renewable energy resources.
“Calpine applauds this objective and, therefore, in principle, supports the package of the CAISO’s proposed tariff changes, including the lowering of the energy bid floor from negative $30/MWh to negative $150/MWh and the separate settlement of bid cost recovery for day-ahead and real-time markets,” Calpine said.
However, while the CAISO’s proposed separation of bid cost recovery in day-ahead and real-time markets is “directionally” correct, one feature of the proposed settlement rules undermines the CAISO’s claims of efficiency and its objective of encouraging the use of economic bids in the real-time market, Calpine added. Calpine protested the proposed netting of bid costs and market revenues in the real-time market across all 24 hours of a day, rather than separately across each hour in the day.
The premise of the CAISO filing, which underlines the proposals to both lower the energy bid floor and to modify bid cost recovery methodology, is that “having a more flexible real-time market with an increased volume of economic bids is a more efficient, cost-effective, and reliable way to address over-supply and other grid conditions compared to out-of-market dispatches and administratively set prices.” Economic bids produce an efficient, cost-effective and reliable market where those bids enable resources to recover their legitimate costs.
Bid cost recovery rules are contained in the CAISO Tariff because resources submit “three-part” economic bids that are intended to cover their start-up and minimum load costs, in addition to energy production costs above minimum load. These three-part bids “reflect the true marginal cost of energy from each resource,” but also create “non-convexities” in cost modeling that can result in a resource being dispatched below its true marginal costs.
As the CAISO filing emphasizes, bid cost recovery rules are “necessary because in certain instances the ISO market may schedule or dispatch a resource in intervals where the locational marginal price (‘LMP’) is below the resource’s bid price for that interval,” and the bid cost recovery mechanism allows a resource to recover that portion of its start-up and minimum load costs not covered by the locational marginal price for energy in a given interval. Thus, bid cost recovery is not just an incentive to generators. It is an essential and just and reasonable compensatory mechanism in an efficient, marginal-cost, and bid-based energy market, Calpine noted.
The CAISO and its Market Surveillance Committee have determined that the lowering of the energy bid floor from negative $30/MWh to negative $150/MWh will incentivize more real-time market bids during intervals of excess generation. At the same time, however, both the CAISO and the committee observe that this change could result in costs to generators and unanticipated adverse impacts. As a result, Calpine said it supports a reduction in the energy bid floor only if accompanied by simultaneous reforms of bid cost recovery settlement rules.
Southern California Edison said in its brief Oct. 16 comments: “SCE generally supports the CAISO’s proposal and the intent to modify current CAISO market design to better integrate variable energy resources. In addition to the proposed lowering of the energy bid floor and bifurcation of the day ahead and real time BCR settlements, CAISO proposes several changes to BCR rules that are necessary to discourage adverse market behavior. CAISO’s proposed implementation plan would introduce the changes in the same release as the upcoming FERC Order No. 764 market changes in Spring 2014. SCE supports the CAISO proposed plan as it provides time for software system development and market simulation. Accordingly, SCE supports the CAISO’s general approach towards implementing the numerous changes contemplated in this filing and recommends that the Commission grant CAISO’s request for a timely and simultaneous approval of the proposed changes as a complete set, as many of the proposed changes work in concert with each other. Approving or disapproving in a piecemeal fashion may introduce unforeseen issues.”