FERC, in a Nov. 17 final rule, said it is revising its regulations to address incremental energy offer caps, adding that each RTO and ISO is to cap each resource’s incremental energy offer at the higher of $1,000/MWh or that resource’s verified cost-based incremental energy offer; and cap verified cost-based incremental energy offers at $2,000/MWh when calculating locational marginal prices (LMP).
FERC said that it further clarifies that the verification process for cost-based incremental offers above $1,000 MWh should ensure that a resource’s cost-based incremental energy offer reasonably reflects that resource’s actual or expected costs.
“This final rule will improve price formation by reducing the likelihood that offer caps will suppress LMPs below the marginal cost of production, while compensating resources for the costs they incur to serve load, by enabling RTOs/ISOs to dispatch the most efficient set of resources when short-run marginal costs exceed $1,000/MWh, by encouraging resources to offer supply to the market when it is most needed, and by reducing the potential for seams issues,” FERC said.
The rule will become effective 75 days after publication in the Federal Register, FERC said. Each RTO/ISO is to submit a filing with the tariff changes needed to implement the final rule within 75 days of the rule’s effective date, FERC said.
As noted in a Nov. 17 statement, extreme weather during the 2013/2014 Polar Vortex led to a significant rise in the price of natural gas that may have caused some resources with must-run requirements to operate at a loss because their short-run marginal costs exceeded the $1,000/MWh offer cap in place at the time.
According to the order, FERC initiated in June 2014 a proceeding in Docket No. AD14-14-000 to evaluate issues regarding price formation in the energy and ancillary services markets operated by RTOs/ISOs. In the instant proceeding, FERC said that it issued in January a notice of proposed rulemaking (NOPR) proposing to require that each RTO/ISO cap each resource’s incremental energy offer to the higher of $1,000 MWh or that resource’s verified cost-based incremental energy offer; and use verified cost-based incremental energy offers above $1,000/MWh to calculate LMPs.
FERC said that it sought comments on the NOPR proposal regarding, for instance:
* Whether a hard cap on cost-based incremental energy offers used for purposes of calculating LMPs should be included in any final rule in the proceeding and, if so, whether the hard cap should equal $2,000/MWh or another value
* The ability of the market monitoring unit or RTO/ISO to verify the costs underlying incremental energy offers above $1,000/MWh prior to the day-ahead or real-time market clearing process, including whether the verification of physical offer components is also necessary
FERC noted that supply offers in day-ahead and real-time energy markets consist of financial and physical components, with the financial components denominated in dollars and representing the costs underlying a resource’s offer to supply electricity in a given day-ahead or real-time interval. The physical components of a supply offer, which are not denominated in dollars, describe the resource’s physical operating parameters, including a resource’s minimum and maximum operating limits in a given day-ahead or real-time interval, FERC said.
FERC said that it finds that current RTO and ISO offer caps on incremental energy offers (offer cap) are not just and reasonable for several reasons, including that offer caps in some RTOs/ISOs may prevent a resource from recouping its short-run marginal costs by not permitting that resource to include all of its short-term marginal costs within its incremental energy offer.
Another reason is that current offer caps in some RTOs/ISOs are likely to suppress LMPs below the marginal cost of production during periods when fuel costs increase dramatically, FERC said. Also, when several resources have short-run marginal costs above $1,000/MWh but are unable to reflect those costs within their incremental energy offers due to the offer cap, the RTO/ISO is unable to dispatch the most efficient set of resources because it will not be able to distinguish among the resources’ actual costs, FERC said.
In addition, the $1,000/MWh offer cap in some RTOs/ISOs may discourage resources with short-run marginal costs above $1,000/MWh from offering supply to the RTO/ISO, even though the market may be willing to purchase that supply, FERC said.
The commission noted that it has modified the proposal in the NOPR to include a $2,000/MWh hard cap for the purposes of calculating LMPs, adding that it is convinced by commenters in the proceeding that the absence of a hard cap creates practical concerns that must be addressed. For instance, FERC said that several commenters noted that RTOs/ISOs and/or market monitoring units may have imperfect information about resource short-run marginal costs, which can create challenges for the proposed requirement to verify cost-based incremental energy offers above $1,000/MWh prior to the market clearing process.
FERC said that the goals of the price formation proceeding are to maximize market surplus for consumers and suppliers; provide correct incentives for market participants to follow commitment and dispatch instructions, make efficient investments in facilities and equipment and maintain reliability; provide transparency so that market participants understand how prices reflect the actual marginal cost of serving load and the operational constraints of reliably operating the system; and ensure that all suppliers have an opportunity to recover their costs.
The reforms will result in LMPs that are more likely to reflect the true marginal cost of production when resources’ short-run marginal costs exceed $1,000/MWh, FERC said, adding that in the short run, LMPs that reflect the short-run marginal costs of production are particularly important during high price periods because they provide a signal to consumers to reduce consumption and a signal to suppliers to increase production or to offer new supplies to the market.
In the long run, FERC said, LMPs that reflect the short-run marginal cost of production are important because they inform investment decisions.
The reforms will give resources the opportunity to recover their short-run marginal costs, thereby encouraging resources to participate in RTO/ISO energy markets, FERC said.
Adequate investment in resources and resource participation in RTO/ISO energy markets ensure adequate and reliable energy for consumers, the commission said.
Among other things, FERC said that all six FERC-jurisdictional RTOs/ISOs have at one time imposed a $1,000/MWh cap on incremental energy offers. The offer cap remains at $1,000/MWh in ISO New England, the California ISO, Midcontinent ISO, New York ISO, and Southwest Power Pool, and resources in those RTOs/ISOs may not submit incremental energy offers above $1,000/MWh. FERC added that resources in PJM Interconnection may submit incremental energy offers above $1,000/MWh, provided they are cost-based, but PJM applies a hard cap that limits incremental energy offers to $2,000/MWh when calculating LMPs.