Cal-ISO proposes market parameter, import bidding enhancements to price cap rules

Responding to stakeholders' concerns with its plan for complying with energy offer cap provisions slated to take effect next month, California Independent System Operator has proposed two market enhancements for aligning higher bid caps with the characteristics of the Western Interconnection's energy market.

One enhancement seeks to avoid excessively high prices during power supply shortages, especially when the supply-demand imbalance is small, and the other aims to prevent generators that export power to Cal-ISO from exercising market power in their import bids, Cal-ISO said in its Feb. 22 filing (ER21-1192) with the Federal Energy Regulatory Commission.

Both matters were concerns raised with regard to the effect Cal-ISO's Order 831-compliant tariff revisions approved in September, with a March 21 effective date, would have on the market parameters used throughout Cal-ISO's forward and real-time markets and on the rules for bidding imports into Cal-ISO's markets, the grid operator told FERC in its filing.

Order 831 (RM16-5), issued in 2016, kept a $1,000/MWh price cap on supply offered in day-ahead and real-time markets, a level already used by most regional grid operators. But it also set a new "hard cap" that would allow offers up to $2,000/MWh to be used to calculate locational marginal prices, as long as those offers are based on verified costs. If costs cannot be verified before the market run, or if costs exceed the $2,000/MWh hard cap, suppliers can seek after-the-fact recovery of fuel costs.

Market parameters

Through a process referred to as shortage pricing, Cal-ISO administratively sets LMPs based on the $1,000/MWh soft energy bid cap when energy supply bids are insufficient to meet demand. The grid operator's proposal would "enable the market to set appropriate levels of shortage pricing when energy costs exceed the cap" that considers the amount of the supply shortfall.

A threshold value, based on the amount of supply shortfall a balancing authority area can incur and still comply with system reliability standards, would "limit shortage pricing when there are small shortfalls in supply that could be the result of forecasting or modeling errors and may not represent a true supply shortage," Cal-ISO said.

In line with that approach, a shortfall with a small threshold value would prompt Cal-ISO to "set prices based on the minimum of the soft energy bid cap or the highest-priced cleared energy bid," the grid operator said. Shortage pricing would be based on the $2,000/MWh hard cap if triggered by a shortfall greater than the threshold value.

Cal-ISO asserted that "implementing this first proposed market enhancement will ensure the market parameters [Cal-ISO] uses to establish market prices in shortage conditions, if they are triggered, do not result in excessively high prices," and "is therefore just and reasonable."

Import, virtual bidding

The second proposed enhancement lays out rules for import, export, demand and virtual bids above $1,000/MWh.

Order 831 did not require grid operators to verify costs for virtual transactions and imports above $1,000/MWh. Because Cal-ISO frequently relies on energy from imports to meet demand and operate reliably, it reasoned that additional protections were warranted "to protect against suppliers potentially exercising system-level market power" by bidding at prices up to $2,000/MWh that are not based on short-run marginal costs.

Cal-ISO proposed only accepting non-resource adequacy import, export, demand and virtual bids above the $1,000/MWh soft cap when they have been cost-verified or the grid operator has calculated a maximum import price that exceeds the soft energy bid cap, based on prevailing bilateral prices.

Import bids above $1,000/MWh that are resource adequacy resources would be reduced "to the greater of the soft energy bid cap, the maximum import bid price, or the highest resource-specific cost-verified bid," under the proposal. And neither energy bids for non-resource-specific system resources nor virtual bids would be eligible for after-the-fact cost recovery, Cal-ISO clarified.

"These enhancements will ensure [Cal-ISO] incentivizes imports it depends on to operate its system reliably when there is insufficient supply to meet demand, while also ensuring energy bids will be based on fair and supportable market prices," the grid operator contended.

Cal-ISO asked that its tariff amendment take effect no later than June 15. While it had hoped to be able to implement the enhancements at the same time as its Order 831-compliant tariff revisions, doing so turned out to be "infeasible, in part due to the significant resources [Cal-ISO] has committed toward assessing challenges and mitigating risks related to the summer of 2021," the grid operator said. It also asked FERC to issue an order approving the enhancements by April 26.