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Tweaks sought for PJM, MISO offer cap rules

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Tweaks sought for PJM, MISO offer cap rules

Tariff revisions proposed by the PJM Interconnection and Midcontinent ISO to comply with a U.S. Federal Energy Regulatory Commission order on energy offer caps in competitive wholesale markets met with some push-back from stakeholders.

Protests were filed over a formulaic screen PJM intends to use to filter out unreasonably high cost-based offers as well as the grid operator's application of offer verification procedures to demand resource strike prices. Meanwhile, Midwest transmission dependent utilities, or TDUs, objected to MISO's methodology for verifying cost-based incremental energy offers before the market clearing process begins.

Issued in November 2016, FERC's Order 831 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, or LMPs, as long as those offers are based on verified costs.

A part of FERC's broader price formation initiative in the energy and ancillary services markets, that final rule aimed to more accurately reflect the costs of producing energy during emergencies.

Grid operators, with the exception of the California ISO, recently submitted tariff revisions to bring their practices and processes in line with the order.

CAISO granted deadline extension

FERC on May 11 granted CAISO an extension of time to comply with the final rule (FERC docket RM16-5), noting that the grid operator, unlike other regional transmission organizations and independent system operators, "does not currently have a process to verify supplier costs prior to market clearing that it could build on to verify cost-based incremental energy offers." CAISO accordingly was given until May 1, 2018, to comply with the rule.

No protests to tariff revisions proposed by the ISO New England (FERC docket ER17-1565), ones filed by the New York ISO (FERC docket ER17-1561) or ones submitted and subsequently amended by the Southwest Power Pool (FERC docket ER17-1568), were posted on FERC's website as of the end the day on May 31.

PJM's proposed tariff revisions (FERC docket ER17-1567), with a Nov. 1 effective date, triggered protests from the Delaware Public Service Commission and the Advanced Energy Management Alliance, or AEMA, a trade group representing distributed energy, demand response and advanced energy management providers.

The Delaware PSC took issue with PJM's plan to implement a "reasonableness check" through a formulaic screen that, according to PJM's filing, would evaluate whether an offer price greater than $1,000/MWh exceeds the expected cost for the generation resource. A price that exceeds PJM's so-called maximum allowable incremental cost, or MAIC, would fail the screen and be ineligible to set the LMP, unless the market seller could provide documentation of actual or expected costs higher than the MAIC ahead of the market clearing process, the grid operator explained.

Too much operational risk falls on customers

The Delaware PSC pointed out that the MAIC would include an estimated fuel cost with a 10% adder to account for uncertainty in computing cost-based offers as well as an additional 10% adder to the fuel price to account for volatility.

"Ultimately, given that energy offers that pass this screen are deemed verified for purposes of setting LMP, customers will be exposed to incremental energy offer costs in the LMP that are at least 10% higher than would otherwise occur," the PSC said, adding that the additional adder for fuel cost volatility was arbitrary and unsupported.

The PSC noted that PJM's capacity performance model as well as market rule changes allowing generators to update offers on an hourly basis that would become effective at the same time as the proposed verification screen already are positioned to mitigate uncertainties and volatility in estimated fuel costs and energy offers. Rather, the state regulator contended that PJM should be required to exclude any fuel cost adder from incremental energy offers above $1,000/MWh before those offers are allowed to set LMP.

"Despite continuing evolution in PJM's energy and capacity markets … it appears to the Delaware PSC that customers are being required to assume increasing operational generation risks that should remain with the market sellers," the state regulator said, urging FERC to reject PJM's proposal to create the formulaic screen to verify offers.

AEMA's protest of PJM's tariff revisions was limited to the treatment of demand response resources. The trade group argued that prices for demand response resources were beyond the scope of Order 831. It asked FERC to direct PJM to submit a compliance filing "that makes clear that PJM's offer verification requirements do not apply to capacity-only demand response resources and retains the existing caps on strike prices associated with those resources."

MISO's method double-counts risk

Objections raised regarding MISO's tariff filing (FERC docket ER17-1570) hinged on a verification process that, according to a protest from the Midwest TDUs, "double-counts fuel cost uncertainty risk; and does not limit to no more than $100/MWh the above-cost adders included in cost-based energy offers above $1,000/MWh."

The Midwest TDUs — Great Lakes Utilities, Missouri River Energy Services, Southern Minnesota Municipal Power Agency and WPPI Energy — said the fuel cost uncertainty adder that would be included in resource reference level determinations is problematic because it would "be added on top of resource reference levels that already include above-cost amounts to reflect 'legitimate risk and opportunity costs.'"

Further, adders for legitimate risk and for opportunity costs incorporated into reference level calculations under the proposal are not subjected to the $100/MWh cap FERC established for above-cost adders in the final rule, the TDUs contended. They asserted that MISO's methodology should stipulate that all above-cost adders for offers above $1,000/MWh should total no more than $100/MWh.