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FERC approves CAISO plan to facilitate hydro participation in the Western EIM

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FERC approves CAISO plan to facilitate hydro participation in the Western EIM

The Federal Energy Regulatory Commission tossed an aspect of a plan to boost participation of fast-ramping hydroelectric resources in the Western Energy Imbalance Market, which FERC said would harm market power mitigation, but otherwise gave California's grid operator the green light to proceed with the rest of the proposal.

In transmission-constrained areas deemed structurally uncompetitive, the California ISO mitigates bids that are higher than the competitive locational marginal price. This mitigation, when applied to the Western Energy Imbalance Market, or EIM, can cause dispatch of resources beyond the required energy offer amount for EIM participation and result in market participants being dispatched to export and serve external load at prices below their bids.

These situations can spur reduced participation in the voluntary EIM, CAISO has said, and are exacerbated by the calculation of default energy bids that often fail to reflect hydroelectric resources' marginal costs.

CAISO in July proposed changes to the local market power mitigation process and cost-based bids used for fast-ramping hydroelectric resources to help alleviate that issue.

Mitigation timing

FERC on Sept. 30 approved the grid operator's proposal to limit instances in which resources are dispatched at mitigated bid prices "when local market power mitigation is not actually triggered in a specific interval, but is a carryover of a determination made in a prior interval," and to create a new default energy bid for hydroelectric resources with storage.

Under the order, CAISO will no longer extend mitigation triggered during a 15-minute market interval to all subsequent intervals for the balance of the hour, nor will it extend mitigation from a five-minute real-time dispatch interval to the balance of the full 15-minute dispatch interval. Further, resources mitigated in a 15-minute interval will no longer be automatically mitigated in the corresponding real-time dispatch interval. Instead, each 15-minute real-time unit commitment interval will be tested for market power.

FERC said in the order that the elimination of these mitigated bid extension rules "will improve the accuracy of CAISO's market power mitigation and minimize bid mitigation when market power does not, in fact, exist."

Default bid

The commission also commended CAISO's plan to introduce a new hydro default energy bid. The "proposal represents a transparent alternative to the existing negotiated [default energy bid] option that will allow hydroelectric resources with storage to reflect their opportunity costs in their [default energy bids], and in turn will ensure that hydroelectric resources will be dispatched when they are most needed."

CAISO's July filing had explained that its methodology for calculating default energy bids did not capture opportunity costs for water, creating situations in which a mitigated resource could be subject to a default energy bid that undervalues its marginal costs. According to the order, that "could create a disincentive for hydroelectric resources with flexible ramping capacity to participate in the voluntary EIM and reduce the economic efficiency of the EIM."

The new formula captures attributes and opportunity costs relevant to hydroelectric resources and provides just and reasonable compensation to mitigated resources, FERC said. Specifically, CAISO's plan would calculate hydroelectric default energy bids as the maximum of three components: long-term/geographic opportunity costs to sell output in the future, including in different bilateral markets; short-term opportunity costs created by short-term water use limitations; and the cost of replacement energy in the real-time market if the resource "exceeds its short-term limitations as measured by the average gas turbine heat rate multiplied by the gas price applicable to the relevant region."

FERC, however, found problems with CAISO's proposal to give EIM entities the power to limit dispatch of incremental net exports under certain conditions. The commission rejected the net export limit proposal, finding it "could weaken CAISO's market power mitigation process by allowing EIM entities to withhold generation through the submission of high supply bids and restricting EIM transfers out of their [balancing authority areas]."

Giving market participants discretion over what constraints are applied to them could lead to unjust and unreasonable rates and "create incentives for inefficient and uneconomic scheduling and bidding because EIM entities may have incentives to bid such that the constraint becomes binding and the resulting congestion revenue is returned to them," FERC added. (FERC docket ER19-2347)

Jasmin Melvin is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.