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FERC aims to further reform pricing policies, this time for fast start resources

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FERC aims to further reform pricing policies, this time for fast start resources

FERC on Dec. 15 floated a proposed rule that would reform the pricing policies for certain generating resources, referred to as fast-start resources, that can provide power quickly in response to unforeseen system needs in markets operated by RTOs and ISOs.

The initiative is the third major pricing reform the agency has officially pursued as part of an effort to improve price formation to support efficient investments in wholesale power markets.

The first initiative was a final rule (RM15-24) issued in June requiring grid operators to better coordinate when they settle real-time energy and operating reserves transactions with their dispatch of energy and the pricing of operating reserves. In November, the commission issued another final rule (RM16-5) revising the $1,000/MWh cap on energy supply offered in the day-ahead and real-time markets run by RTOs and ISOs.

Under the Dec. 15 proposed rule, RTOs and ISOs would have to adopt market rules that meet certain requirements when pricing fast-start resources. The problem the proposed rule seeks to address is that market rules in some regions do not allow fast-start resources to set market clearing prices even when they are the marginal resource. And even when they can set the market clearing price, that price may not be enough to cover the fast-start resources' costs.

FERC said that result would be unjust and unreasonable because the clearing prices are not reflecting the value fast-start resources provide in maintaining grid reliability. In addition, the agency said such pricing fails to provide the proper investment incentives and creates the need for out-of-market uplift payments to make the resources whole.

While several RTOs and ISOs have taken steps to address the issue, others have not. FERC therefore has proposed to set five standard requirements.

The first would standardize the definition of fast-start resources as those that can start up in 10 minutes or less, can run for one hour or less (referred to as a minimum run time) and have submitted an economic energy offer to a market run by the RTO or ISO. Any resource that meets the definition, regardless of technology type, would qualify as a fast-start resource.

Second, the proposal would require the RTOs and ISOs to incorporate a fast-start resource's so-called commitment costs, including start-up and no-load costs, into their energy and operating reserve prices, but only during the resource's minimum run time.

The third proposed requirement would mandate that the grid operators relax certain minimum operating limits for fast-start resources and treat them as dispatchable far more often for the purpose of calculating prices.

Fourth, the RTOs and ISOs must allow an offline fast-start resource to set prices if the resource can economically address certain system needs. Finally they must incorporate fast-start pricing in both their day-ahead and real-time markets.

Commenting on the proposed rule during FERC's regular monthly open meeting the same day, Chairman Norman Bay stressed the value fast-start resources provide to the grid because of their ability to respond to system needs and get offline quickly. By making sure those resources are compensated in a way that reflects that value, the proposed rule will give market participants the proper incentive to invest in fast start capacity, he said.

"Making prices better reflect the marginal cost of what it takes to keep the lights on will help reduce uplift payments that are otherwise necessary when the marginal costs don't reflect all of the resources that are needed," added Commissioner Cheryl LaFleur.

Commissioner Colette Honorable observed that the proposed rule is just another step down a lengthy road to better market pricing. She acknowledged that the proposed rule moves away from "classic" locational marginal pricing and that "there will be winners and losers" if it is adopted. But she said the goal is to ensure that the price is accurate and reflects costs. Honorable also stressed the targeted nature of the proposed reform, noting that they apply only to fast-start resources.

Comments on the NOPR (RM17-3) are due 60 days after it publication in the Federal Register.