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Need for forward resource auction in MISO competitive retail areas debated


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Need for forward resource auction in MISO competitive retail areas debated

The Midcontinent Independent System Operator's plan to meet the resource adequacy needs of competitive retail areas within its footprint by holding a three-year forward resource auction for parts of Illinois and Michigan drew criticism from many weighing in on the proposal.

Establishing a forward auction for generators that serve only 10% of MISO's footprint will result in higher prices for customers in that part of the region and deprive them of "the benefits of [RTO] membership that come with access to the large pool of capacity and energy resources in MISO," according to Illinois Attorney General Lisa Madigan.

Others insisted that the proposal, dubbed the competitive retail solution, or CRS, is premature since legislators in those two states have or are attempting to address long-term resource adequacy concerns. "At a minimum, FERC should suspend consideration of this proceeding until the actions by the Illinois and Michigan state governments ... can be independently analyzed," Public Citizen Inc. said.

More generally, stakeholders such as the Organization of MISO States, or OMS, stressed the importance of ensuring that the CRS applies only to retail choice jurisdictions and therefore has no negative consequences for areas that are still served by vertically integrated utilities.

In a Nov. 1 filing at FERC, MISO asked the agency to approve its proposal for addressing concerns that its planning resource auction, which is effective in traditionally regulated jurisdictions, may not produce timely and efficient price signals in competitive retail areas.

MISO explained that it faces the strong possibility that its capacity resources in portions of Illinois and Michigan that have implemented retail competition will fall below minimum reserve margins as soon as 2018. Under the plan, load-serving entities that have a "material" level of competitive demand and are not subject to state or local long-term resource adequacy planning processes could meet CRS resource adequacy requirement by participating in the forward resource auction, submitting a forward fixed resource adequacy plan or taking advantage of a "prevailing state compensation mechanism."

Some say MISO failed to show changes are needed

But some said MISO did not show that substantial changes to its capacity construct are needed.

For instance, a coalition of industrial customers took issue with MISO's failure to place into the record certain critical information, including the model used to demonstrate that the existing market design is unlikely to attract and retain enough merchant capacity in the long term. They also questioned MISO's conclusions regarding potential future capacity shortfalls, arguing that the grid operator failed to take into account any planned generation that does not already have an executed interconnection agreement.

The industrial customers further expressed skepticism regarding MISO's suggestion that adopting a forward capacity construct similar to the one in place in the PJM Interconnection would improve price formation and increase price stability. Capacity prices in the competitive retail choice portion of Illinois that belongs to PJM "are much more volatile" than those in the competitive retail choice portion of the state that falls within MISO's footprint, the industrial customers noted.

Another problem with the proposal, according to the industrial customers, is that the pivotal supplier test MISO proposes to use for determining when to screen offers into the forward resource auction is flawed because it would circumvent FERC's mandate that conduct thresholds be applied to all offers. Moreover, they said the establishment of the prevailing state compensation mechanism option for meeting the CRS resource adequacy requirement infringes on FERC's exclusive jurisdiction to regulate wholesale power prices.

Like the industrial customers and others, the Sustainable FERC Project and the Sierra Club jointly argued that MISO relied primarily on faulty predictions of future resource adequacy shortfalls. "In attempting to justify the CRS proposal, MISO focuses entirely on its own worst-case scenarios," they said.

And like the Illinois attorney general, the two groups asserted that creating "two temporally distinct markets" out of MISO's historically single capacity market will undermine market efficiency and unnecessarily raise capacity prices. They insisted that "bifurcating markets creates a significant risk of treating similarly situated electricity consumers differently depending on where they live within the MISO footprint."

Expressing concern that MISO's proposal "does not directly address the lack of long-term planning" in competitive retail areas, the American Public Power Association urged FERC to learn from the experiences of PJM, the New York ISO and the ISO New England, where the group said capacity market constructs have impaired the ability of public power to develop the resources needed to supply load.

"Given this history, APPA believes that it would be worthwhile for MISO to work directly with the states to determine measures to promote longer-term bilateral contracting and utility ownership of resources within the retail access regions," the group said.

Others don't want a broader market

The OMS asked FERC to reiterate that capacity markets are not needed in vertically integrated areas, which make up approximately 91% of MISO load, and stressed that the CRS should not be seen as the default means for maintaining resource adequacy within retail choice areas. According to the OMS, ensuring that state regulators maintain authority over resource adequacy decisions within their jurisdiction is imperative, and any negative impacts from the CRS on vertically-integrated areas "must be addressed expeditiously."

In a joint filing, consumer advocates for Indiana, Iowa, Minnesota and Missouri similarly asked FERC to ensure that the CRS is narrowly tailored and does not "create a pathway for the establishment of a broader capacity market in the MISO region."

The Electric Power Supply Association said it conditionally supports the CRS, so long as MISO agrees to assess how well the first interim forward resource auction performs and propose improvements before the next is held. "This is critical to allow for sound market design and efficient price formation by ensuring that the three 'catch-up' auctions are not similarly conducted pursuant to a set of tariff provisions that does not produce an efficient outcome," EPSA said.

In particular, EPSA asserted that MISO's proposal is missing three important features of successful capacity markets: effective mitigation of buyer-side market power, required participation of all supply and demand resources in the relevant zone, and adequate restrictions on resources' ability to toggle in and out of the auction.

Citing recent state efforts to subsidize noncompetitive generation, the Natural Gas Supply Association lauded the CRS as a means of addressing MISO's concerns regarding resource adequacy without resorting to out-of-market mechanisms that distort competitive market signals.

The American Wind Energy Association and Wind on the Wires jointly asked that MISO be required to clarify that all resource types, including wind generators, would be eligible to participate in the forward resource auctions. (FERC docket ER17-284)