The Federal Energy Regulatory Commission turned thumbs up on the ISO New England's request for an additional five months to amend and implement its plan to comply with the agency's order on energy offer caps in the competitive wholesale markets.
Issued in 2016, order (FERC docket RM16-5) 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 allowed incremental energy offers above that cap if they are cost-based, subject to a $2,000/MWh hard cap on cost-based offers used for purposes of calculating clearing prices.
While putting the new hard cap into effect has the potential to drastically increase locational marginal prices in the region, the conditions for that to occur have been few and far between over the years, according to S&P Global Platts Analytics.
With the potential market impact subdued, the ISO-NE's June 14 filing (FERC docket ER19-2137) requesting to delay implementation of the new offer cap provisions did not draw any pushback.
The grid operator said resource and staffing demands from competing market design change priorities delayed its ability to put necessary software and process changes in place to implement its offer cap tariff revisions Oct. 1 as originally planned.
It instead sought a new effective date of March 1, 2020, and permission to revise its compliance plan to forgo plans to determine economic merit-order dispatch for cost-based incremental energy offers above $2,000/MWh — a practice encouraged by FERC but not required.
The ISO-NE's market rules (FERC docket ER17-1565) accepted by FERC in 2017 would not have capped cost-verified energy offers for commitment or dispatch purposes, limiting offer capping to just pricing. But as the grid operator worked toward compliance, it "determined that implementing cost-verified incremental energy offers above $2,000/MWh in the dispatch software in the day-ahead energy market is significantly more complex than it originally anticipated and would result in a further delay in the implementation of the Order 831 offer cap revisions," ISO-NE said in its filing.
FERC staff, using delegated authority, on Aug. 13 signed off on the proposed change to the dispatch treatment of resources whose supply offers are price-capped in the day-ahead energy market as well as the requested new effective date for the tariff revisions FERC accepted in 2017 to comply with Order 831.
The order aimed to more accurately reflect the costs of producing energy during emergencies and was part of FERC's broader price formation initiative in the energy and ancillary services markets.
"ISO-NE has seen few occasions with sustained pricing over $1,000/MWh, and an increased offer cap is only likely to have a significant impact on market clearing prices in the event of an extremely cold winter with very high fuel prices," Kieran Kemmerer, a power market analyst with Platts Analytics, said Aug. 14.
While cold spells can drive up power prices, in recent years, capacity shortage events have been the primary driver of extremely high LMPs, "which are bolstered by penalty adders associated with violating reserve requirements," Kemmerer said, adding that such events are not isolated to winter months, having more recently occurred in September 2018 and August 2016.
Kemmerer added that the highest hourly price during the 2017-2018 winter was under $450/MWh, well below the offer cap. "Thus, while theoretically it is possible that an increase in offer cap could result in higher LMPs, recent history demonstrates otherwise," he said.
The tariff changes accepted Aug. 13 clarify that the ISO-NE would apply the $2,000/MWh cap for determining day-ahead energy market dispatch quantities as well as for day-ahead price calculations.
The amended tariff language would commit resources in the day-ahead market based on lowest cost to satisfy demand, while the day-ahead dispatch and pricing process would apply the $2,000/MWh hard cap, dispatching resources above the cap on a pro-rated basis regardless of whether the verified offer price was $2,100 or $2,200, for instance.
Jasmin Melvin is a reporter for S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.