On November 20, 2014, The Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an Order (“Fuel Assurance Order”) directing each regional transmission organization (“RTO”) and independent system operator (“ISO”) to file a report on the status of its efforts to address market and system performance associated with “fuel assurance” issues, by February 18, 2015.
FERC explained that the term “fuel assurance” describes a range of generator-specific and system-wide issues, including the overall ability of resources to access sufficient fuel and the firmness of their fuel arrangements as necessary to maintain reliability in RTOs and ISOs. Many of these issues were identified in the September 25, 2013 centralized capacity markets technical conference concerning the ability of capacity markets and resource adequacy constructs to procure and retain the resources necessary to meet future reliability. FERC also identified fuel assurance issues in the April 1, 2014 polar vortex technical conference, which explored the impacts on system performance and market operations of cold weather events occurring in the 2013/2014 winter and the actions taken by RTOs/ISOs to respond to those impacts.
While acknowledging the steps taken by some RTOs/ISOs to avoid the stressed market conditions suffered last winter, the Commission indicated that further reforms will be needed to the extent that energy, ancillary and capacity markets fail to properly address fuel assurance concerns.
Capacity Markets and Resource Adequacy Constructs.
FERC observed that most capacity markets fail to properly value fuel assurance because their auctions establish capacity prices based on economic bids, without taking into account fuel supply arrangements or the operational characteristics of the generators. FERC suggested that RTOs/ISOs may reform their capacity markets or resource adequacy constructs by:
(i) providing greater price incentives for capacity resources to be available during critical system conditions coupled with stiff penalties for failure to perform (i.e. a pay-for-performance approach); or
(ii) requiring that capacity resources have certain fuel arrangements in place in order to be eligible to provide resource adequacy (i.e. an administrative approach).
Even if fuel assurance is expressly valued in capacity markets or resource adequacy constructs, FERC proposed that additional changes to offer caps and commitment processes may be appropriate to enhance fuel assurance. The Fuel Assurance Order further suggests that resources may not be allowed to take “economic” outages, including outages based on economic decisions not to procure fuel or fuel transportation.
One example of ongoing initiatives to respond to fuel assurance issues is the capacity performance initiative of PJM Interconnection, LLC (“PJM”). This initiative is still being discussed in PJM’s stakeholder process and, in its latest form, proposes to establish two types of capacity products eligible to participate in the Reliability Pricing Model (“RPM”): (1) a Capacity Performance product; and (2) a Base Capacity product. Capacity Performance resources will be expected to have arrangements in place to ensure fuel availability and availability of resources to operate during extreme weather events when PJM declares a Hot or Cold Weather alert or a more severe emergency procedure during the delivery year. Base Capacity resources must satisfy the current annual resource product requirements as defined in the PJM Tariff and manuals. PJM proposes that a maximum of 20 percent of the capacity procured in the 2018/19 RPM auction be Base Capacity and the remaining 80 percent be Capacity Performance.
Energy and Ancillary Service Markets
With regard to potential reforms to the energy and ancillary service markets, FERC suggested that RTOs/ISOs evaluate potential enhancements to existing rules concerning fuel cost recovery. For instance, FERC stated that shortage pricing measures that accurately reflect the value to consumers of avoiding an involuntary curtailment could provide incentives for resources to pursue firmer fuel arrangements.
The Fuel Assurance Order cites as an example a recent filing by the California Independent System Operator (“CAISO”) proposing, among other things, Tariff revisions to: (1) increase applicable caps to cost-based energy bids in order to provide resources the necessary flexibility to address price spikes in the natural gas market; and (2) establish a mechanism to update the natural gas price used by the CAISO to calculate fuel costs for resources biding into the day-ahead market.Another example of ongoing initiatives to address fuel assurance issues is the New York Independent System Operator (“NYISO”) comprehensive shortage pricing proposal, which is still under discussion in the NYISO stakeholder process. If approved, the NYISO shortage pricing proposal would update prices and shortage points in rate schedules 3 and 4 and define Southeastern New York as a new reserve region for shortage pricing purposes.
These orders and initiatives highlight the perpetual tension between the effects of competition on keeping capacity and energy prices relatively low (when not spiking due to circumstances such as extraordinary fuel shortages) and the need to maintain market prices at a level that fairly compensates generation owners and that promotes construction and financing of new generation.