Dive Brief:

• The Federal Energy Regulatory Commission has rejected several proposed changes the California ISO's proposed for ensuring sufficient capacity, specifically in how it keeps some generating resources available that would otherwise retire.
• Earlier this year, the grid operator proposed tariff revisions to its risk of retirement capacity procurement mechanism (CPM), including how compensation for the at-risk resources is determined.
• Of primary concern was CAISO's proposal to eliminate the current market-based compensation methodology in favor of a cost-based methodology.

Dive Insight:

If a generating unit is at risk of retirement, then it probably has costs higher than it can cover in the markets, federal regulators pointed out in their rejection of CAISO's proposal.

"The resource-specific cost-based compensation offered by CAISO under the risk of retirement program is likely to exceed what a resource could earn under a bilateral resource adequacy contract," FERC said. The commission said there was merit to protestors' concerns that adding a spring request window could "distort prices or otherwise interfere with the bilateral resource adequacy process."

As pressure rises on older and higher-cost generators, including gas generators, the California grid operator has been rethinking its capacity procurement efforts to ensure reliability. 

CAISO uses the retirement CPM to keep generators available a year in advance, when they would otherwise retire. For example, if the grid operator determined a unit would be necessary for reliability in 2020 but the unit is planning to retire in 2019, then it can be compensated in order to ensure it is available.

Several requirements must be met, including that the generator must have offered all eligible capacity into all competitive solicitation processes during the current year.

If a generator accepts a risk of retirement CPM designation, it is then compensated for capacity at the CPM offer price, capped at the soft offer cap of of $6.31/kW-month. But a higher price may be sought, but requires a resource-specific cost-based filing with FERC.

"Specifically, we are concerned that the resource with a conditional Type 2 designation would likely offer, in the bilateral resource adequacy market, no less than the payment it expected to receive as CPM risk of retirement resource," FERC said.

A Type 2 resource owner is a generator requesting a risk of retirement CPM designation which would include the upcoming year.

"Therefore, without more comprehensive reform, as discussed below, we find that any incremental improvement that may result from CAISO’s proposed revisions here are outweighed by the potential for deleterious effects on the competitiveness of capacity procurement under CPUC’s resource adequacy program," FERC concluded.