Dive Brief:

• The Federal Energy Regulatory Commission on Monday unanimously rejected a proposal from independent generators to establish a mandatory capacity market for the California ISO (CAISO), similar to ones operating in the New England and mid-Atlantic electricity markets.

• Generators argued that the CAISO market does not allow them opportunity to earn return on their investments without a forward capacity market, but FERC wrote they failed to identify where CAISO market rules are unreasonable or any serious reliability problems that could result. 

• The request came as part of a cost recovery proceeding for the La Paloma gas plant, which in June first asked FERC for a capacity market. CAISO, state utility regulators and regulated utilities opposed the proposal. 

Dive Insight:

The battle over a capacity market in California highlights how the growth of renewable power, spurred by California's ambitious clean energy policies, is stressing the finances of conventional generators.

As wind and solar increase on the grid, generators say they drive down the market prices for other power plants, "plunging resource owners into bankruptcy or forcing resources to exit the market altogether," as La Paloma's operator wrote in its protest.

As the state moves toward 60% renewables by 2030, any generator not covered by that mandate will need to apply for cost recovery tariffs like Reliability-Must-Run arrangements or CAISO's Capacity Procurement Program, which generators argued would be more costly to consumers than sourcing the resources through a market.

The solution, La Paloma and other generators say, is for FERC to mandate the creation of a capacity market, which secures power delivery contracts years in the future. Similar markets operate in the ISO-New England and PJM electricity markets, but not in CAISO.

"The Commission should order CAISO to implement all the essential elements of a functional centralized capacity procurement construct, which include a downward sloped demand curve, uniform locational pricing, and several other features outlined in the complaint," the Electric Power Supply Association, a generator trade group, wrote.

FERC, however, wrote that La Paloma did not adequately support its claims that the current market rules "will lead to the premature retirement of needed gas-fired resources."

"La Paloma fails to identify any reliability violation resulting from the purported inadequacies of the resource adequacy paradigm, nor does it provide credible evidence that any such reliability violations are likely in the foreseeable future," FERC wrote.

Additionally, FERC noted that it has never administered a capacity market on a region itself, only approving capacity market proposals brought to it by stakeholders in regions that have the construct.

"While the Commission has opined on the benefits of specific features of the eastern RTO/ISO centralized capacity markets within the context of those specific regions and market designs, the Commission has not imposed a centralized capacity market in an RTO/ISO or found that it is the only just and reasonable resource adequacy construct to attract and retain sufficient capacity," FERC wrote.

Regulators also ruled that generator complaints about the impact of renewable energy on the market were outside of FERC's scope in this case.

"La Paloma focuses its claims of undue discrimination on state-administered programs and not on CAISO's tariff or on CAISO's implementation of its resource adequacy authority," FERC wrote. "With regard to the impact of the participation of subsidized renewable resources in CAISO's energy markets, we find that [La Paloma] has not demonstrated that CAISO's energy market rules have become unjust, unreasonable, or unduly discriminatory as a result of an increased proportion of subsidized resources in the market."

Finally, FERC also rejected a request from generators to open a broader proceeding on resource adequacy in California.

"Through the [California Public Utilities Commission] Resource Adequacy Refinement Proceeding and related CAISO stakeholder processes, CAISO and CPUC are undertaking appropriate initiatives to address various challenges as grid conditions evolve," FERC wrote.