Dive Brief:
- The Federal Energy Regulatory Commission last week issued an order revising its $1,000/MWh cap on supply offered in day-ahead and real-time markets run by operators of regional wholesale power markets, a response to extreme weather three years ago that generators said made cost recovery difficult.
- The commission said its ruling modifies a January proposal by requiring a “hard cap” of $2,000/MWh on the incremental energy offers used for the purposes of calculating locational marginal prices (LMP).
- SNL Energy reports organized markets in California, New England, New York, the Southwest and Midcontinent all currently have the lower cap in place. PJM Interconnection was recently allowed to use the higher clearing price.
Dive Insight:
As the first band of strong winter weather hits the Northeast, lessons from the Polar vortex event of the 2013-2014 winter are still being implemented by the electric power sector.
FERC issued a statement saying its final decision concluded that current offer caps in some regional markets can "produce unjust and unreasonable rates, and the situation requires a generic policy to avoid issues that could arise if one market has an offer cap that materially differs from a neighboring market."
During the extreme winter weather three years ago, a significant rise in the price of natural gas caused some resources with must-run requirements to operate at a loss because their short-run marginal costs exceeded the $1,000/MWh offer cap in place at the time. Demand during the Polar Vortex winter broke records and cold weather forced up to 20% of generation offline, leading to market reforms aimed at ensuring adequate capacity remains available. But the process to implement lessons learned is still in progress.
PJM Interconnection, among the grid operators his hardest by the Polar vortex, implemented new capacity performance rules with steeper penalties for generators not available, but also offering higher payments. But those proposals led to concerns that stricter requirements could keep some demand response resources out of capacity markets, resulting in proposed fixes.
FERC's order aims to make LMPs more likely to reflect the true marginal cost of production, while giving resources the incentive to participate in RTO and ISO electricity markets when their short-run marginal costs exceed $1,000/MWh.
The commission said the new rule will go into effect 75 days after publication in the Federal Register.