Dive Brief:

• Independent generators last week asked the Federal Energy Regulatory Commission (FERC) to establish a mandatory capacity market for the California ISO (CAISO), similar to ones already operating in the PJM Interconnection and ISO-New England.

• CAISO's market rules are unjust and unreasonable because they do not allow generators to recoup their costs and rely on out-of-market programs to maintain reliability, The Electric Power Supply Association (EPSA) said in comments. FERC should order the grid operator to implement "a functional centralized capacity procurement construct," the group wrote.

• The request came as part of a cost recovery proceeding for the La Paloma gas plant, which in June first asked FERC for a CAISO capacity market. California regulators and electric utilities oppose the proposal, saying generators have not shown CAISO market rules to be unjust.

Dive Insight:

The emerging battle over a potential capacity market in California is the latest in a string of debates over how to reconcile electricity market operations with state energy policies.

In California, generators say the state's ambitious renewable energy policies are running them out of business. 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.

The consequence, generators say, is that as the state moves toward 50% 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. This, they argue, will be more costly to consumers than sourcing the resources through a market.

The solution, La Paloma and EPSA 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 Northeast and mid-Atlantic 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," EPSA wrote.

A wide array of California stakeholders oppose the effort, including utility Pacific Gas & Electric, co-ops and municipal utilities, and the California Public Utilities Commission. The idea comes as California lawmakers consider expanding CAISO's jurisdiction to other states, which critics worry will open the state to more policy influence from Washington.

"La Paloma has failed to demonstrate that current procurement planning for new resources and bilateral contracting in the resource adequacy market is unjust, unreasonable or unduly discriminatory and, therefore, warrants FERC intervention," the CPUC wrote, "including the formation of a centralized capacity market over objection of the state, which could conflict with state environmental laws and policies."

Regions with capacity markets are not immune to the tension with state energy policies.

In March, FERC approved a two-part capacity auction for ISO-NE to help mitigate the impact of renewable energy and nuclear supports, and in June FERC threw out the capacity market rules for PJM, the nation's largest wholesale operator, saying state policies were depressing auction prices. The grid operator has asked to delay its 2019 auction as a result.