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FERC Mandates Scarcity Pricing for "Transient Shortages"; Retail Suppliers Have Warned Requirement Will Increase Uplift

June 17, 2016

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Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

As part of its never-ending march to increase compensation to capacity owners, FERC has mandated an increase in the frequency in which jurisdictional RTOs enter shortage pricing conditions

Specifically, FERC ordered that each RTO/ISO establish a mechanism to trigger shortage pricing for any interval in which a shortage of energy or operating reserves is indicated during the pricing of resources for that interval

Most importantly, "[t]his rationale applies to any shortage 'regardless of the duration or cause of [the] shortage.' It thus would apply to 'transient shortages,'" FERC said

"Under this requirement, whenever a shortage of energy or operating reserves is indicated in an RTO’s/ISO’s pricing run software for a particular pricing interval, shortage pricing should be invoked even if during that period resources are ramping up to a particular level they are likely to reach in a few minutes," FERC said

In adopting this policy, FERC rejected the counsel of PJM, which had noted that applying shortage prices to events that do not cause reliability concerns allows price increases even when such events are transitory, do not pose reliability concerns, and cannot be addressed due to limitations on resource response. PJM noted in comments that FERC's adopted policy will trigger shortage pricing even during times when there is no NERC reliability violation.

Direct Energy had opposed FERC's adopted policy, noting that requiring shortage pricing during transient shortages will create control issues and increase uplift. Direct Energy further noted that the application of RTO/ISO shortage penalty factors to these transient situations will likely lead to higher prices than would otherwise be produced, creating unjust and unreasonable rates for generation compensation

Other opponents said that expanded shortage pricing for transient events, due to their transient nature, will not attract new investment (given the unpredictability of future events), and therefore, such transient shortage pricing would only enrich incumbents. Additionally, opponents said that transient shortage pricing is futile in incenting generator behavior because resources cannot respond in time to the higher prices.

FERC dismissed such concerns, stating, "We find that the shortage pricing requirement will help ensure that prices rise sufficiently and appropriately to allow supply to meet demand during an operating reserve shortage."

However, we remain confused why shortage pricing, of any variety, is needed in the Northeast RTOs, based on the ostensible "benefits" of their capacity markets, which we have been told assure reliability. After all, if capacity markets assure resource adequacy, and capacity suppliers now have an obligation to perform (what a novel concept), how can there be shortages? Either a capacity supplier is not performing (showing the inherent impotence of the capacity market), or there is a transmission constraint/outage. But if there is a transmission constraint/outage, and an otherwise offline supplier with a capacity obligation is dispatched to resolve it, such resource was still under an obligation to provide capacity, so why does it deserve shortage pricing?

Perhaps a case could be made that units without a capacity supply obligation should receive shortage pricing in the energy-plus-capacity markets (and if such an argument is made, it should be limited to such units). But wait. We're told that units will exit the market without the mandated capacity payments, so clearly, there will be no units without a capacity supply obligation in the market to dispatch in shortage conditions, so there would be no need to have shortage pricing.

In another market "reform", FERC directed RTOs to align settlement and dispatch intervals by: (1) settling energy transactions in its real-time markets at the same time interval it dispatches energy; (2) settling operating reserves transactions in its real-time markets at the same time interval it prices operating reserves; and (3) settling intertie transactions in the same time interval it schedules intertie transactions

Such changes will introduce five-minute settlement intervals for generation, in areas where dispatch is performed every five minutes.

FERC clarified that in adopting these settlement and dispatch changes, it is not applying the settlement interval changes to load. "We also clarify that adoption of the settlement interval requirements are not intended to change how load is metered. The Commission’s basis for requiring changes to the settlement interval focused exclusively on supply resources rather than load. As a result, we have no record to require any changes to the settlement interval for load. However, we are not prohibiting settling load on a five-minute basis, and will evaluate any such proposals on a case-by-case basis in separate proceedings submitted pursuant to section 205 of the FPA," FERC said

Docket No. RM15-24

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