FERC Issues NOPR to Increase Compensation to Fast-Responding Providers of Frequency Regulation

FERC yesterday issued a Notice of Proposed Rulemaking (RM11-7) to establish uniform compensation for frequency regulation service in the jurisdictional RTOs, stating that faster-ramping resources may be under-compensated for their services.

While FERC claims that the revised compensation formula will incent efficient procurement of frequency regulation, and may also have energy-market benefits, it remains to be seen if the changes will actually reduce costs to load, or simply provide additional compensation to select resources. Commissioner Marc Spitzer dissented from the NOPR, in part, due to a lack of complete evidence on potential reliability and efficiency benefits of faster-ramping resources providing frequency regulation service.

Under the NOPR, FERC would require jurisdictional RTOs to follow a uniform frequency regulation pricing formula as follows.

The first part of the payment would be a capacity, or option, payment to have a certain amount of capacity held in reserve and not participate in the energy market in order to provide frequency regulation service. The NOPR holds that this payment must include the marginal regulating resource's opportunity costs, which is not included in the clearing-price formula of some RTOs currently, though supplemental payments are made for opportunity costs. In other words, under the NOPR, all cleared frequency regulation resources would be paid the single market clearing price, which would reflect the total marginal costs of the marginal cleared unit.

The second part of the payment would be a performance payment based on the amount of up and down movement, in megawatts, the resource provides in response to a control signal. This performance payment should also take into consideration a resource's accuracy in providing Area Correction Error (ACE) correction, the NOPR says.

The NOPR finds that current pricing may be unjust and preliminarily concludes that, "slower, larger resources are being given a compensatory advantage for their size while faster, smaller resources do not similarly receive compensation for their ramping speed."

Aside from increased efficiencies in the frequency regulation market, the NOPR anticipates, "a secondary effect on energy markets: as slower ramping resources move out of the frequency regulation market and are able to focus on providing sustained energy, they should be able to operate at more efficient heat rates."