FERC Approves $2,000/MWh Hard Offer Cap Which May Set LMPs In All RTOs, Effective (Essentially) Immediately

FERC has adopted a hard cap of $2,000/MWh for the energy markets in all the FERC-jurisdictional RTOs, with offers up to $2,000/MWh permitted to set LMP, and offers in excess of $2,000/MWh also permitted but with offers in excess of $2,000/MWh not setting LMP and addressed instead through make-whole payments and uplift

FERC's order is effective 75 days after publication in the federal register, given retail suppliers and other LSEs scant time to adjust their strategies and business practices to reflect the new market design

The current FERC offer cap is $1,000/MWh

Offers above $1,000/MWh will only be permitted when cost-based. However, in justifying a $2,000/MWh hard cap, FERC noted inherent difficulties in verifying a resource's costs -- concerns which are equally applicable to the offers from $1,000-$2,000 which set LMP as they are for >$2,000 offers.

"The Commission is adopting aspects of the offer cap structure set forth in the NOPR, which caps a resource’s incremental energy offer used for purposes of calculating LMPs in day-ahead and real-time energy markets at the higher of $1,000/MWh or that resource’s cost-based incremental energy offer. Based on the comments received in this proceeding, the Commission is also adopting a hard cap as part of this Final Rule. Although a resource may submit a cost-based incremental energy offer above $2,000/MWh, the hard cap will prohibit the use of such offers above $2,000/MWh when calculating LMPs ... {I]ncremental energy offers above $1,000/MWh must be verified before they are used to calculate LMPs. As noted above, RTOs/ISOs must cap verified cost-based incremental energy offers at $2,000/MWh when calculating LMPs," FERC explained

As a result of this Final Rule, an RTO/ISO will treat resources’ incremental energy offers differently, depending on the level of the offer itself.

Each RTO/ISO shall treat incremental energy offers below $1,000/MWh as it currently does. Such offers: (1) are subject to existing RTO/ISO market power mitigation procedures and are not required to be cost-based; and (2) may be used to calculate LMPs. A resource may only submit an incremental energy offer equal to or above $1,000/MWh if the offer is cost-based, that is, if the offer accurately reflects that resource’s actual or expected short-run marginal costs.

For an incremental energy offer equal to or above $1,000/MWh and less than or equal to $2,000/MWh, the RTO/ISO or Market Monitoring Unit must verify that the offer is cost-based before the RTO/ISO may use the offer to calculate LMPs. For an incremental energy offer above $2,000/MWh, the RTO/ISO or Market Monitoring Unit must also verify that the offer is cost-based.

Cost-based incremental energy offers in excess of $2,000/MWh will be capped at $2,000/MWh for purposes of calculating LMPs. As such, the $2,000/MWh hard cap places an upper limit on the incremental energy offers that the RTO/ISO can use to calculate LMPs. Additionally, resources with verified cost-based incremental energy offers above $2,000/MWh will be eligible to receive uplift

Although offers are capped at $2,000/MWh for LMP purposes, resulting LMPs may exceed $2,000/MWh due to losses and congestion

FERC will permit market participants to submit virtual transactions up to $2,000/MWh. FERC will not require that virtual transactions be subject to the cost verification described above.

FERC will also permit economic exchange transactions (i.e., imports and exports) to offer up to the level of the $2,000/MWh hard cap. FERC will not require that import or export transactions above $1,000/MWh be subject to the verification requirement prior to the market clearing process.

FERC said that, "the offer cap structure adopted in this Final Rule will encourage a resource to offer supply to the market when it is needed most," which seems to be addressing a non-existent concern, seeing as capacity resources have already assumed an obligation (now, after a decade, with performance requirements) that ostensibly require them to provide power when needed (hence no further "encouraging" is needed). While, of course, there may be resources without a capacity obligation (and no attendant obligation to make energy available), we're told that procuring capacity in advance by three years, at a level above even the mandated reserve margin (based on the intersection of demand/supply curves) will assure resource adequacy, so, given that customers are paying billions of dollars for this assurance that there will be sufficient supplies, we fail to see why there would be a need for any such non-capacity resource plants (and therefore, no need to encourage such plants to offer energy when needed)

In adopting a hard cap of $2,000, FERC said that this provision, "will address the fact that RTOs/ISOs and/or Market Monitoring Units may have imperfect information about resources’ short-run marginal costs during the verification process."

"[S]everal commenters note that there may be imperfect information associated with the verification of cost-based incremental energy offers above $1,000/MWh prior to the market clearing process because some of those offers will be based on a resource’s estimate of its costs and RTOs/ISOs or Market Monitoring Units may not have perfect information with which to estimate those costs," FERC noted

"Additionally, as noted by market monitors, when natural gas spot market prices rise to levels that could result in the short-run marginal costs of some natural gas-fired resources exceeding $1,000/MWh, over-the-counter natural gas markets often lack liquidity or have wide bid-ask spreads, which can make verification challenging, particularly verification of expected costs. At those times, a market participant’s expected costs could vary significantly from its actual costs," FERC noted.

Given these challenges to cost verification, retail suppliers and load should have little faith that the "verified" offers between $1,000-$2,000 that are permitted are legitimate.

Docket No. RM16-5-000