FERC has begun a process to evaluate "price formation" in the organized markets, which means FERC will examine how to ensure prices form at higher levels.

Although FERC did not explicitly cite raising the current $1,000/MWh price caps as an area for discussion (though scarcity pricing is generally cited), expect stakeholder-desired "reforms" to quickly zero-in on that issue

This will do nothing but impose higher costs on load for no additional value, because, as we are repeatedly told, energy market prices -- no matter how high -- are too unpredictable and transient to drive investment decisions. Therefore, it seems nothing but a windfall to existing generators to juice the prices in the energy and ancillary markets (if you believe the aforementioned logic)

"At a time when the nation is undergoing significant changes in its resource mix, it is crucial that energy and ancillary services markets send the appropriate signals to attract investments needed to sustain reliability. I appreciate staff's work on this important issue and look forward to the workshops," Acting FERC Chairman Cheryl LaFleur said in announcing the technical conference

We are puzzled why energy and ancillaries markets are needed to "attract investment", since that is the ostensible job of the centralized capacity markets.

Moreover, we have been told time and time again, in the Texas market, that no investor is going to rely on transient, short-term energy or ancillary prices in making a 30-year investment decision such as a new plant, and therefore, we struggle to understand (based on this logic from Texas capacity market supporters) why energy and ancillary markets, in RTOs with a capacity market, must have a focus on driving investment, since we are told that the investor community does not respond to energy market price signals.

Specifically, FERC's technical conference will examine the following topics:

• "Use of uplift payments: Use of uplift payments can undermine the market's ability to send actionable price signals. Sustained patterns of specific resources receiving a large proportion of uplift payments over long periods of time raise additional concerns that those resources are providing a service that should be priced in the market or opened to competition. "

• "Offer price mitigation and offer price caps: All RTOs/ISOs have protocols that endeavor to identify resources with market power and ensure that such resources bid in a manner consistent with their marginal cost. As a backstop to offer price mitigation, RTOs/ISOs also employ offer price caps that are designed to be consistent with scarcity and shortage pricing rules. These protocols require that the RTO/ISO's measure of marginal cost be accurate and allow a resource to fully reflect its marginal cost in its bid. To the extent existing rules on marginal cost bidding do not provide for this, bids and resulting energy and ancillary service prices may be artificially low."

• "Scarcity and shortage pricing: All RTOs/ISOs have tariff provisions governing operational actions (e.g., dispatching emergency demand response, voltage reductions, etc.) to manage operating reserves as they approach a reserve deficiency. These actions often are tied to administrative pricing rules designed to reflect degrees of scarcity in the energy and ancillary services markets. In addition, in the event of an operating reserve shortage, all RTOs/ISOs have adopted separate administrative pricing mechanisms designed to set prices that reflect the economic value of scarcity. To the extent that actions taken to avoid reserve deficiencies are not priced appropriately or not priced in a manner consistent with the prices set during a reserve deficiency, the price signals sent when the system is tight will not incent appropriate short- and long-term actions by resources and loads. "

• "Operator actions that affect prices: RTO/ISO operators regularly commit resources that are not economic to address reliability issues or un-modeled system constraints. Some activity may be necessary to maintain system reliability and security. However, to the extent RTOs/ISOs regularly commit excess resources, such actions may artificially suppress energy and ancillary service prices or otherwise interfere with price formation. "

Retail suppliers may welcome efforts to eliminate uplift, and we understand such concerns. However, if the solution to uplift is merely to re-assign such costs to the LMP, rather than actually reducing the costs that drive uplift, retail suppliers are going to be in for a rude awakening.

Higher LMPs -- and generators are already seeking a lifting of the $1,000/MWh cap if not removal of any cap entirely -- will strain retail suppliers' finances, and undoubtedly increase credit costs to RTOs and counterparties.

Again, in Texas, we were told that significantly raising the price cap would damage the retail market by reducing liquidity and making the wholesale market riskier. If these arguments were true (and not merely posturing to talk-down the success of the energy-only market), we fully expect retail suppliers to raise such concerns in the FERC proceedings. If they do not, that silence speaks for itself.

See more: FERC Notice of Proceeding, Docket AD14-14

Tags:
FERC   Capacity Markets   Organized Markets   Price Cap  

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