FERC last week granted MISO permission to embed the production costs of providing spinning reserves in its market prices.
The commission said in an order March 18 that the RTO’s plan to add a deployment cost adder for suppliers of spinning reserves is fair (ER21-679), although Commissioner Allison Clements expressed concerns over market impacts.
MISO’s current clearing process for selecting spinning service doesn’t incorporate costs incurred when it’s deployed as contingency reserves, including demand response’s shutdown costs. The grid operator said its proposal gives spinning reserves a simpler means of recouping the costs of providing energy. (See “Spinning Reserves May Get Embedded Deployment Cost Recovery,” MISO Market Subcommittee Briefs: March 5, 2020.)
The RTO’s spinning reserves are online and synched to the grid; they are meant to be available within 10 minutes for contingency events. MISO has not included energy deployment costs for spinning reserves since it began its ancillary market in 2009. When it commits spinning reserves, they are guaranteed to be made whole to their production costs. However, assets committed outside the market don’t have the same make-whole guarantee. Some units are made whole through uplift; others never recoup deployment costs.
With FERC’s approval, spinning reserve suppliers will reflect their expected deployment costs in their offers. MISO has said the move will probably raise spinning reserve clearing prices and could cause some resources with high deployment costs to not offer.
In any hour, MISO clears about 800 to 900 MW of spinning reserves, usually at about $2/MW.
FERC disagreed with some stakeholders’ contention that the proposal represents a departure from MISO’s cost-based market framework. On the contrary, it said the move could lead to more efficient pricing because resource offers would be based on the expected cost to provide spinning reserves.
“[MISO’s] market software currently selects (and pays uplift to) resources with low spinning reserve offers but high deployment costs when lower-cost alternatives are available,” the commission said. “Under the proposed reforms, spinning reserve offers will also reflect a resource’s anticipated deployment costs, and the market will be better able to select the set of spinning reserve resources that minimize the total cost of meeting the system’s … requirement.”
FERC ordered that MISO make a minor adjustment in its proposal by removing a reference to spinning reserve’s “incremental energy costs” within 45 days. The commission pointed out that as a demand response resource type, spinning reserves have shutdown and/or hourly curtailment costs, not incremental energy costs.
Clements’ Concerns
Clements concurred with a separate statement, voicing apprehension over the proposal’s effect on price formation and reserve market participation.
She pointed out the proposal is a departure from MISO’s current market, where only some resource types are currently eligible to set prices and some can be deployed even when energy prices don’t fully cover their costs.
“Regardless of the cause of the shortfall, it can and does occur, as MISO explains,” Clements said. “Currently that shortfall is recovered by the resource through make-whole payments. But because MISO’s proposal does away with those make-whole payments, MISO must offer an alternative means for recovery: Resources will be permitted — and arguably compelled — to include in their reserve offer a portion of the costs they may incur if they are instead asked to provide energy after a contingency event.
“That is, they will be asked to approximate their potential energy revenue shortfall based on a future unknown energy price and add that to their reserve offer. We can therefore expect that the reserve price will, at times, reflect not simply the marginal resources’ cost of providing reserves during the given interval, but also its approximated revenue shortfall if it is instead deployed for energy,” Clements said.
Opponents of the proposal argued that the rule would deter resources from providing reserves if they have high costs of providing energy and are ineligible to set prices.
Clements said that with MISO allowing energy costs within reserve offers, “[it] is moving away, even if only in a small way, from reserve prices reflective solely of reserve costs.”
While she said her concerns didn’t rise to the level of second-guessing her approval decision, Clements said she would monitor the proposal’s effects on market pricing and participation. She also encouraged MISO — once its new market platform is functional — to consider whether its reserve selection, pricing and deployment can be improved.
Waiver for Voltus
FERC separately approved a MISO tariff waiver for Voltus, which offered its aggregated demand response resources as spinning reserves and incurred about $200,000 in unrecovered shutdown costs over seven occasions in 2019 (ER20-1892).
The waiver will allow Voltus to recover the shutdown costs through an adjustment on an upcoming market settlement statement, even though the online demand response category Voltus deployed doesn’t have defined security-constrained unit commitment instructions necessary to receive revenue sufficiency guarantee payments.
Voltus had initiated an alternative dispute resolution with MISO to recoup its shutdown costs.
FERC’s second spinning reserve ruling of the day had another commissioner penning a statement. This time, Commissioner James Danly dissented, saying the $200,000 recovery amounted to retroactive ratemaking.
Danly said though MISO’s tariff was confusing as to whether spinning reserves should recoup shutdown costs, the provisions were no different than the “provisions [that] prevented generation owners from recovering the unexpectedly high costs of natural gas they purchased to generate electricity during a cold snap.”
“The commission simply has no discretion to grant the retroactive relief requested by Voltus based on equitable consideration,” Danly said. “The commission has acted outside of its legal authority by granting a retroactive rate increase.”
Danly added that the commission failed to consider the impact the waiver would have on third parties, although no one protested the waiver.
