By Michael Brooks
Two years after the polar vortex, and on the eve of a major snowstorm on the East Coast, FERC last week proposed a uniform “soft” offer cap for all RTOs’ day-ahead and real-time markets (RM16-5).
Under the commission’s Notice of Proposed Rulemaking, generators’ incremental energy offers would be capped at the higher of $1,000/MWh or an RTO-verified cost-based offer.
Most RTOs and ISOs already cap offers at a hard $1,000/MWh. In December, FERC approved doubling PJM’s offer cap to $2,000/MWh in reaction to the extreme cold of the January 2014 polar vortex, which drove up natural gas prices to the point that some generators could not recoup all of their costs (ER16-76).
PJM members approved the increase in October after a long stand-off. Some members who were originally opposed to the increase agreed to support a compromise proposal, as they predicted it would be a temporary change. (See PJM Members OK $2,000/MWh Energy Market Offer Cap.)
The NOPR would allow generators with cost-based offers that are more than $1,000/MWh to set LMPs. FERC, however, said it is seeking comment on whether it should place a hard cap on these offers and, if so, what this cap should be.
FERC said the current structure may suppress LMPs below the marginal cost of production. “If this occurs, resources may lack an economic incentive to supply power during times when the electric system may need it most. Additionally, if resources cannot reflect their short-run marginal costs in incremental energy offers due to the cap, the grid operator cannot dispatch the most efficient set of resources.”
A standard offer cap would also allow RTOs “to avoid issues that could arise if one region has an offer cap that materially differs from a neighboring region,” FERC said.
“The draft NOPR proposes to make the change to the offer cap applicable to all RTOs and ISOs in order to avoid exacerbating seams issues,” said Emma Nicholson of the commission’s Office of Energy Policy and Innovation. “Otherwise, different offer caps in neighboring regions could result in power flows that reflect the level of the two offer caps as opposed to reliability needs or economics.”
Nicholson also said that the NOPR doesn’t eliminate the $1,000 cap entirely because of feedback from RTO market monitors, who said the cap “plays a back stop role in market mitigation.”
Commissioner Cheryl LaFleur said the NOPR “strikes a good balance … between generally maintaining the $1,000 cap but allowing higher offers that can be verified to set prices.”
“The commission is proposing to take important steps that, in my mind, would increase both confidence and transparency” in the markets, Commissioner Colette Honorable said.
Comments are due 60 days after the NOPR’s publication in the Federal Register.
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