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FERC Puts Reliability Ball In Power Market’s Court

FERC’s recent pressure on the electric power market to provide incentives to contract for firm fuel supplies is very encouraging, the Interstate Natural Gas Association of America (INGAA) said in a letter to the chairman last week.

INGAA’s comments referred to an order [AD13-7] by the Federal Energy Regulatory Commission late last month giving regional transmission organizations (RTO) and independent system operators (ISO) 90 days to report how they were structuring their markets for “fuel assurance.” Looking back at power outages over the last few peak winter seasons, FERC said technical conferences have identified lack of firm generator access to fuel supplies, including natural gas, as a key issue. And the reason for that appears to be that the power markets are not set up to value a reliable fuel supply.

“Commenters raised specific concerns focused on the ability of capacity markets to address a range of reliability and operational needs, including valuing firmer fuel supplies. As currently designed, the eastern capacity market auctions establish capacity prices based on economic bids of sellers, but do not directly take into account generator type, fuel supply arrangements, or operational characteristics.” Other RTOs appear to suffer from the same problems that lead to forced outages or paying extremely high prices during winter weather.

It’s all about the bidding process. “Following the severe cold weather events experienced during winter 2013-2014, concerns were raised regarding the impact of offer caps and other RTO/ISO practices on the ability of generators to recover their fuel costs.

The Commission said failing to ensure fuel reliability ahead of time forces generators into the volatile market for heating fuel during winter peaks, which thereby makes that market even more volatile (read: high priced).

The pipeline organization has been hammering for at least the last few years on the fact that without firm customers, there’s little encouragement for natural gas pipelines, or their bankers, to back new pipelines to increase winter deliveries.

“In organized wholesale power markets, the market rules must create the incentives and the means for electric market participants to do their part to ensure reliability. And as part of that, the market rules must enable electric market participants to pay what is necessary to ensure the reliable delivery of fuel supplies,” INGAA said in endorsing the Commission’s call for a response from the RTOs/ISOs.

Some grid operators already have been restructuring their rules to compensate for reliable supplies. FERC noted market rule changes proposed by ISO New England Inc. (ISO-NE) and the New England Power Pool (NEPOOL) to provide greater market incentives, in both the capacity market and energy and ancillary services markets, for generators to be available and meet their obligations during reserve shortages.

The capacity market rule changes, approved by FERC, called “pay for performance,” more closely link capacity revenues to real-time performance, paying capacity resources more when they deliver energy or reserves during reserve shortages and penalizing capacity resources that fail to perform during such events.

The Commission also required ISO-NE to adopt a NEPOOL proposal to increase reserve constraint penalty factors to provide better price signals in the energy and ancillary services markets during reserve shortage events.

“The potential additional market revenues to generators available in real-time shortage conditions, and the potential for significant penalties when not available, are intended to spur investments in fuel assurance, dual-fuel capability, improved maintenance and staffing, and other enhancements to improve resource performance,” FERC said.

Another initiative would allow ISO-NE’s energy market to provide greater flexibility for market participants to structure and modify their supply offers in the day-ahead and real-time markets.

The Commission said the RTO/ISOs have a number of options they could exercise to improve their reliability, and they have until Feb. 20 to inform the Commission of their plans to address “fuel assurance.” Since conditions are different in grid regions across the country,

“We allow each RTO/ISO the opportunity to identify the fuel assurance issues most relevant to its markets and comprehensively describe the set of actions it has already undertaken or proposed to undertake to address these issues.”

While earlier Commission efforts have focused on changes to the natural gas market and the gas day to accommodate power producers (see Daily GPI, Dec. 3), “only now is the discussion shifting to the question of fuel assurance that is central to preserving electric reliability,” INGAA said.

“Natural gas can be as reliable as any other fuel source for electric power generation as long as electric market participants have contracted for the gas supply and delivery capacity that will ensure such reliability.”

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