CAL-ISO Gets FERC Approval for Backstop Capacity Auctions

On October 1, the California Independent System Operator (CAL-ISO) got the go-ahead (Docket No. ER15-1783-000) from the Federal Energy Regulatory Commission (FERC) to revise its capacity procurement mechanism (CPM) by implementing a competitive solicitation process.

The new auction process is intended to ensure that sufficient resources with the right capabilities are offered into the ISO markets to meet local, flexible, and system capacity requirements. Under the amended competitive backstop capacity procurement process – to be launched in 2016 – CAL-ISO will pay designated resources their bid price for capacity, subject to a soft offer cap, rather than paying an administratively set price.

Indeed, the reliability services initiative will replace the administrative rate with one that will reflect both variable market conditions and corresponding fluctuations in capacity prices. The new bid process will take effect upon the expiration of the existing CPM in February 2016.

Specifically, FERC has approved CAL-ISO’s plan to compensate CPM capacity based on a unit’s as-bid price up to a CPM soft offer cap of $6.31/kW per month (or $75.68/kW per year). Under the proposal, CAL-ISO will convene a stakeholder process to update the soft offer cap every four years.

These changes, CAL-ISO states, will “result in a more durable CPM product, without a continued sunset provision, which … both responds to the commission’s prior guidance to provide enhanced fixed-cost recovery opportunities to CPM resources and [to] implement a mechanism that reflects changing market conditions.”

The auction process will solicit offers annually, monthly, daily; as well as on an as-needed basis, whenever CAL-ISO determines that there is less-than-adequate backstop capacity. All resource types will be able to participate in the solicitations, including distributed energy resources, demand response, and use-limited resources.
In accepting CAL-ISO’s filing, the FERC commissioners commented, “We find that CAL-ISO’s proposal to replace its administratively priced CPM with a competitive solicitation process is a just and reasonable approach to meeting CAISO’s operational needs and providing appropriate compensation to needed resources. We find that compensating CPM capacity based on the results of a competitive solicitation process will result in compensation driven by competitive factors and, therefore, will appropriately reflect both changing market conditions and corresponding fluctuations in capacity prices.”

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