CAISO’s Market Monitor has cautioned that a new resource adequacy proposal could lead to strategic gaming in the ISO’s market when capacity supplies are tight on the grid. 

The Department of Market Monitoring voiced its concerns in Sept. 19 comments responding to a CAISO proposal that seeks to revise critical portions of the ISO’s resource adequacy requirements and processes to help ensure RA capacity is available under tight conditions. (See CAISO RA Initiative Moves Forward with 3 Proposals.) 

The proposal is part of a CAISO Resource Adequacy Working Group initiative that has prompted some stakeholders — including the DMM — to oppose a few of the potential changes.  

Their concerns centered on two aspects of the Track 2: Outage and Substitution straw proposal released in August.  

One aspect involves a plan for a new energy resource RA pool, while the other deals with an ISO policy requiring load-serving entities to provide substitute capacity during “conditional” resource outages.  

The Track 2 plan attempts to address the fact that the ISO’s current market design incentivizes LSEs to hold back RA capacity from the market in order to avoid potential penalties. This creates artificial tightness in the RA market, which CAISO and stakeholders say could be overcome with changes to outage substitution rules. 

To address the issue, the Track 2 proposal calls for creating a decentralized matching system that would “function like a bulletin board for buyers and sellers to request or provide substitution capacity,” the DMM said. 

This marketplace would be a central clearinghouse to share information for direct bilateral transactions — one that CAISO compared with StubHub, a website that allows users to connect with each other to buy and sell event tickets. The advantage of such a marketplace would be decreased informational friction for scheduling coordinators to find replacement capacity, the ISO has said. 

However, DMM identified potential issues with this new design: Track 2’s proposed marketplace could lead to a “strategic game of pricing” during tight conditions on the grid, it said. 

The problem with the proposed design is too much transparency, DMM contends. The proposed marketplace would reveal supply- and demand-side prices, but not the true reservation — or opportunity — cost and value of capacity for buyers and sellers, it said. 

Instead, DMM proposes an outage substitution pool design based on a reverse second price auction, in which buyers and sellers are incentivized to non-publicly reveal their true reservation prices for substitution capacity, rather than publicly as under the current proposal. 

“DMM suggests that the product purchased in the auction could be analogous to the ISO’s preferred option in the straw proposal, but use the auction mechanism instead,” DMM wrote. “This would require the auction clearing on a unit of capacity per day, just as the proposed marketplace option in the ISO’s currently preferred design. The main difference is the auction would clear resources with the highest marginal value for substitute capacity, and bid prices would not be revealed to market participants.” 

This alternative approach would reduce market power concerns and be designed to disincentivize strategic interactions between market participants, DMM said. 

The DMM’s model would work well if the outage product and capacity available were for a single day of single week, a CAISO spokesperson told RTO Insider in an email. However, this approach becomes much more complex when the duration of outages and durations of supply to cover those outages are mismatched, the spokesperson said. 

DMM’s proposal includes “potential design and implementation challenges when this approach is applied in a manner that reflects scenarios for outage and substitution which often can require multiple days or weeks depending on the participant needs,” the spokesperson said. 

‘Conditional’ Outages Removed

In separate comments to the RA Working Group, other stakeholders shared concerns that the Track 2 proposal no longer includes a provision addressing the concept of “conditional” resource outages — instances when a resource has indicated it will be offline but has not provided substitute capacity. 

CAISO could approve a conditional outage when reliability conditions allow, California Community Choice Association (CalCCA) said in its comments to CAISO. If reliability conditions changed, the ISO could then require the resource to provide substitute capacity, the group said. 

“As a general matter, suppliers should be able to perform short-term maintenance without having to substitute capacity during non-stressed periods,” CalCCA added. “This would allow for more opportunities to perform planned maintenance necessary to support reliable grid operation, minimizing potential maintenance delays and minimizing forced outages.” 

While CAISO would continue to allow off-peak opportunity outages that do not require substitute capacity, off-peak opportunity outages are only allowed during certain hours of the day and cannot extend multiple days, the CalCCA representative said. 

Commenting on behalf of ACP-California, Energy Strategies’ Caitlin Liotiris said the Track 2 proposal “dismisses the concept of conditional outages with little justification.” 

“We continue to believe that conditional outages can be implemented in a manner that fully preserves reliability and reduces costs for ratepayers, while also providing a valuable tool for RA resources to take outages without having to secure substitute capacity,” Liotiris said. 

Allowing conditional outages at least during non-summer, off-peak months would be a reasonable first step, particularly since CAISO used to approve such outages before implementing a full substitution requirement, Liotiris added. 

But a CAISO spokesperson told RTO Insider the “conditional” outages concept was removed “for reliability reasons and challenges.” 

“The California Public Utilities Commission sets monthly RA requirements for LSEs under their jurisdiction to meet the reliability needs, and as such we do not anticipate that under such a construct there would be significant shown RA that could go on planned outage without substitution,” the spokesperson said. 

“In comments received on the issue paper, the CAISO heard many stakeholders disagree with the ‘conditional’ aspect of this approach and a desire for more certainty,” the spokesperson added. “Removing this topic reflected the challenges in providing certainty desired by stakeholders without imposing a reliability risk to the system.” 

CAISO anticipates the Track 2 proposal will be reviewed by its Board of Governors in 2026, the spokesperson said.