The CAISO Board of Governors on Thursday bid farewell to its retired CEO, greeted a new leader and passed a half dozen measures, including a plan to implement FERC Order 831 that one governor worried could lead to market manipulation.
The five-member board also named its new chair and vice chair.
The meeting occurred as CAISO called for conservation to avoid shortfalls unusually late in the year. Triple-digit temperatures hit Los Angeles and inland areas of California last week, straining supply.
The late-season heat wave was a reminder of the grid emergencies in August and September, when resources ran short during record temperatures and forced CAISO to order rolling blackouts Aug. 14-15. (See CAISO: Blackouts May Continue, Calls Emergency Meetings.)
The summer shortages came up in several of Thursday’s policy discussions and when former CEO Steve Berberich delivered his last report to the board about events that had happened on his watch.
Berberich officially retired from CAISO on Sept. 29 but agreed to stick around to help with the transition. He told the board Thursday he wanted to “make sure [new CEO Elliot Mainzer] doesn’t drown in the firehose that is headed his way.”
The ISO, the California Energy Commission and the California Public Utilities Commission are preparing a report that examines the root causes of the energy shortages, Berberich told the governors. The report will delve into factors such as exports from the state during the shortfalls and failures of some load-serving entities to schedule supply in the day-ahead market.
“We will look into those contributing factors and make sure we are not living on the margin like we were this summer,” Berberich said. “Mr. Mainzer, I know, is going to make resource adequacy a top priority.”
The board honored Berberich with a resolution that praised his accomplishments during his nine years as CEO, including the creation of the now flourishing Western Energy Imbalance Market and the establishment of RC West, the reliability coordinator for most of the Western Interconnection.
The governors told Mainzer they were pleased he had accepted their job offer after seven years as head of the Bonneville Power Administration.
“Elliot, welcome,” Governor Ashutosh Bhagwat said. “We are very excited to work with you. These are exciting times — challenging times, but exciting times. And I know you are going to do an amazing job leading this organization.”
Mainzer thanked the governors for their expressions of support and said he was looking forward to getting to work. (See CAISO Retiring, Incoming CEOs Field Questions.)
New Chair, ESDER Phase 4
Later in the meeting, Bhagwat’s four colleagues chose him as their new vice chair and picked Angelina Galiteva as CAISO’s first female board chair in its 20-year existence. The positions rotate every two years.
The board approved CAISO’s fourth and last phase of its five-year effort to make it easier for energy storage and distributed energy resources (ESDER) to participate in its market. (See CAISO Finalizes ESDER Phase 4 Proposal.)
The ESDER initiative includes rooftop solar, energy storage, plug-in electric vehicles and demand response. It addresses a state-of-charge biddable parameter for storage resources; streamlines market participation agreements for non-generator resources; applies market power mitigation to storage resources; and sets a maximum daily run time parameter for DR.
The board also approved proposals on flexible ramping products, maximum import capability, reliability-must-run contracts, and changes to ISO rates and fees for next year.
Order 831 Initiative
The longest and most complex of the policy discussions, however, took place over an initiative meant to align the ISO’s practices with the requirements of FERC Order 831.
FERC issued Order 831 in 2016, two years after the polar vortex of 2014 pushed natural gas prices in the Northeast and Midwest to levels where marginal generation costs exceeded the $1,000 offer caps then in place. It required ISOs and RTOs to raise the hard caps on supply bids from $1,000 to $2,000, with offers over $1,000 requiring suppliers to justify their costs.
FERC approved CAISO’s Tariff changes to comply with the order on Sept. 21. (See FERC OKs CAISO Cost Recovery Plan for Gas.)
The board on Thursday approved a stakeholder initiative intended to help facilitate the order in California with import bidding rules and market parameters meant to “align the implementation of the order with some of the different characteristics of the Western grid,” said Greg Cook, the ISO’s director of market and infrastructure policy.
CAISO must implement the changes by March to comply with FERC’s ruling, he said.
The main differences between Eastern and Western markets, Cook said, is that it is rare to see natural gas prices as high as in the East because gas demand peaks at different times in varying parts of the West. Some areas are extremely hot in summer; others are bitterly cold in winter.
And CAISO, unlike other ISOs and RTOs, is heavily dependent on imported electricity, he said.
In response, CAISO maintains a power balance constraint to ensure that supply equals demand. If there is insufficient supply, the ISO relaxes the constraint and sets market prices at a bid cap of $1,000/MWh.
The initiative approved Thursday sets “appropriate levels of shortage pricing when energy costs exceed $1,000/MWh.” When that happens, and there is insufficient supply to meet demand, the “market will base prices on the price of the highest-priced cleared energy bid if the shortfall is no more than a small threshold value,” CAISO Vice President of Market Policy and Performance Mark Rothleder said in his written report to the board. “Market prices will be based on $2,000/MWh if the shortfall is greater than the threshold value.”
A second enhancement establishes rules for allowing import and virtual bids greater than $1,000/MWh, which Order 831 does not do. The proposal would allow CAISO to accept non-resource adequacy import and virtual bids above $1,000/MWh “only when the ISO has cost-verified a bid or the ISO has calculated a maximum import price that exceeds $1,000/MWh,” Rothleder wrote.
“For resource adequacy import bids, management proposes to reduce the price of bids priced above $1,000/MWh to the maximum import bid price index or the highest resource-specific cost-verified bid,” he said.
The ISO would calculate the maximum import price based on prevailing bilateral prices at the Palo Verde and Mid-Columbia trading hubs, whichever is higher.
“We picked those because those are the largest, most liquid trading hubs in the Southwest and Northwest, respectively,” Cook said.
CAISO’s Market Surveillance Committee previously supported the changes as an intermediate step but called for a stakeholder initiative on scarcity pricing to address situations similar to the August and September shortages. (See CAISO MSC Urges Scarcity Pricing for Emergencies.)
Cook said the ISO agrees with that assessment and intends to introduce a scarcity pricing initiative.
Governor Severin Borenstein, a professor at the University of California, Berkeley, took issue with the idea of using the higher-priced trading hub to set prices. Palo Verde can have higher prices and trades at a lower volume than Mid-Columbia, he noted.
“It seems that this is … not a very precise price index if we’re taking the maximum of two very different locations,” he said. He worried that CAISO is setting up a system by which traders could game the market with high bids at Palo Verde, which is less liquid than the Mid-Columbia hub.
CAISO said prices at Palo Verde climbed to $1,500/MWh during the August emergency, and Southern California Edison said it had seen prices of $1,750/MWh.
Eric Hildebrandt, executive director of market monitoring at CAISO, told Borenstein that FERC must approve such high prices after the fact.
“The best we can do is encourage FERC to perform that kind of review,” Hildebrandt said.
Cook said it would “be very rare for these bilateral trading prices to exceed $1,000 MWh,” except in situations such as the August heat wave.
In the initiative, CAISO “wanted to ensure we wouldn’t discourage import bids” during times of tight supply, Cook said. If conditions support prices over $1,000/MWh, then the ISO wants the energy to be able flow into its market, he said.
Rothleder said it would be “too risky at this point” to limit imported supply based on prices, given the experiences of August and September. CAISO intends to address the liquidity issue in the future, including seeking guidance from FERC, he said. In the meantime, it will closely watch prices to make sure they “keep with reality,” he said.
The board, including a somewhat reluctant Borenstein, approved the Order 831 initiative unanimously.
“I think we have to do this,” Borenstein said of the measure, but he said he remained concerned about creating an “incentive to manipulate the prices at the trading hubs” and urged the ISO to find a solution.