CAISO is moving quickly to win approval for a proposal to raise the soft offer cap in its market from $1,000/MWh to $2,000 to accommodate the bidding needs of battery storage and hydroelectric resources in time for operations this summer. 

The expedited proposal will be put up for a vote by the ISO’s Board of Governors and the Western Energy Imbalance Market’s Governing Body during their joint meeting May 22. 

A product of stakeholder discussions in the ISO’s Price Formation Enhancements (PFE) Working Group, the two-part proposal seeks to allow “energy-limited” resources with “intraday opportunity costs” — specifically batteries and hydro — to reflect those costs in their energy bids. 

Those opportunity costs become a factor on days when the grid is stressed by tight supplies, usually from extreme weather. Under those conditions, energy-limited resources committed to the market at the $1,000/MWh soft offer cap can find themselves dispatched at high prices occurring relatively early in the day. But because of constraints on their use once they’ve depleted their available energy, they will be unable to offer into the market later in the day in the face of even higher prices (which often signal the need for more supply to prevent grid emergencies), reducing their opportunity to earn revenues. 

“Market participants have posited that allowing these [opportunity] costs to be accurately reflected will ensure the market can effectively and efficiently manage the dispatch of these resources,” CAISO’s proposal says. 

The proposal is tied to the ISO’s rules stemming from FERC Order 831, which was issued in November 2016. That order required RTOs/ISOs to subject the bids of an energy resource in their markets to the higher of either a soft offer cap of $1,000/MWh or a cost-based offer already verified by the market operator, which can exceed the soft cap. In the CAISO market, the ISO-recognized offer level for a resource is referred to as the resource’s default energy bid (DEB). 

To address concerns about the potential for runaway prices because of market power, Order 831 also directed RTOs/ISOs to set a hard cap of $2,000/MWh for energy offers in calculating LMPs. 

‘Uncap the DEB’

CAISO’s proposal explains that, to comply with Order 831, the ISO developed a reference level change request (RLCR) process to verify that a resource’s costs exceed the soft offer cap, allowing a resource to update its DEB to reflect its full costs for serving incremental demand. 

But the RLCR process “was tailored toward gas resources that faced discrepancies between their actual fuel costs and the costs that CAISO’s market systems used to calculate their DEB” and “was designed to validate requested DEB adjustments, using a reference based on fuel costs, in response to changing fuel costs.” 

Energy storage and hydro resources cannot use the RLCR process “to adjust their DEBs in response to intraday opportunity costs because the ISO does not have rules to determine a reasonable cost expectation upon which to base an intraday opportunity cost adjustment request,” the proposal says. “Without the ability to use the automated RLCR process, hydro and storage resources cannot request DEB adjustments or bid above the soft offer cap when opportunity costs materialize in real time.” 

To remedy that issue, the first part of the proposal (section 4.1) calls for the cap on all energy bids — including those from natural gas-fired resources — to be raised from $1,000/MWh to $2,000. 

“This proposal would ‘uncap the DEB’ for all resources” in both the day-ahead and real-time markets, CAISO wrote. “In particular, this would allow hydro resources to bid up to a value that reflects the opportunity costs already defined in their DEBs, even when those costs exceed $1,000/MWh.” 

Because the DEB reflects a resource’s “verifiable” cost-based offer, the proposal would comply with Order 831 rules requiring such offers to be capped at $2,000/MWh, CAISO said. The plan represents “a process change, not a value change,” because eliminating the $1,000/MWh from the DEB calculation “does not change the basis for calculating marginal reference costs accepted” as the DEB, as outlined in the ISO’s tariff, it said. 

The ISO also attempts to provide assurance that the change won’t mean gas-fired resources will have a free pass to increase their DEBs. 

“This proposal would not change the resource-specific parameters defined by any resource’s DEB calculation, but offers value to resources for whom the automated RLCR process is cumbersome or unusable for validating costs above $1,000/MWh,” the proposal says. 

Rules for Storage

But the proposal also explains that the proposed bidding changes cannot apply to battery storage resources in the near term because the technological changes needed to accommodate them cannot be implemented by this summer. 

For that reason, CAISO proposes a second provision (section 4.2) that offers an “interim solution” by modifying market rules to provide storage resources in both the ISO and the WEIM to bid with more flexibility. 

“The additional flexibility allows these resources to reflect intraday opportunity costs not fully captured by the existing storage DEB, and allows storage resources to unlock the benefit of the uncapped DEB value as a cushion in the event of market power mitigation,” the proposal says. 

Under the plan, instead of using a storage resource’s uncapped DEB to formulate a bid, the proposal calls for using the market’s maximum import bid price (MIBP) — set by bilateral market prices outside CAISO — as a proxy for the resource’s “verifiable opportunity costs.” 

“The ISO proposes to allow storage resources to bid up to the higher of the MIBP’s fourth-highest calculated hourly value and the highest cost-verified bid when either of those values rise above $1,000/MWh,” allowing those resources to manage their state of charge (SOC) through economic bids. 

“Functionally, this proposal ensures four hours of SOC, which correlates to the typical sizing of the existing battery fleet, is available for use across net-peak hours, aligns with the day-ahead schedules and accurately values the storage resources’ opportunity costs,” the proposal says. 

MSC Endorses

CAISO’s Market Surveillance Committee endorsed the proposal in a 3-0 vote during its meeting May 15.  

Committee members said that, for them, concerns about reliability trumped those about market power. 

“I would say on balance, we’re more worried about the depletion of storage than we are about the questions of system market power at this point,” said James Bushnell, professor in the Department of Economics at the University of California, Davis. 

Kyle Navis, a senior analyst with the California Public Utilities Commission’s Public Advocates Office, expressed concern about letting batteries bid above the cap and warned the proposal was advancing too quickly. 

“I want to say that Cal Advocates agrees that the problem statement guiding this initiative is a valid concern that needs to be addressed,” Navis said. “At this particular point, our fundamental overarching concern is that the expedited interim solution for summer 2024 has been too rushed and is not ready for adoption and creates significant cost risks.” 

Michele Kito, CPUC regulatory analyst, expressed myriad concerns with the proposal, including a contention that the new bid calculation used for storage resources would represent a price based on a “thinly traded” bilateral market rather than a true opportunity cost for those resources.