CAISO’s Market Surveillance Committee on Monday endorsed of a set of rule changes that the ISO proposed to avoid shortfalls this summer, including allowing higher prices to attract capacity in strained conditions.

But the MSC encouraged the ISO to adopt a complete scarcity pricing design going forward and to better explain how it passed its own resource sufficiency tests even during energy emergencies.

The ISO introduced its summer readiness measures in a stakeholder initiative earlier this year, putting the initiative on a fast-track for approval by the Board of Governors on March 24-25. The changes are intended to avoid capacity shortfalls such as those the ISO experienced in August, when it was forced to order rolling blackouts, and again in September, when it avoided blackouts only through conservation measures. (See CAISO Speeds Rule Changes to Avoid Shortfalls.)

A root-cause analysis of the Aug. 14-15 blackouts identified problems that contributed to the shortfalls. Among them were low prices that were inconsistent with severely strained system conditions. The initiative’s pricing changes are a quick fix to be implemented June 1.

“Under this proposal,” the MSC wrote, “the energy offer price of any generation scheduled to provide reserves but released for dispatch when the reserves were replaced by armed load would be automatically set at the prevailing bid cap level, which is either $1,000 under normal conditions, or $2,000/MWh if [FERC] Order 831 conditions were triggered. Market energy prices would be set by these bid cap level offer prices if the released reserves were needed to meet load.”

FERC Order 831 requires ISOs and RTOs to raise the hard caps on supply bids from $1,000 to $2,000; offers over $1,000 require suppliers to justify their costs.

CAISO’s current proposal is not a scarcity pricing design “in the sense that such designs are implemented in eastern ISOs,” the MSC said. Instead, the plan will set prices that are more consistent with system conditions when the ISO is “on the verge of controlled load shedding, and CAISO load is at risk of being shed within minutes were a major CAISO generator to trip off-line.”

“With the proposed pricing changes, it is anticipated that the CAISO market software will send a price signal that will attract additional imports during periods that load has been armed for shedding,” the MSC said. “If available, this additional supply will reduce the amount of load that would need to be shed following a significant generation or transmission contingency and also reduce the likelihood that reserves will fall to a level that requires load shedding.”

The three MSC members — James Bushnell, Scott Harvey and Benjamin Hobbs — previously urged the ISO to pursue a full-scale scarcity pricing design. This week they said they still favor that approach because it would cause prices to rise gradually as the ISO approached the need to shed load, but they acknowledged there is not enough time to develop and implement such a design for summer 2021. (See CAISO MSC Urges Scarcity Pricing for Emergencies.)

“We support the scarcity pricing design the CAISO proposes to implement for summer … to reduce the likelihood of load shedding if the CAISO encounters very high load conditions this coming summer,” Harvey said in Monday’s MSC meeting. “On the other hand, we agree with the many stakeholder comments that the proposed changes for summer 2021 are far from constituting a complete scarcity pricing design.”

The fixes will use mostly existing software to provide price signals that match system conditions, Harvey said. Spot prices remained too low, around $100 to $200/MWh, as CAISO “slid closer and closer” to rolling blackouts on Aug. 14, preventing it from attracting sufficient imported capacity, he said.

“This pricing seems to have ensured the outcome in which load shedding became necessary,” Harvey said. “The proposed changes are intended to ensure that this cycle does not repeat.”

The MSC also supported CAISO’s plan to make sure resource sufficiency tests are implemented properly in summer 2021, “which we understand was not the case during summer 2020,” the committee said in its opinion. Implementation failures allowed the ISO to pass its bid range sufficiency test when it was in Stage 2 and 3 emergencies. The committee said CAISO needs to better explain how such an outcome was possible.