By Robert Mullin
CAISO stakeholders last week voiced skepticism about the effectiveness of a new ISO initiative to prevent early retirement of unprofitable generators that will be needed to ensure grid reliability as California progresses on its aggressive renewable energy goals.
The ISO wants to limit the scope of its “risk-of-retirement” initiative to improving processes for its existing Capacity Procurement Mechanism (CPM), which includes a set of “backstop” provisions that enable the ISO to bypass its wholesale market to directly compensate generators under exceptional circumstances.
“We’ve had the CPM risk-of-retirement Tariff provisions in place for a number of years, and we’ve heard from suppliers that they think that those provisions are — for lack of a better word — clunky,” Keith Johnson, CAISO manager of infrastructure policy and contracts, said during a May 18 CPM Risk-of-Retirement Process Enhancements working group meeting to kick off the initiative.
Unaddressed Issue?
But some market participants say the initiative will fail to address a looming and critical issue: that CAISO’s energy market can no longer adequately compensate the construction and operation of the kind of resources needed to support the grid as California moves to meet its 50% renewable portfolio standard by 2030.
The effort specifically aims to address the circumstances of gas-fired plants that are not currently needed for resource adequacy (RA) and do not earn enough money in the wholesale market to remain financially viable but will likely be needed in the future as other units shut down because of state environmental standards prohibiting once-through cooling.
CAISO wants to build a clear “bridge” that would provide a needed supply resource with a limited period of out-of-market payments until the plant is able to obtain an RA contract from a load-serving entity.
Under existing rules, only resources not currently under an RA contract are eligible for a CPM risk-of-retirement designation. A resource still under contract must wait until its agreement expires before making an application.
The application must include an offer price as well as an attestation signed by an executive officer stating that the resource is uneconomic and that retirement is inevitable without the CPM designation. Once that information has been submitted, the ISO undertakes a study to determine whether the unit will likely be needed for RA during the compliance period two years out.
Timing Problem
A key problem for resource owners: CAISO cannot initiate its study to determine the need for an individual unit until November of each year, just after all LSEs publish their RA requirements for the following calendar year. That gives a resource just two months’ notice before losing an RA contract, followed by a three- to four-month ISO study and stakeholder comment process, leaving the resource owner in financial limbo for an extended period. Through process changes, the ISO hopes to provide a resource a financial bridge to get from the next year — for which it lost its RA designation — to the following year, when it is assumed to be needed.
Mark Smith, a vice president at Calpine, said that even if the ISO could issue a CPM designation as early as November, it wouldn’t provide his company enough time to weigh the decision of whether to keep operating a potentially money-losing plant.
“We’re making business decisions on maintenance. We’re making business decisions on employment of people. We’re making business decisions that cannot be done in a few weeks or a couple of months’ timeframe,” Smith said. “These are multimillion-dollar assets — sometimes hundreds of millions of dollars.”
Earlier this year, CAISO awarded reliability-must-run designations to two Calpine peaking plants after the company said it would be forced to retire the facilities if required to await a CPM decision next year. (See CAISO RMRs Win Board OK, Stakeholders Critical.)
“What we found ourselves in was a situation that the only viable option was to use an RMR contract,” Johnson said. “So what we’re trying to do in this initiative here with CPM is to address at least some of these process enhancements so CPM can be used as, more or less, the first and primary backstop procurement option.”
CAISO won’t produce a proposal on the issue until it receives stakeholder comments after a second working group meeting May 25. Johnson emphasized that the ISO wants the initiative to zero in on the process for applying for a CPM designation — including the timing and deadlines for studies, rather than dealing with the costs or terms of CPM contracts.
Johnson also assured stakeholders that CAISO would not use CPM to circumvent other procedures in place, such as the RA program administered by the California Public Utilities Commission, which relies on ISO studies to determine statewide needs for system, local and flexible capacity carried by the state’s utilities. The ISO’s own RA efforts focus on complementing that program by developing market mechanisms to procure increasing amounts of flexible capacity.
Michele Kito, a PUC regulatory analyst, expressed concern that the ISO would start to use an updated CPM process under more than just “extraordinary circumstances.”
“We don’t envision using this more frequently than we do now, in the sense that it’s really just making the process work better,” Johnson responded. “I mean it’s possible that you might see more CPM risk-of-retirement if more units become at risk of retirement, because — remember — this is really a backstop mechanism.”
While Tyrone Hillman, a principal with Pacific Gas and Electric, said he understood the ISO’s need to narrow the scope of the initiative, he pointed out its overlap with another effort that could allow certain unprofitable generators to temporarily suspend operations short of full retirement. (See CAISO Initiative Could Toss Lifeline to Struggling Generators.)
Johnson acknowledged the “potential” overlap between the two efforts, but said the ISO wanted to keep them separate to ensure the ISO Board of Governors approves at least one of them later this year.
“If one of the initiatives gets bogged down, then hopefully it wouldn’t bog down the other initiative,” Johnson said.
‘Elephant in the Room’
“The elephant in the room is killing me, so I’m going to bring it up,” said Eric Little, manager of wholesale market and greenhouse gas market design at Southern California Edison. “We have to recognize that the state has goals to go to low — if not zero — GHG emissions from the electricity sector.”
Getting there will mean increased reliance on renewable resources, translating into a larger number of market intervals with “very low” to negative prices, Little said.
Prior to the high penetration of solar on the California system, generators without RA contracts could earn sufficient revenues from the energy market, Little said. That opportunity is dwindling.
“So the question in front of us is how to we get from here — where we have been with that environment — to an environment in which we no longer have any thermal resources on the system,” Little said. He joked that California might never achieve that goal if nobody is consuming electricity at all “because the lights are out” because of low system reliability.
“I think recognizing all the different pieces that have to work is important thing,” Little said.
Calpine’s Smith pointed to the “huge shift in pricing dynamics” over the past two years, which leaves peaking units running just 5% of the time and earning just 50 cents/kW-month, too little to cover property taxes, let alone operation and maintenance costs.
“Eric is right. What we need here is a thought-out plan to transition us to the new world, and part of that plan has to involve — at least from Calpine’s perspective — the confirmation that units needed for local reliability are locked in and able to do all the stuff they need to do to manage the transition while the transition occurs,” Smith said.
“That’s way beyond CPM, way beyond the very narrow issue, Keith, that you’ve defined here, but that is the elephant that needs to be addressed.”
