By Robert Mullin

CAISO has kicked off an “expedited” stakeholder process to help Southern California’s gas-fired generators mitigate the financial impact of proposed pipeline restrictions stemming from the closure of the Aliso Canyon gas storage facility.

The initiative seeks to identify what measures the ISO can implement to allow those generators to recover — or avoid — penalties for violating new daily balancing requirements that SoCalGas has proposed for the region’s pipeline system.

Under the requirements, any customer whose daily gas burn deviates from nominated pipeline flows by more than 5% would face per-unit penalties as high as 150% of daily gas indices. Generators say those penalty costs would put them out of the money in instances when the grid operator’s dispatch instructions force their units to burn more or less gas than scheduled.

Leak Forced Closure

SoCalGas and San Diego Gas & Electric asked state regulators to approve the requirements ahead of summer to support reliable gas delivery during the region’s peak season for electricity consumption. SoCalGas said it needs more precise scheduling to ensure proper pipeline pressure without the ability to backfill from Aliso Canyon.

The storage facility north of Los Angeles was closed following a leak that spewed massive amounts of methane between October and February.

The new requirements are expected to take effect May 1, pending approval by the California Public Utilities Commission. That makes a rapid response essential for CAISO’s most exposed market participants, who worry about the costs they will incur in the period between that date and the implementation of any necessary ISO market mechanisms.

“The gap [in time] could be disastrous for us,” said NRG Energy Director of Market Affairs Brian Theaker during a March 23 teleconference to discuss CAISO’s response. “We’re very concerned about our exposure in that gap.”

For its part, CAISO supports the tighter balancing requirements as a way to prevent last-minute gas curtailments to generators called on to respond to unpredictable summer cooling loads.

“Depending on the scope of curtailment, the ISO’s ability to redispatch might be hindered,” said Mark Rothleder, CAISO vice president of market quality and renewable integration.

But CAISO also recognizes the reliability risks that come with the balancing penalties, which could deter some gas-fired units from committing to the short-term market when most needed.

“When it comes to commitment, that’s where we see the disconnect,” said Erik Johnson, principal energy trader with the city of Pasadena. “It’s not the hardest thing to figure out when a unit is going to be out of compliance with SoCalGas.”

Better Gas-Electric Coordination

CAISO is taking a twofold strategy in response, considering both ways to prevent pipeline penalties and revised rules to allow generators to recover the fines. Cathleen Colbert, CAISO senior market design and regulatory policy developer, said any solutions will be “interim” — lasting until Aliso Canyon reopens.

The first approach would seek to prevent pipeline penalties through improved coordination of ISO market instructions with gas balancing requirements. That could entail posting a “two-day-ahead” forecast to inform gas procurements as early as possible or moving the day-ahead market to earlier in the day in advance of the timely gas nomination cycle, when supplies are most liquid.

Market participants are skeptical about the effectiveness of those measures.

“The idea of doing a two-day-ahead forecast is appealing,” said NRG’s Theaker. “But in summer, when loads can get blown pretty high, that could leave you exposed.”

Generator participants also point out that earlier gas procurements — even in the day-ahead cycle — would incur additional costs that might not be recovered under current market rules.

“Does the ISO understand that Intra-day Cycle 3 [day-ahead evening gas procurement] requires storage?” said Pasadena’s Johnson. “We have the ability to procure for day-ahead, but we’ll be paying a premium.”

Johnson also noted that, under the new balancing requirements, it will be impossible to economically cover last-minute gas needs in light of a CAISO Tariff provision that caps gas cost recovery at 125% of daily gas indices.

“Get into the second half of tomorrow [real-time], and it’s going to be impossible to get gas,” Johnson said. “Any dispatch you force on us is going to put us outside the 5%. The 125% [cost cap] doesn’t give enough room.”

David Francis, vice president of West power for EDF, said it is difficult to obtain gas close to real-time operation, a potential strategy to avoid incurring overscheduling penalties. “The amount of volumes that are traded in the cycles after the daily are fairly limited,” he said. “It becomes more challenging to get more [gas] into the [Los Angeles] basin as you get into the cycle.”

Market Changes on the Table

CAISO’s second approach to the new requirements would require revising market rules, both to make dispatch more predictable and to allow generators to recover the cost of the penalties after the fact. Among the multiple options CAISO is putting on the table for stakeholder consideration:

• Enforcing day-ahead commitments for all resource types as binding in the real-time market;
• Constraining dispatch decisions around day-ahead market schedules;
• Limiting real-time market instructions to exceptional dispatches (manually issued orders used when reliability requirements cannot be resolved through market software); and
• Allowing resources to request outages to manage their fuel constraints.

Market-based solutions include allowing energy bids to reflect intraday gas prices and including the gas balancing penalties in bid cost estimates, both of which would likely require Tariff revisions. CAISO said it could ask FERC for a waiver of 50-day notice to expedite any such changes.

“Including these costs in the market optimization is great,” said NRG’s Theaker. “Not just including it in the market, but allowing generators to recover it [after the fact].”

Pasadena’s Johnson concurred: “After-the-fact recovery through [bid cost recovery] resettlement sounds more appropriate.”

Whatever the solutions, CAISO has set an ambitious schedule to arrive at an outcome. The ISO plans to issue a straw proposal on the subject April 1, with a draft final proposal scheduled for April 15. Final stakeholder written comments are due April 29. But even that aggressive timeframe is causing some discomfort among market participants.

“At the risk of stating the obvious, SoCalGas has asked for the daily balancing to be implemented May 1, and the stakeholder process runs right up to that,” Theaker said. “What does CAISO plan to do?”

“This timeline could be compressed even further,” said CAISO’s Colbert.