The CAISO Board of Governors and Western Energy Markets Governing Body on Nov. 7 unanimously passed a proposal to modify the calculation used to determine bid cost recovery payments for storage resources.  

The product of four months of intense stakeholder engagement, the proposal aims to address what ISO staff and stakeholders identified in 2022: that BCR provisions for storage resources don’t align with the intent of BCR. (See CAISO Proposal Seeks to Refine Storage Bid Cost Recovery.) 

The initiative, which kicked off in July, identified two main concerns: that storage assets are not exposed to real-time prices for deviating from day-ahead schedules, and that they may have an incentive to bid strategically to maximize their combined BCR and market payments. 

Resources receive BCR payments when market revenues don’t cover the resource’s bid costs, such as startup, minimum load and transition costs. BCR also incentivizes resources to follow dispatch and bid efficiently by removing risk if the dispatch doesn’t cover costs.  

But bids for storage resources are largely driven not by the cost to produce energy in a given interval, but rather by their state-of-charge limits. The ISO noted that a combination of ancillary service awards or self-provisions for regulation-down in the real-time market, coupled with relatively high energy bids, resulted in unusually high BCR payments to storage resources.  

The final proposal recommends revising the calculation of real-time BCR for storage resources by basing the bid cost on an alternative to eliminate the opportunity for strategic bidding that inflates BCR.  

For resources dispatched up, the alternative would be the minimum of the bid and the maximum of three alternatives: the real-time default energy bid, the real-time market-cleared price, or the day-ahead market-cleared price. For resources dispatched down, the alternative would be the maximum of the bid and the minimum of the three alternatives.  

‘An Incomplete Approach’

In an opinion published Nov. 1, CAISO’s Market Surveillance Committee (MSC) agreed with the proposal, but indicated it should represent only a first step. 

“We definitely agree with the ISO and the Department of Market Monitoring that there are important incentive problems that can result in both significant financial transfers that we believe are unearned in the form of excess bid cost recovery and, very importantly, market inefficiencies in terms of insulation from incentives that real-time prices are supposed to provide,” MSC Chair Ben Hobbs said in a Nov. 1 meeting. 

The first goal should be to eliminate BCR “phantom losses” that result from including resource charging bids and discharge offers in the BCR calculation.  

“We believe that this goal is likely to be partially but not completely accomplished by implementation of the ISO proposal,” Hobbs said.  

The ISO’s Department of Market Monitoring (DMM) also showed cautious support of the proposal, viewing it as an interim solution that didn’t fully address both concerns.  

According to Adam Swadley, DMM manager of market policy and analysis, the proposal targets the bid cost component of the BCR calculation by limiting bids used in the real-time BCR calculation but does not affect the revenue portion, allowing storage operators to remain insulated from real-time prices.  

“DMM does not oppose management’s proposal. However, we do view it as an incomplete approach that does not address the underlying efficiency issues of the current BCR rules applied to batteries, and therefore we strongly encourage the ISO to immediately continue working with stakeholders to develop a more complete and effective solution for the fundamental problems,” Swadley said. 

The ISO is kicking off a new storage design and modeling initiative next month to continue addressing the first concern related to real-time prices.