FERC pushes RTOs on demand response, shortage pricing, and other wholesale market design tweaks

Michael Giberson

On October 16, FERC directed operators of regional transmission systems with integrated wholesale power markets (i.e. RTOs and ISOs) to take additional steps to accommodate participation of demand response resources, and to ensure energy pricing rules appropriately reflect shortage conditions. The new regulations also require the organizations to take actions intended to support long-term contracting for power, revise market monitoring rules a bit, and provide for stakeholder access to RTO/ISO boards. However, the demand response and shortage pricing provisions are likely the most significant of the changes.

Demand side resources: While each regional market already has some provisions for demand-side resource participation, the changes are intended to expand the ways in which demand response resources can participate. Among the new rules are requirements to allow technically-capable demand-side resources to provide ancillary services, provisions to help demand-side resources provide emergency response services, and requirements to allow the roll-up of demand-side resources by aggregators unless prohibited by state laws. Finally, RTOs/ISOs are to review their markets are report on any barriers to comparable treatment in their markets of demand-side and supply-side resources.

Shortage pricing: The new regulation requires RTOs/ISOs to ensure that the price for energy accurately reflects the value of energy during shortage periods, as, for example, during an operating reserve shortage. FERC has proposed four separate possible techniques, some of which are better than others, and directed RTOs/ISOs to either choose one of the four or propose an alternative that fits the region’s existing market design.

The shortage pricing proposal was among the more controversial elements in the final rule – Commissioner Suedeen Kelly dissented in part from the rule because she wanted RTOs/ISOs to demonstrate sufficient opportunities for consumers to protect themselves from potential price spikes before rule changes that could make spikes more common. Most Commissioners were satisfied with the final rule’s requirement that RTO/ISO scarcity pricing proposals include careful consideration of market power mitigation issues.

Lynne and I have both opined on the importance of demand-side participation in markets in the past. The new rules appear likely to be helpful in bringing about fuller integration of demand side resources into the market. I’d like to now opine in favor of shortage pricing:

It is particularly important to price energy well when the system is reaching reliability-based limits, because good price signals at these times will encourage investors to build a more reliable system. Unfortunately, sometimes extraordinary actions taken by system operators to maintain reliability actually work to dampen price signals and perversely work to discourage development of resources that would help meet the system’s reliability needs.

For example, assume as the energy offer stack becomes exhausted during real time operations, the system operator dispatches resources held as reserves to provide energy, and no additional reserves are available to replace the reserves dispatched. If the market pricing rules don’t account for the shortage of operating reserves, the sudden availability of additional energy resources can push the energy price down. The lower price perversely signals relatively less scarcity of supply at a time when system operators have to resort to extraordinary measures to make sufficient supply available. Scarcity pricing rules for energy can ensure that prices better reflect actual resource availability relative to amounts demanded.

LINKS/NOTES: FERC news release. Order No. 719. Commissioner Kelly’s comment. More information is available from the FERC website news release page under October 16.

Tracy Davis at the Energy Legal Blog has a summary that briefly covers all parts of the rule. (Also see recent Energy Legal Blog posts on jurisdictional disputes on ocean power and a draft bill in Congress that would have FERC running a carbon-permit market.)