CAISO Asks FERC to Approve Tariff Changes Establishing Flexible Resource Adequacy Capacity and Must-Offer Obligation Requirements

by Latham & Watkins LLP

On August 1, 2014, the California Independent System Operator (“CAISO”) filed proposed tariff changes at the Federal Energy Regulatory Commission (“FERC”) in FERC Docket No. ER14-2574 that would establish new flexible resource adequacy capacity (“FRAC”) and must-offer obligation (“MOO”) requirements aimed at ensuring that adequate flexible capacity is available to address the added variability and net load volatility associated with ongoing and expected future changes on the CAISO-controlled grid. In its filing, the CAISO proposes a November 1, 2014, effective date for the tariff changes establishing the FRAC-MOO so that they will apply to resource adequacy showings beginning in January 2015.  FERC has set Friday, August 22, 2014, as the due date for comments on the CAISO’s FRAC-MOO proposal.        

As explained in the transmittal letter for the CAISO’s FRAC-MOO filing, “[t]he CAISO electric grid is undergoing significant transformation.”  By 2020, at least 33 percent of retail electric sales in California will be served by renewable energy sources, representing approximately 20,000 megawatts of capacity from new variable energy resources.  In addition, 12,079 megawatts of coastal fossil fuel-fired generation resources will likely retire over the next eight years rather than meet once-through cooling requirements under new environmental regulations.  Further, California is currently examining policies to achieve 12,000 megawatts of distributed generation that could further exacerbate operational challenges.  CAISO studies show (as illustrated in the CAISO’s well-known “duck chart” (as excerpted from filing)) that to reliably operate the grid with this heightened level of uncertainty and variability, the CAISO will have an increased need for flexible capacity resources that can ramp up and down quickly and start and shut down potentially multiple times per day.

The CAISO’s FRAC-MOO proposal would provide a mechanism for ensuring that flexible capacity resources that want to qualify as FRAC resources submit economic bids into the CAISO-administered energy and ancillary services markets for economic dispatch by the CAISO. The CAISO’s FRAC-MOO proposal has seven basic elements:

  1. Needs determination.  The CAISO will determine system-wide flexible capacity needs on a monthly basis through an assessment of the largest monthly three-hour system net load ramps.
  2. Flexible Capacity Categories.  The CAISO will have three categories of FRAC resources that correlate with the three types of conditions that the CAISO faces that require flexible capacity: (1) base ramping flexibility (requires economic bids for the period from 5:00 a.m. to 10:00 p.m. every day); (2) peak ramping flexibility (requires economic bids for a five-hour period (to be determined by the CAISO) every day); and (3) super-peak ramping flexibility (same bidding requirement as peak ramping flexibility, but required to respond to only five dispatches per month).  Each category will have specific availability requirements, and the CAISO will calculate the amount of flexible capacity needed in each category to ensure that it has sufficient capacity to meet the specific needs it has identified.
  3. Allocation.  The CAISO will allocate the total system flexible capacity need to local regulatory authorities based on their jurisdictional load serving entities’ (“LSEs”) average contribution to the components of the five highest daily maximum three-hour net load ramps on the system.
  4. Flexible Resource Adequacy Showing.  The CAISO will require LSEs to provide both month-ahead and year-ahead FRAC showings.
  5. Showing Assessment and Resource Counting.  Local regulatory authorities may assume responsibility for evaluating the sufficiency of the FRAC showings of individual LSEs using the local regulatory authority’s counting rules. Otherwise, the CAISO will evaluate the sufficiency.
  6. Must Offer Obligation.  FRAC resources included in the flexible capacity resource adequacy demonstration are subject to a flexible MOO according to their designated flexible capacity category.
  7. Backstop Procurement.  In the event of a system-wide cumulative deficiency, the CAISO will use the proposed flexible capacity designation to procure backstop flexible capacity pursuant to its capacity procurement mechanism.

In the transmittal letter for its FRAC-MOO filing the CAISO explains that the California Public Utilities Commission (“CPUC”) also has recognized the need for a flexible capacity framework and procurement obligation for CPUC-jurisdictional LSEs; most recently in the CPUC’s June 2014 final decision in its resource adequacy proceeding for operating year 2015 (which relied on the CAISO’s Final 2014 Flexible Capacity Need Assessment).  At the same time, the transmittal letter provides that CAISO views the proposed FRAC-MOO as an interim measure to meet the immediate need for flexible capacity requirements to address the emerging operational challenges relating to variable energy resources, while reducing its need to rely on exceptional dispatch and the capacity procurement mechanism.  Regarding longer-term measures the transmittal letter outlines other elements of a broader approach that the CAISO is considering through stakeholder initiatives and in cooperation with the CPUC.  As discussed in previous Clean Energy Law Report posts, these initiatives include a market-based backstop procurement that will also provide incentive mechanisms and rational performance penalties, a spot market for flexible ramping products, and a multi-year forward resource adequacy mechanism. 

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