On February 2, the Federal Energy Regulatory Commission (FERC) rejected a capacity market proposal from the Midcontinent Independent System Operator (MISO) that would have created a new electricity futures (capacity) market specifically designed to increase payments to prop up Illinois’s (and part of Michigan’s) failing coal sector (the “Competitive Resource Solution,” or “CRS Proposal”). FERC’s ruling is a victory for common-sense energy sector management, and keeps in place MISO’s existing capacity market, which has successfully ensured the safety and reliability of Southern Illinois’s power production every year it has been in place.
Understanding Capacity Markets and Projections
To understand what happened here, it helps to understand how electricity futures, or “capacity”, markets operate. To ensure that the lights stay on even during times of peak demand or during severe weather events and other emergencies, power grid operators like MISO have to buy promises from power generators that they maintain their potential generation, or “capacity”, to provide electricity as needed.
To ensure power is efficiently allocated between different areas, a system operator like MISO will typically secure these promises by setting up regional auctions, where all power suppliers in a given region tell the operator what they want to be paid to keep their generation available to call on as needed (their “bid”). These auctions—called capacity auctions—allow the system operator to first figure out how much capacity it needs to keep the lights on in each “zone” of MISO (each zone in MISO roughly corresponds to state boundaries), taking into account how much power it can move around between zones (i.e., the transfer potential between zones), and then pay for the capacity it needs across the entire MISO region.
This process has been successful so far: with the exception of one year in which certain merchant power generators attempted to manipulate market prices by strategically raising their capacity bids, MISO has secured relatively low capacity prices while still ensuring that the lights are kept on across the Midwest. In spite of this success however, in recent surveys of the MISO region performed in conjunction with the Organization of MISO States (the “OMS Surveys”), MISO has expressed concern that anticipated retirements and long-term load growth could threaten adequacy of available resources across the MISO region. MISO apparently believes that this danger is particularly acute in MISO’s Zone 4, covering most of Illinois outside Chicago, and 10% of MISO’s Zone 7, covering most of Michigan, because these two zones are so-called “Competitive Retail Areas” (CRAs) where customers are not required to buy from monopolistic utilities, and power providers tend to be independent, privately held merchant generation companies.
MISO’s Proposal
To respond to these concerns, in November 2016 MISO submitted to FERC its CRS Proposal, which would create a new capacity auction system specifically tailored to the CRAs (Zones 4 and 7). This new auction would have procured capacity for the CRAs three years ahead of when the capacity is actually needed, while still procuring capacity for the rest of MISO just one year out, thereby bifurcating the MISO market into two separate auctions. Even worse, it would have only allowed for limited participation by utilities from outside the CRAs, thereby underutilizing the ability of those zones to import the power they need from neighboring states.
MISO’s filing of this proposal was extremely controversial: it came at the end of a nearly yearlong stakeholder engagement process in which Sierra Club joined several other stakeholders in questioning the need for any change to the existing markets, and raising concerns that the CRS Proposal was unduly discriminatory between regions and could have a large and unpredictable impact on MISO’s capacity market prices. (Notably, MISO’s own Independent Market Monitor was also opposed to the filing.) And Sierra Club joined with NRDC’s Sustainable FERC Project and Earthjustice to protest the CRS Proposal before FERC. As we argued, even were the CRS Proposal fully thought through (which it was not), there is not yet any indication that MISO even faces a resource adequacy issue: the projected retirements in the MISO-OMS Survey are already outdated because they do not account for the long-term impacts of the Illinois Future Energy Jobs Bill, and the surveys have consistently overestimated future load growth.
FERC’s Decision
FERC appears to have rejected the CRS Proposal largely because of concerns it had with bifurcating the capacity markets in the MISO region. In its Order, FERC noted that “[m]arket-wide clearing processes are typically more efficient than bifurcated clearing processes,” because in bifurcated markets, “unpredictable and variable supply participation could result in significant and unnecessary price volatility” in both of the bifurcated markets.[1]
The Commission also highlighted potential issues with the practicalities of allocating transmission capacity between two markets occurring two years apart from each other: the CRS Proposal would have given MISO authority to choose how much transmission capability either market could use, which would have added an additional layer of administrative inefficiency and further deviated from the most efficient potential market outcomes.[2]
Finally, although the Order did not address directly MISO’s arguments that it needed the CRS Proposal to meet urgent resource adequacy needs in the CRAs and across the MISO footprint, FERC’s decision to reject the proposal outright indicates that it was not convinced that any need was urgent enough to justify radical restructuring of MISO’s markets.
Looking Forward
FERC’s Order puts to rest one problematic market reform proposal from MISO, but it would not be surprising if MISO went back to the drawing board and eventually proposed an alternative market solution to address what it continues to perceive as an urgent need. In light of FERC’s emphasis on bifurcation, any new proposal would probably avoid splitting the market. Instead, MISO may either a) propose a MISO-wide replacement market (although such a proposal would be unpopular with regulated utilities in other states, so the politics might be prohibitive; or b) attempt to craft an administrative subsidy program along the lines of what MISO’s Independent Market Monitor (IMM) proposed during the stakeholder process and in their comments to FERC.
Regardless though, Sierra Club remains well placed to monitor and respond to all proposed changes that might threaten the balance of MISO’s markets.