In an order issued on November 20, 2014, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) directs regional transmission organizations and independent system operators (“ISOs”) to file a report on the status of how their market rules address fuel assurance challenges. ISOs have 90 days from the date of the Commission’s order to evaluate the specific fuel assurance challenges they may experience and prepare a report that comprehensively describes the actions they have already undertaken, and/or propose to undertake, in response to their unique fuel assurance concerns.
Fuel assurance, which the Commission describes as generator access to sufficient fuel supplies and the firmness of generator fuel arrangements, has a direct and immediate impact on generator performance; and, as a result, system reliability. The Commission has identified fuel deliverability and handling problems as contributors to past high levels of forced generation outages in several ISOs. Given this significance, the topic has been a part of Commission-stakeholder discussions at two recent FERC technical conferences. The Commission’s order reflects its view that failing to respond adequately to the issue of fuel assurance could “potentially lead to volatile and often high fuel prices or costly ISO actions to ensure reliability.”
Opportunity for Individualized Review
While there may be common concerns among ISOs regarding fuel assurance, the Commission recognizes that there is likely not a one-size-fits-all solution because there are “significant differences in the nature and scope of the fuel assurance issues among the [ISOs] . . . .” As a result, the ISO report ordered by the Commission will: i) identify each ISO’s unique concerns, identifying which fuel assurance issues are most relevant to its markets, and ii) describe the comprehensive strategies the ISO has already undertaken, or proposes to undertake, to address those issues. The Commission expects each ISO to provide a status update on its efforts to respond to market and system performance associated with fuel assurance issues which details the specific programs and mechanisms it plans to use to carry out its strategies.
FERC acknowledges that there is a spectrum of potential responses to the fuel assurance issue. At one end of the spectrum, the Commission suggests that ISOs could reform their centralized capacity markets to provide greater price incentives for capacity resources to be available while imposing stiff penalties for failure to perform, which could encourage capacity resources to enter into firmer fuel arrangements. The Commission has already approved a proposal submitted by the ISO-NE. The Commission notes that while providing incentives to resources places the risk and obligation on the resource owners to determine how each resource can best fulfill its fuel assurance needs, it provides the ISO with limited certainty regarding how resources will perform in the future. There are cost consequences for consumers when resource owners price risk into their market offers. At the other end of the spectrum are more administrative approaches, such as reforming capacity markets and/or resource adequacy mechanisms to specifically require that capacity resources have certain fuel arrangements in place in order to be eligible to provide resource adequacy. This could be achieved by requiring that, to be eligible to participate in a centralized capacity market, a generator must demonstrate it has fuel arrangements in place that are required in the ISO’s definition of the capacity product or resource adequacy obligation. This approach may offer more certainty to ISOs regarding the expected performance of resources, but it also requires that the ISO correctly identify all future system needs and the best methods for meeting those needs. There are cost consequences for consumers if the ISO does not do so correctly. A hybrid approach the Commission suggests would be for an ISO to discount the value of capacity resources (by lowering their capacity rating or some other means) based on their fuel arrangements.
No matter what approach is taken, additional changes may be required if fuel assurance is going to be expressly valued in capacity markets or resource adequacy constructs. For example, the Commission suggests that it may be appropriate to adjust capacity market offer caps to allow offers to include investments required for fuel assurance. In addition, the Commission suggests that the rules related to the timing of the day-ahead market and unit commitment processes may require further clarification.
The Commission also discusses potential reforms to energy and ancillary services markets. Similar to capacity markets, the Commission encourages ISOs to evaluate whether changes are needed to energy market rules to ensure sufficient fuel cost recovery, thereby enhancing fuel assurance. The Commission believes that shortage pricing measures that accurately reflect the value to consumers of avoiding an involuntary curtailment could provide incentives for resources to pursue firmer fuel arrangements. In particular, in its guidance, the Commission notes that the potential to earn revenues to cover costs and earn a return in a few high priced hours each year could provide a strong incentive for resources to ensure they are available during those hours. Additionally, the risk of higher prices during peak demand hours could provide a strong incentive for load to take steps to hedge against that risk. These steps could include using bilateral arrangements to support additional infrastructure needed to ensure fuel availability.
Every potential solution will involve a balancing of interests. ISOs will have to weigh the benefits of increased levels of fuel assurance against the associated costs. The trade-offs of each potential solution should be carefully considered by the ISOs as they develop their approaches to addressing their fuel assurance concerns.
Opportunity for Comment
After the ISOs submit their reports, there will be a 30-day public comment period. A copy of the order can be found here: Order on Technical Conferences.