To address changing system needs, FERC ordered each Regional Transmission Organization and Independent System Operator (collectively, RTO/ISO) to submit information to the Commission regarding changes to wholesale markets within 180 days.
The questions to the RTOs/ISOs in FERC’s order, issued in its docket for Modernizing Wholesale Electricity Market Design (Docket No. AD21-10), suggests that the Commission is eyeing widespread changes to the electric wholesale markets beyond changes just to energy and ancillary services (E&AS) markets that FERC has signed when opening this docket last year.
As electric transmission providers, RTOs/ISOs procure ancillary services through market-based mechanisms. In late 2021, the Commission held two technical conferences regarding the E&AS markets. The Commission has opined, citing comments from these conferences, that new operational challenges require E&AS market reforms that permit greater operational flexibility. These operational challenges result from a changing mix of generation resources (e.g., weather-dependent resources like wind and solar, and storage resources) and changes to customer loads from distributed energy resources and increased electrification.
Technical conferences participants expressed concerns such as ensuring sufficient generation from dispatchable resources in real time and faster resource commitment, startup, and ramping. Some participants commented that reforms beyond the E&AS market might be necessary, including reforms beyond the control of the RTOs/ISOs.
The Commission directed each RTO/ISO to answer 12 questions about the following four topics: current system needs, changing system needs, RTO/ISO market reforms to address changing system needs, and potential reforms outside of the E&AS markets or even the scope of activities managed by the RTOs/ISOs. The RTOs/ISOs have until October 18, 2022, to respond to the Commission’s inquiry. The public may comment on the RTO/ISO reports until December 17, 2022.
1. Current System Needs:
The Commission seeks to understand what system needs each RTO/ISO experienced due to changes in resource mix and customer load profiles, and how these system needs vary over different time horizons. The Commission also asked what specific resources could address these needs.
2. Changing System Needs:
The Commission opined that, based on its existing record in the docket, each RTO/ISO expects changes in system needs in the near future, but with varied pace and needs between the RTOs/ISOs. FERC also noted the high-level and non-specific discussions about challenges to satisfying system needs and seeks to clarify the discussion. To that end, the Commission has asked the RTOs/ISOs to discuss the following:
- How during the next five and 10 years they expect system needs to change, the magnitude of those needs, and the drivers of changes to system needs. FERC also requested a high-level overview of the methods used to develop the system needs forecast and for the RTOs/ISOs to identify the time horizons (e.g., minutes, hours, days, or seasons) that will present the biggest challenge regarding net load variability and uncertainty.
- What new system needs not already described will emerge over the next five and 10 years, the drivers of those needs, and whether those needs can be quantified?
3. RTO/ISO Market & Operations Reforms to Manage Changing System Needs:
Participant comments regarding ancillary services has led the Commission to express concern as to whether current market products and pricing align with the time horizons for system needs and are adequate to recover costs associated with meeting system needs. FERC also noted concerns with undue discrimination in the E&AS markets and a market design that pays resources regardless of how well they satisfy system needs. The Commission directed each RTO/ISO to explain their planned reforms to their E&AS markets. Specifically, FERC has requested information on the following:
- The extent to which current RTO/ISO E&AS market products and compensation schemes cannot procure or adequately compensate the resource capabilities needed to meet expected changing system needs, and the risk of disorderly retirements of resources absent market reforms.
- Planned E&AS market reforms under consideration and stakeholder processes being conducted regarding meeting changing system needs.
- How well over the next five and 10 years existing market design and planned reforms will incentivize adequately resource behaviors that will enable the RTOs/ISOs to meet changing system needs.
- How over the next five and 10 years the RTO/ISO expects to alter its operational practices to address changing system needs.
- What other reforms to E&AS market rules are required due to changing system needs and current market shortcomings?
4. Other Potential Reforms Outside of the E&AS Markets:
Among comments regarding E&AS market design changes, FERC noted that some participants expressed support for reforms in the capacity markets and resource adequacy policies. Other participants expressed the need for reforms beyond the RTO/ISO markets, such as for planning criteria and horizons to adapt to an evolving grid and reliability criteria to reflect the frequency, severity, and duration of potential loss-of-load events. The Commission also highlighted comments asserting that inflexibility in natural gas markets limits flexibility in electric markets reliant on natural gas generation. Accordingly, FERC has asked RTOs/ISOs to address the following questions regarding reforms beyond those to the E&AS markets:
- What capacity market or resource adequacy reforms, if any, are being considered to meet expected future system needs, such as changes in new capacity accreditation methods or changes to valuation for flexibility attributes?
- What reforms beyond the RTO’s/ISO’s tariff does each RTO/ISO believe is necessary to address changing system needs? For example, FERC asks whether there are any changes necessary regarding reliability requirements such as NERC standards; coordination of operations between balancing authorities; coordination between transmission and distribution system operators to improve visibility into distribution-connected resources; and natural gas transportation services to improve flexibility in fuel supply.
- What activities is the RTO/ISO undertaking regarding changing system needs beyond a 10-year time horizon?
- How can the Commission assist RTOs/ISOs in reforming markets beyond planned E&AS market reforms?
Although a unanimous order, both Commissioners James Danly and Mark Christie filed concurrences.
Commissioner Danly suggested that a single basic set of questions must guide FERC’s examination: whether price signals are providing the proper incentive for the orderly entry and exit of generation resources, and if not, why? Commissioner Danly warned against “engineering a record” by which to justify “preordained policy goals,” somewhat cryptically suggesting that a majority of the Commission may already have ideas of their preferred market reforms.
Commissioner Christie requests that the RTOs/ISOs expand the scope of the mandated reports beyond the E&AS markets to questions regarding reliability challenges resulting from a changing generation mix changes. Specifically, Commissioner Christie proposed five questions regarding pricing and compensation in the energy, ancillary services, and capacity markets. These questions focus on appropriate compensation to dispatchable, intermittent, and hybrid resources to ensure reliability, continued use of locational marginal prices, whether there is a better alternative to capacity markets to facilitate resource adequacy, and how compliance with Order No. 2222 mandating participation of distributed energy resources affects answers to the foregoing questions.