FERC orders review of imbalance market flaws

OREANDA-NEWS. Federal energy regulators have ordered a review of recurring price volatility and other problems plaguing the western US energy imbalance market since its launch in November 2014.

The Federal Energy Regulatory Commission (FERC) has concluded that the California Independent System Operator, which operates the new trading structure, has misjudged the severity of the underlying causes of imbalance price volatility. Regulators ordered the California grid operator to conduct more stringent market simulations before the market expands, potentially delaying participation by Nevada utility NV Energy and Washington-based Puget Sound Energy.

The energy imbalance market launched on 1 November 2014 after a month-long trial period. California's primary grid operator operates the structure, which includes PacifiCorp balancing areas in five more western states.

Rising renewable generation in California and the correspondent increase in imbalance energy — deviations in demand and generation from anticipated levels — were the driving forces behind the new structure. The market allows participating entities to trade their ability to adjust generation up or down over five-minute or 15-minute intervals to balance load changes.

Imbalance market operations started off with significant, unforeseen volatility in prices, especially for exchanges between PacifiCorp balancing areas in the Pacific northwest and Rocky Mountains regions.

The market operator in December received FERC authorization to waive the application of a tariff rule that sets energy imbalance power prices at \\\\$1,000/MWh when transmission constraints or insufficient supply prevent dispatch of least-cost generation resources. The waiver allows dispatchers to permit the marginal economic bid — the highest-priced valid economic offer to sell energy — to set the price.

The California grid operator has asked FERC to extend the waiver through 1 November and to apply a similar waiver for a period of 12 months after new entrants join the market. Grid officials explained the problems by a stiff learning curve and transitional issues, arguing that imbalance prices with manual interventions are trailing prevailing wholesale power prices and that the market has yielded \\\\$6mn in net benefits in the first two months of operations.

But FERC said in an order issued yesterday that the imbalance market operator has failed to prove that price volatility is occurring primarily as a result of transitional issues and that waiving scarcity pricing provisions for an entire year will fix the problems.

FERC launched an investigation of the market problems, with potential for refunds, and decided to hold a technical conference to find if there are fundamental problems with the market. But regulators allowed a three-month extension of the waiver from the scarcity pricing rule.

Any future expansion of the imbalance market will have to be preceded by a "robust market simulation and appropriate period of parallel operation" to ensure identification of operational issues. California's primary grid and new entrants will have to certify at least 30 days in advance of the expansion that all operational processes are ready to expand the market.

NV Energy was expected to join in October. Puget Sound Energy earlier this month announced its intention to join the California-led market in 2016.