FERC to look at California power trading liquidity

OREANDA-NEWS. The Federal Energy Regulatory Commission (FERC) has agreed to delay the restart of virtual bidding for exports and imports into California's primary power grid but regulators want to take a closer look at power trading dynamics at interties of the largest western US power market.

The California Independent System Operator (ISO) last month asked FERC to delay the restart of convergence bidding at interties until May 2016, citing lack of economic export and import bids in the 15-minute cycle.

Convergence — or virtual — bidding enables electricity traders to make purely financial sales or purchases of electricity in the day-ahead market with the explicit requirement that they undertake the opposite transaction in the real-time market. In theory, convergence bidding pressures big power purchasers not to under-schedule demand in the day-ahead market with the hopes of getting lower real-time prices, thereby converging prices between the two markets.

California introduced convergence bidding in 2011, suspended it in 2012 and faced a 1 May 2015 deadline for reintroducing the mechanism. But few economic bids for exports or imports have occurred in the 15-minute cycle at most California interties since last May. Reintroducing convergence bidding under current market conditions will allow market participants to make a guaranteed profit from differences in congestion prices in the day-ahead market and the highly illiquid real-time 15-minute market, the grid operator said.

FERC agreed to push back the 1 May deadline for bringing back virtual trading. But the commission is asking for comments from market participants until 20 May. "The commission and parties would benefit from further development of the record in this case," regulators said.

California utilities in their comments filed before the FERC order backed the decision to delay virtual bidding. The 2011-12 experience with convergence bidding saddled many utilities with uplift payments without the benefit of cutting congestion costs.

Convergence bidding is not controversial but the underlying cause for the delay — low liquidity in real-time trading for exports and imports — is of concern to traders, transmission schedulers and generators.

The drop in liquidity happened after the ISO in May 2014 switched to a 15-minute cycle for scheduling and settling export and import bids. The physical volume of imports has not changed significantly, but trading volumes have moved into the day-ahead market or were replaced with self-scheduling for fixed hourly blocks.

The grid operator admits that it does not yet understand the causes of low liquidity. It has listed difficulty in procuring transmission in 15-minute blocks, lack of intra-hour bilateral trading and the reluctance of generators to adjust their output within the hour as plausible explanations.

Power trader Powerex in a filing last month decried fundamental price formation issues in California because of three major market operations changes last year: the 15-minute cycle for imports; introducing full network model for dispatch and launching energy imbalance market operations.

"It is irrefutable that the interplay of these three substantial market changes has caused a myriad of price formation issues," Powerex said.