[vc_row][vc_column][vc_column_text]It’s springtime! The weather is getting warmer by the day and the Major League Baseball season is underway. I dusted off my foam finger and gave my cow bell its first ring during the Indycar season opener back in March and then again during the Cubs season opener in Anaheim. The nine-run start is proof that you can never have too much cow bell.
Spring is also the time when utilities in MISO determine where they will get their electricity to serve their customers during the following year. In MISO, we call this “resource adequacy.” The MISO-stakeholder relationship around this issue is similar in some ways to open wheel racing. Let me explain.
INDYCAR, the sanctioning body for the Indycar series, develops the processes and procedures that ensure a fair racing platform. While INDYCAR lays out many technical specifications, the strategies behind how and when to make adjustments are left to the team.
Understanding the Planning Resource Auction
Similarly, MISO works with stakeholders to develop and implement processes and procedures that ensure utilities acquire enough electric capacity to serve their customers on the hottest and coldest days of the year. Just like race-teams mix-and-match strategies in hopes to achieve the fastest car, utilities mix-and-match the ways in which they acquire electricity in hopes to achieve the lowest-cost energy for their customers. First they figure out how much electricity their customers will need, and then they add an “in case of emergency” surplus amount. We call that the Planning Reserve Margin.
In MISO there are three options for utilities to procure the electricity they need to ensure resource adequacy: utilities can generate it themselves from resources they own, like a wind farm or a natural gas plant; they can enter into a contract to buy it directly from another generating company; or, they can buy it through the annual Planning Resource Auction administered by MISO. The auction determines the lowest-cost price for electric capacity in each of our Local Resource Zones.
Given the size of MISO, our footprint is divided into ten zones called Local Resource Zones. Each Local Resource Zone has a Capacity Import Limit and Capacity Export Limit which ensures electricity flows safely and reliably across the transmission system. Because transmission system limitations may restrict how much electricity can be imported into a zone, it is important for utilities to secure and provide their customers with a certain amount of electricity that comes from the resources in their zone. Each year, MISO determines the amount of electricity needed from resources in each zone to serve the customers there. This is referred to as the Local Clearing Requirement.
Planning Reserve Margins, Local Resource Zones, Capacity Import/Export Limits and Local Clearing Requirements help set the parameters for ensuring Resource Adequacy in MISO. How does the process actually work?
How the Auction Works
MISO’s Planning Resource Auction begins during the last three business days in March. When MISO opens the offer window, utilities use an online auction tool to specify how they plan to procure electricity over the 12-month period from June 1 to May 31, which is MISO’s Planning Year. On the first business day in April, MISO combines all the data with the parameters and executes the auction process. During this period, MISO engineers and MISO’s Independent Market Monitor review the transactions to ensure the rules and procedures were followed. Once the data is given the green flag, MISO posts the price of capacity in each of its ten Local Resource Zones. And just like that, participants get the checkered flag – a market-based value of the cost of capacity in their zone.
Thanks to the media, sports enthusiasts can pull up a website or a mobile app for the latest analysis and trends shaping upcoming sporting events. While MISO cannot forecast the outcome of this year’s auction, the results are generally reflective of industry trends:
- For the past several years, MISO has been undergoing a dramatic shift in the generation fleet. Several surveys of electricity providers and modeling analysis have shown increased coal generation retirements and narrowing margins between the amount of available generation and the amount needed for customers. As more capacity goes offline, the remaining electricity resources become much more valuable in the Planning Resource Auction.
- Natural Gas prices fell steadily from 2014 to 2016 and are expected to remain below $4.00 /mmbtu through 2020. With coal-fired generators retiring, gas-fired generation could become more popular for electricity production.
- Solar and wind generators comprise 61% of MISO’s Generator Interconnection Queue from 2016-2030. Renewable resources such as these produce less-costly electricity. However, the best wind and solar resources typically exist in rural areas leaving the resource highly dependent on transmission expansion in order to serve densely populated areas where electricity is needed the most.
Additionally, this year’s auction underwent several changes in response to FERC’s order regarding some of the calculations used in the Planning Resource Auction. For example, MISO removed the impacts of certain exports from its determination of the Capacity Import Limit – including the benefits of these exporting units in supporting Local Resource Requirements. As a result, this changed both the Capacity Import Limit and the resulting Local Clearing Requirement for this year’s auction. FERC also changed the manner in which the Initial Reference Price of capacity is determined for utilities participating in the auction. The new reference price is now $0, rather than a price based on the opportunity cost of selling into a neighboring market like PJM.
It’s hard to imagine that just seven years ago, the auction produced clearing prices in the single digits. But, like Eddie Cheever’s 236mph lap in the 1996 Indy 500, there is no denying it happened. However, in today’s changing landscape, where generators are retiring, natural gas prices are falling and renewable energy generation is climbing, we are now facing a less certain environment with respect to price formation. Moreover, these changes are happening quickly, necessitating discussions with stakeholders and further evaluation of MISO’s Resource Adequacy construct.
Last March MISO posted its Resource Adequacy Issues Statement which identified a framework for this evaluation. Since then, MISO has posted additional reform proposals to address seasonal and locational issues, as well as a proposal to address issues experienced by utilities that operate in states with competitive retail choice markets.
Together with stakeholders, MISO is working hard to evolve its Resource Adequacy construct such that it supports state-led resource adequacy requirements, sends effective and efficient price signals, is fair and transparent and ensures confidence in Resource Adequacy outcomes now and in the future.[/vc_column_text][/vc_column][/vc_row]