Keeping the Lights on in Competitive Retail Areas: MISO Moves Forward with Three year Forward Auction

As the results from our OMS-MISO Survey show, capacity forecasts are tightening across MISO.  This tightening requires utilities, States and MISO to plan for the future.  MISO has determined that a three-year forward market mechanism is the preferred approach to meet resource adequacy needs.

Much of MISO is traditionally regulated.  Utilities manage the distribution of electricity and they own the generation needed to serve their customers. With this business model, regulators and utilities can easily see when and where new generation is needed.

But in parts of MISO – specifically, much of Illinois and some of Michigan – there is no state regulatory body charged with resource adequacy for competitive retail area load-serving entities. Customers there depend on generation from merchant companies, which rely on long-term signals for decisions about whether to invest in new resources or suspend or retire existing resources.

Discussions with stakeholders on the issue began in March 2015. The stakeholder process culminated in two distinct proposals to address competitive retail area resource adequacy needs. The Competitive Retail Area (CRA) Forward proposal was developed by MISO staff with input from stakeholders. The second, the Hybrid System-Wide Prompt proposal, resulted from MISO staff working closely with the IMM to develop the IMM’s initial concepts into a more robust proposal that addressed all key requirements, including competitive retail loads in Michigan, while preserving the planning methods used by municipal and cooperative utilities in southern Illinois.

At the July 14 Resource Adequacy Subcommittee meeting, MISO’s Jeff Bladen discussed analysis and stakeholder feedback leading to MISO’s determination that a three-year forward market mechanism to procure capacity is the preferred approach to meet the resource adequacy needs of competitive retail areas in the MISO region. The CRA Forward proposal creates a new and separate three-year forward capacity auction for competitive retail area load only.  Any supply (both merchant and non-merchant and inside or outside MISO) may elect to participate in the new market.  This design maintains a single fungible capacity product in the MISO region while providing non-discriminatory (same rules for everyone) access to that market for all suppliers. The market leverages a clearing mechanism similar to MISO’s Planning Resource Auction, augmented with a sloped demand curve similar to the PJM RPM (Reliability Pricing Model) sloped demand curve.  As a result, the solution closely resembles the elements of other FERC- approved organized capacity markets only scaled in size to meet the resource adequacy needs of CRAs in the MISO footprint

Also at the meeting, MISO’s Independent Market Monitor (IMM) gave a presentation focused on a hybrid prompt auction approach. The Hybrid System-Wide Prompt proposal modifies the existing Planning Resource Auction (PRA) by creating a two- stage clearing process: stage one clears merchant supply and demand, and stage two clears non-merchant supply and demand.  As a result, the proposed PRA modification creates a new and unique two-stage clearing mechanism that sets two separate prices.

MISO solicited feedback from a range of stakeholders in order to refine key elements of its forward auction proposal. It also hired the Brattle Group, an independent consulting firm, to analyze both proposals.  The Brattle Group found that MISO’s forward auction proposal was superior based on the proposal’s design to best meet  reliability standards and realize the greatest reductions in reduce price volatility.

Some benefits of MISO’s Forward Auction proposal include:

  • For non-competitive and competitive retail areas of the MISO region, the proposal preserves the existing resource adequacy processes.
  • MISO’s Forward Auction proposal is designed for fair treatment of all consumers and suppliers.
  • All foundational design components of the forward auction are less complex and consistent with FERC precedent and other RTOs’ practices.

MISO continues to evaluate and carefully consider input and feedback received to date in assessing next steps.

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