FERC recently approved the California ISO’s (CAISO) proposal to lower a bidding floor to more efficiently address a growing “over generation” problem due in part to increasing “variable energy” (i.e., typically renewable) resources.  A bit of background is needed to understand the problem and the solution.

CAISO operates two bid-based energy spot markets to secure the right amount of resources to keep supply and demand in balance.  One market is the Day-Ahead market in which generators make binding financial commitments to supply resources in each hour of the next day, based on forecasts of the next day’s needs.  Of course, forecasts are not perfect and as a result CAISO frequently commits for either too much or too little generation.  When it has too much generation in the next day’s energy market, CAISO must pay generators not to produce, so it solicits “decremental bids” from generators to express the price at which they would be willing not to be dispatched.  However, if there are too few bids to decrease output, CAISO must address the over-generation condition by issuing dispatch instructions that are not based on economic bids, which can result in the inefficient dispatch of resources.

CAISO’s “floor” for negative decremental bids had been -$30/MWh.  However, at this level, variable energy resources, a growing part of the market, will not submit decremental bids.  This is because variable energy resources generally receive, in addition to market revenues, production tax credits, renewable energy credits, and contractual energy payments, which amount to about $130/MWh for the average wind resource.  But those payments would be foregone if the resource is not dispatched.  Thus, with the current -$30/MWh floor, variable resources have no incentive not to generate once they have been accepted in the Day-Ahead market.

To encourage variable resources to make decremental bids, FERC approved CAISO’s proposal to lower the bid floor to -$150/MWh.  At this level, wind resources, and potentially some solar resources, can submit economic decremental bids and still cover their opportunity costs for not producing.  With more decremental bids in the market, CAISO may not have to resort to non-economic dispatch instructions to cure over-generation problems, and thus may avoid the accompanying inefficiencies.

The new rules go into effect on April 1, 2014.