What recent FERC decisions could mean for capacity markets and energy storage in Ontario

Recent experiences in the northeastern US regional transmission organization, PJM Interconnection (PJM) and New York Independent System Operator (NYISO) indicate that the integration of energy storage into competitive wholesale electricity markets can have serious consequences for new and existing capacity resources in Ontario.

The U.S. Federal Energy Regulatory Commission (FERC) recently issued a series of orders denying certain challenges to buyer-side mitigation (BSM) rules in the NYISO’s capacity zones, resulting in the continued broad application of the BSM rules. Among other things, this means that most capacity market participants will be required to offer into the NYISO capacity zones at or above specified offer floors set out in the applicable market rules, including energy storage resources. This is not dissimilar to the December 2019 FERC-ordered expansion of PJM’s minimum-offer price rule (MOPR) to most capacity auction participants, including new energy storage participants (but exempting existing storage resources).

In relation to NYISO, the complainants sought a blanket exemption from the BSM rules for all storage resources, arguing that the BSM rules counteract state efforts to meet certain objectives related to renewable generation, storage uptake and carbon emissions reductions. In the FERC order, the majority took the view that the BSM rules appropriately protect the capacity markets from price suppressive effects of storage resources receiving out-of-market payments and that other policy instruments are available to achieve these objectives. While FERC agreed with the complainant’s assertion that a single storage provider would be unlikely to exercise market power, the order concluded that the cumulative effect of all such resources participating in the capacity market could significantly impact market prices, and therefore, the application of the BSM rules was appropriate.

The rationale for these decisions, in part, is to create a more even-level playing field for capacity market participants by facilitating competition of new entrants against existing resources that receive out-of-market payments under government sponsored supply contracts and to ensure that all resource types, whether existing or new, having the ability to exercise market power are subject to the same mitigation rules. These types of administrative ‘corrections’, however, must be measured against the system costs of implementation as well as potential loss of investor confidence and market participation. Many long-standing participants, for instance, are considering departing from the PJM-administered markets altogether following the issuance of the abovementioned FERC order.

These are some of the issues the Independent Electricity System Operator (the IESO) may need to grapple with in its contemporaneous development of a capacity auction on the one hand and energy storage participation on the other hand.

The creation of new IESO market rules and amendments for the introduction of local and system-backed imports energy storage participation in the upcoming June 2020 capacity auction and beyond was recently stakeholdered and is being recommended for approval by the IESO Board of Directors later this month. Yet many questions continue to remain including whether mandatory offer floors similar to those instituted in PJM and NYISO – whether based on a proportion of Net Cost of New Entry (Net CONE) or otherwise - should be introduced so as to allow energy storage to meaningfully compete in IESO’s capacity markets going forward. Although an administrative default offer cap of $350/MWh is being proposed as part of the now March 2021 capacity auction design, no other market power mitigation mechanisms publicly appear to be under serious consideration.

Whether additional administrative mechanisms are required to enable energy storage to efficiently compete in the pending capacity auctions will turn in part on the pace of storage technology development in Ontario and the physical and financial characteristics of competing capacity market participants. According to the IESO’s recent Annual Planning Outlook, capacity markets are being introduced in Ontario in part to retain existing generation resources after their applicable long-term supply contracts expire to manage the expected capacity shortfall beginning in 2023. This then may lend itself to the adoption of a capacity offer model in the interim akin to that now mandated in PJM. Depending on the rate of energy storage development in Ontario and the characteristics of participating storage resources, a case may be made for the potential exercise of market power in the long term and therefore the equal application of a uniform minimum offer price akin to that now required in NYISO.

Whether such questions will form part of the scope of the IESO’s Capacity Market stakeholder engagement, Energy Storage Design Project or another initiative remains uncertain. Although some elements of Ontario electricity market design differ significantly from its U.S. counterparts, we can be reasonably assured from the recent experiences in PJM and NYISO that the IESO’s contemporaneous development of capacity markets and energy storage participation raise significant questions for new and existing capacity market participants and therefore needs to be closely coordinated. Broader considerations include the extent to which these issues will interface with the Ontario Energy Board’s current consideration of distributed energy resources integration at the distribution level.

If you would like more information about these orders or more information about energy storage in Ontario generally, we are here to help. Please contact Reena Goyal or Christopher Zawadzki or any other member of the Power Group at McCarthy Tétrault with any questions or for assistance

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