In June 2014, the Federal Energy Regulatory Commission initiated a review of price formation in energy and ancillary services markets operated by regional transmission organizations and independent system operators. Based on its evaluation, the FERC recently required PJM Interconnection, LLC and the New York Independent System Operator, Inc. to implement tariff changes designed to produce prices for energy from “fast-start resources” that reflect the marginal cost of serving load more accurately, while respecting the value of fast-start resources in meeting system needs. PJM Interconnection, LLC, 167 FERC ¶ 61,058 (2019); New York Independent System Operator, Inc., 167 FERC ¶ 61,057 (2019).

Fast-start generating resources such as certain combustion turbines and diesel generators are, as their name suggests, capable of starting quickly to meet changing system needs. Many fast-start resources have economic minimum operating limits that are equal to (or are relatively close to) their economic maximum operating limits, and therefore have limited or no dispatch range. A generating resource that operates inflexibly cannot be dispatched to serve an additional increment or decrement of load, and therefore is not eligible to set the marginal price of energy in markets administered by RTOs/ISOs unless fast-pricing logic is applied.

Fast-start pricing allows RTO’s/ISO’s software algorithms to incorporate the offers of fast-start resources into the market prices for energy and ancillary services. The rule changes ordered by the FERC are designed to establish a fast-start pricing arrangement that reflects marginal costs of serving load from fast-start resources, and to enable such resources to recover their commitment costs through the market rather than through uplift payments.

As explained by FERC Commissioner Richard Glick, the FERC’s goal was not necessarily to reduce prices of energy from fast-start resources, but instead to produce accurate price signals that reflect the marginal cost of serving load from such resources. This principle may guide the FERC as it continues its review of price formation in markets for energy and ancillary services operated by RTOs/ISOs.

Among the issues addressed by the FERC in its orders on pricing of energy from fast-start resources are the following:

Fast Start Pricing

The FERC found that fast-start resources generally operate on short notice in coordination with real-time dispatch, and therefore that the marginal costs of generation from fast-start resources include commitment costs. For that reason, the FERC ruled that the price of energy from fast-start resources should include commitment costs, and concluded that the price of energy determined in this manner “will better reflect system needs, and help inform investment decisions.”

Relaxation of Economic Minimum Operating Limit

According to the FERC, instances in which the additional amount of energy needed to serve load is below the economic minimum operating limit raise concerns about the ability of fast-start resources to set marginal energy prices. In order for such fast-start resources to be able to set the marginal price of energy, the FERC required a relaxation of the pricing algorithms used by PJM and NYISO. Such modifications will allow fast-start resources to be deemed to be dispatchable from zero to their economic maximum operating limit for the purpose of setting prices.

Considering Fast-Start Resources when Determining Real-Time Dispatch

Preliminary dispatch instructions within markets administered by RTOs/ISOs are based on bids submitted by suppliers into the day-ahead energy market. The FERC was concerned that instructions by PJM for dispatch of fast-start resources thereafter in real time might result in an imbalance between dispatched generation and load, and may be inconsistent with the objective of minimizing system production costs. It therefore ordered PJM to execute a cost-minimizing dispatch solution in its real-time energy clearing process, and then perform a pricing run to determine prices that would not affect the dispatch instructions sent to supply resources.

Commitment Costs

Commitment costs of a fast-start resource include start-up costs and no-load operating costs. The FERC determined that in order for prices for energy and ancillary services from fast-start resources to represent the marginal cost of serving load accurately, such prices should include commitment costs.  Accordingly, it ordered PJM and the NYISO to permit fast-start resources to include their commitment costs in bids to supply energy.

Start-Up and Minimum Run Time Requirements

The operating characteristics of fast-start resources make them uniquely situated to respond to unforeseen or transient real-time system needs on short notice. With due concern for the singular  role that fast-start resources play in maintaining system reliability, the FERC ruled that fast-start pricing would only be available to resources that can start up within one hour or less (including notification time) and that have a minimum run time of one hour. By limiting fast-start pricing to units that meet these criteria, the FERC made fast-start pricing treatment available only to those resources whose commitment and dispatch is analogous to that of a more flexible resource that might otherwise set the marginal price.

Commitment Costs in the Day-Ahead and Real-Time Markets

RTOs/ISOs with organized energy markets typically conduct day-ahead energy markets to allow advance determination of dispatch needs, and adjust the market price based on real-time market conditions. The FERC found that unless a fast-start resource’s commitment costs are reflected in both the day-ahead and real-time energy prices, comparable load conditions might produce different energy prices in day-ahead and real-time markets. The FERC therefore ordered PJM to permit inclusion of commitment costs in the price of energy from fast-start resources in both the day-ahead and real-time markets.

Over-Generation and Price-Chasing Behavior

The FERC recognized that the price of energy from fast-start resources would be determined as if such resources are fully dispatchable. Because most fast-start resources have little or no dispatchable range between minimum output and maximum output, the real-time output of a fast-start resource is likely to exceed the generation from that resource on which the price was established. In order to maintain a proper balance between loads and resources under such circumstance, the real-time dispatch runs conducted by RTOs/ISOs need to reduce the output of flexible resources to accommodate the actual amount of generation  of the fast-start resources that are dispatched in real time. However, generation resources which bid successfully in the day-ahead market that are instructed to reduce their real-time output to accommodate increased output from fast-start resources might have an incentive to deviate from real-time dispatch instructions. The FERC therefore approved a proposal by PJM to compensate such resources for their lost opportunity costs. However, the FERC concluded that it would not require a similar incentive to mitigate the potential for over-generation in the NYISO, which already penalizes generators for uninstructed deviations from established dispatch schedules.