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CAISO Response to Pay for Performance in Electricity Market

Find out how the new performance payments system can be gamed for profit and CAISO’s response to these claims.

Background – Order 755

CAISO sceptical that markets can be gamed [Larger Size]

The CAISO Market Surveillance Committee believes that there are market inefficiencies in the Californian Electricity Market.

This news follows the Federal Energy Regulatory Commission’s passing Order 755 which relates to payments made for controlling the security of the electricity market.

What are regulation payments?

Every second of the day the electricity system must be in perfect balance. For every house using a kettle, there must be an equivalent amount supplied from a wind turbine, or a power plant somewhere.

If there is not enough power supply, the whole power system begins to slow down. Just like if you were riding your bike, and encountered a hill but didn’t pedal any harder. Eventually the system is too slow and will fall over (like you would come off your bike).

CAISO already knows this. So they have generators everywhere on standby to produce little bits more energy to constantly balance things out. This system of balancing is called regulation.

Regulation payments are the system CAISO uses to pay generators for providing this balancing service.

What is Order 755?

FERC has given Independent System Operators like CAISO a short period of time to comply with their new policy: To pay generators for two things relating to regulation:

  1. Just for being available, a capacity payment
  2. For doing their job and actually balancing the power, a mileage payment

Generators all bid against each other to say: “I’m available for $X per hour and you need to pay me $Y per MW when I actually change my output to balance the power.”

Can the new payments system be gamed?

The Market Surveillance Committee says yes it can. Here is how:

Offer a low capacity price

The CAISO currently evaluates regulation offers by the lowest capacity price (not the new mileage price). So step one is to offer a very low capacity price so that you are selected to provide regulation services.

Quickly take all of the mileage payments.

The mileage payments are the amount of work you do to balance. Say there was a deficit of 100 MW and you were to increase output by 20 MW. You would get paid the mileage rate for that 20 MW. Everyone else would share in the remaining 80 MW. But what if you were quick, and could provide the entire 100 MW? Then that’s great; you get all of the mileage payments. And because you bid those payments yourself you can set whatever price you want.

The Market Management Council’s response

The opinion of the MMC (PDF) is that the divergence of capacity and mileage payments creates market inefficiencies.

However, the gaming issues identified are unlikely to cause a problem in the short term. Strong competition should keep prices in check. There are few, if any fast enough resources capable of providing regulation. The available fast ramping resources are hydro power plants and all of the hydro plants are owned by regulated load serving entities. So they don’t think any market participants will actually game the system.

Can the system be gamed?

We aren’t sure, the money changing hands in the regulation market is much lower than in the traditional wholesale electricity market, so there might be less incentive. The MMC’s reply to the possibility for market gaming didn’t seem alarmed. They have a market monitoring procedure in place that should pick up on irregularities.

The MMC asserts that a regulated load serving entity wouldn’t take advantage of the new market design to increase their profit. We find that to be interesting because we’ve seen evidence in other markets that even Government- owned businesses still profit from market power when they can.

Is there currently a way to game the Californian electricity market to increase profit? Are energy companies now silently boosting their profits by exerting their market power? What do you think?