On December 15, 2016, FERC issued a notice of proposed rulemaking (“NOPR”) that proposed to establish a set of fast-start pricing requirements applicable to regional transmission organizations (“RTO”) and independent system operators (“ISO”). FERC indicated it was issuing the NOPR to address concerns that rates for fast-start resources in RTO and ISO day-ahead and real-time markets do not reflect the value of fast-start resources.

FERC defines a fast-start resource as any resource that is able to start up within ten minutes or less, that has a minimum run time of one hour or less, and that submitted an economic energy offer to the market. In RTO and ISO markets, locational marginal price (“LMP”) reflects the system marginal cost of serving the next increment of load. Only resources that can be dispatched up or down in response to changes in system conditions are eligible to set the LMP. Fast start resources are often dispatched to their inflexible minimum or maximum operating limits, and are thus not eligible to set the LMP. To account for the unique characteristics of fast-start resources, each RTO and ISO has developed pricing rules to recognize that fast-start resources are, for all intents and purposes, the marginal resource used to meet the next increment of energy or operating reserves demand.

According to FERC, some of the pricing rules for fast-start resources developed by RTOs and ISOs result in prices that do not accurately reflect the value of fast-start resources, potentially creating unnecessary uplift payments, and potentially failing to provide incentives for market participants to make efficient investments. As a result, FERC proposed certain reforms that would be applicable to all RTO and ISO pricing rules.

Specifically, FERC proposed to require each RTO/ISO to establish the following set of requirements for its fast-start pricing: (1) apply fast-start pricing to any resource committed by the RTO/ISO that is able to start up within ten minutes, has a minimum run time of one hour or less, and that submits economic energy offers to the market; (2) incorporate commitment costs, i.e., start-up and no-load costs, of fast-start resources in energy and operating reserve prices; (3) modify fast-start pricing to relax the economic minimum operating limit of fast-start resources and treat them as dispatchable from zero to the economic maximum operating limit for the purpose of calculating prices; (4) the resource must be feasible and economic if the RTO/ISO allows offline fast-start resources to set prices for addressing certain system needs; and (5) incorporate fast-start pricing in both the day-ahead and real-time markets.

FERC seeks comment on the need for fast-start resource pricing reform and on its prescribed set of five requirements. Additionally, FERC seeks comment on the estimated costs to implement the proposed changes, and whether allowing fast-start resources to set prices could result in the exercise of market power.  Comments are due 60 days after the date of publication in the federal register.

The NOPR is available here.