The recently issued North American Electric Reliability Corporation (NERC) 2022 Summer Reliability Assessment identifies worrying challenges facing the Midcontinent Independent System Operator (MISO) for the coming summer. NERC’s report outlines tangible concerns over reliable electricity service because “[m]ore extreme temperatures, higher generation outages, or low wind conditions expose the MISO North and Central areas to higher risk of temporary operator-initiated load shedding to maintain system reliability.”
This report comes weeks after MISO’s capacity market auction (the Planning Resource Auction, “PRA”) resulted in prices that jumped to $236.66/MW-day from $5/MW-day a year ago across the grid operator’s central and northern regions, driven by an uptick in projected electricity use and a drop in power supply.
NERC’s Assessment and these auction results clearly indicate an increased chance that MISO may have to turn to temporary blackouts this summer, a situation that no American consumer should have to endure. As MISO’s independent market monitor stated: “If we’re going to say reliability is an imperative, we need to fix this.” FERC staff agreed with the threat assessment, finding in its Summer Energy Market and Reliability Assessment that MISO is one of a handful of regions facing “more acute” risks of energy shortfalls during extreme operating conditions.
In an efficiently designed capacity construct, a lack of sufficient generation and increasing prices would – over time – send clear and dependable price signals to competitive suppliers supporting investment in new or upgraded resources needed to preserve reliability. However, MISO’s capacity construct has historically sent flawed price signals, leading to the worst of all outcomes: higher prices this year that will not necessarily incentivize new generation needed to preserve reliability into the future.
While the capacity market is flawed in numerous ways, MISO’s current problems are largely due to its use of a vertical demand curve. A vertical demand curve fails to capture the reliability value of excess capacity, which contributes to capacity prices that are too low to spur investments in new power plants or to maintain existing plants needed for reliability. If there are enough resources to meet the ISO’s reserve margin, the vertical demand curve values capacity at nearly zero – but shoots up to the cap price as soon as supply is short (which happened this year). This approach takes away any price signal in advance of a shortage, and by depriving existing resources of any meaningful capacity payment, it leads to the retirement of plants that may in fact be needed for reliability.
EPSA has outlined the deficiencies of MISO’s methodology in a number of proceedings dating back almost a decade. MISO’s lack of true reform measures to address these deficiencies has unfortunately led to foreseeable – and likely preventable – reliability challenges identified by MISO, NERC, and FERC in the past few weeks.
Meanwhile, in the Eastern US – which has three RTOs/ISOs with more robust capacity markets – NERC found that anticipated Reserve Margins “meet or surpass the Reference Margin Level, indicating that planned resources in these areas are adequate to manage the risk of a capacity deficiency under normal conditions. Furthermore, based on risk scenario analysis in these areas, resources and energy appear adequate.”
While capacity markets have been under fire in recent years, clearly they have been effective at delivering the signals for needed resources and investment to preserve reliability during a rapid energy transition. It wasn’t all that long ago that FERC Chairman Rich Glick opined that these markets needed to look to MISO as an efficient model for resource adequacy; the events of the past month suggest that MISO should adjust its gaze eastward.