COMMENTS ON CAISO PROPOSAL FOR RESOLVING DEFICIENCIES IN REPRESENTATION OF GENERATOR START-UP AND MINIMUM LOAD COSTS

Transcription

1 COMMENTS ON CAISO PROPOSAL FOR RESOLVING DEFICIENCIES IN REPRESENTATION OF GENERATOR START-UP AND MINIMUM LOAD COSTS On June 12, 2009, the CAISO published a paper entitled Changes to Restrictions on Bidding Start-Up and Minimum Load, ( Issue Paper ) 1 which was presented and discussed at the Market Surveillance Committee Meeting on June 17, Comments on that paper were requested by June 26, These comments are jointly submitted by the following market participants: Brian Theaker (530) Steve Greenleaf (916) Sean Beatty (925) Kerry Hattevik (510) Eric Leuze (916) Dynegy (Dynegy Morro Bay, LLC, Dynegy Moss Landing, LLC, Dynegy Oakland LLC and Dynegy South Bay, LLC) J.P. Morgan Ventures Energy Corporation and BE CA, LLC (J.P. Morgan) Mirant Delta, LLC, Mirant Potrero, LLC, Mirant California, LLC NRG Power Marketing LLC, Cabrillo Power I LLC, Cabrillo Power II LLC, El Segundo Power, LLC, and Long Beach Generation LLC (collectively, NRG or the NRG Companies ) RRI Energy, Inc. We appreciate the CAISO s responsiveness to this issue, and believe that the CAISO s paper offers an excellent starting point for developing a proposal that market participants can broadly support. URGENT ACTION IS REQUIRED Generating Units do not have the ability to accurately represent their opportunity costs and actual Start-Up Costs and Minimum Load Costs through the Proxy Cost and Registered Cost options specified in Section 30.4 of the CAISO Tariff. This leads to the frequent and uneconomic market commitment of short-start units, and other units with limited run times or environmental constraints; and risks for longer start units that cannot be fully mitigated. Of particular concern are frequent unit starts that are both inefficient and sub-optimal from a unit operations perspective. The inefficient commitment of these resources is exacerbated by the lack of opportunity to fully reflect fixed maintenance costs, such as wear and tear. Furthermore, the limitation on the ability to reflect During the discussion of this topic at the Market Surveillance Committee meeting, the CAISO announced that the original deadline of June 24, 2009 would be extended to June 26. June 26, 2009 Page 1 of 5

2 opportunity costs for start up and minimum load undermines the CAISO ability to make economic commitment decisions and allow for the economic optimization of limited run time and environmentally constrained resources. Heading in to the new market, resource owners had the expectation that they may be able to recover such costs through their market bids. However, because resources are being started and shut down and often not dispatched into their economic bid range (i.e., only committed and dispatched to their PMin), they often do not have an opportunity to recover these legitimate costs through their economic bids. As a result of these circumstances, resource owners are reevaluating the nature and level of their participation in the CAISO s markets. The current methodologies for determining Start-Up and Minimum Load Costs also likely influences non-market resource commitment that occur pursuant to the CAISO s Exceptional Dispatch authority. The Proxy Cost option, which is largely based on gas commodity costs, omits start-based wear and tear costs and as such understates the cost of committing resources outside the market (both pre and post market). The inability to reflect opportunity costs compounded by a noncomprehensive proxy cost calculation therefore results in uneconomic decisions to commit units to minimum load. With bid caps in place, the Registered Cost option unnecessarily binds the generator to a six-month commitment.. For this reason many generators have opted for a Proxy cost alternative since it at least allows for a more current reflection of gas prices. Resource owners are concerned that, under the existing Start-Up and Minimum Load Cost methodologies, the commitment of resources at PMin under Exceptional Dispatch: 1) does not appropriately compensate resources for the Energy provided; and 2) understates Exceptional Dispatch costs and thus may exacerbate the CAISO s reliance on out of market commitment. The ability of a generator to bid start up and minimum load costs, particularly quick start units, is a critical element in providing the ISO an economic basis for commitment and must be implemented as soon as possible. As further explained below, we recommend that the CAISO file tariff amendments for the short-term proposal outlined in the CAISO s Issue Paper 3 and seek an effective date of no later than August 1, SHORT TERM PROPOSAL We support the Issue Paper s proposal to reduce the duration of the commitment of the Registered Cost option to one-month, and also support the CAISO s plan to take the short-term proposal to the Board of Governors for approval in July While reducing the registered cost commitment to 1 month is an improvement, it still embodies substantial gas price risk compared with the Proxy 3 CAISO June 12, 2009 Issue Paper Changes to Restrictions on Bidding Start-up and Minimum Load Pages 3-4. June 26, 2009 Page 2 of 5

3 cost option. For this reason, we suggest short-term improvements to the proxy cost calculation that more accurately encompass true start up costs. We have three recommendations regarding the short-term proposal: A. Include Additional Cost Components in the Proxy Cost Option to Allow Generating Units to Recover Fixed Start-Up Maintenance and Labor Costs. The CAISO s market software commits units based on start-up and minimumload costs Generation resources that have declined to bear the risk associated with the six-month commitment required under the Registered Cost option have chosen the Proxy Cost option for calculating start-up costs. The comparatively lower resulting values for start-up and minimum-load have led to frequent commitment of generating units to minimum operating levels. A generator should be able to include certain fixed start-up costs, including wear and tear costs in the Proxy Cost calculations that the ISO uses to commit units. Each start contributes to additional maintenance costs that are not recognized in the current Proxy Cost calculation, which includes only the following cost components: 4 1) Cost of fuel based on the average volume required to start, priced at the prior day s index. 2) Auxiliary power priced at a resource-specific rate. Starting a generating unit increases maintenance costs from wear and tear and adds labor expenses. These costs are not adequately compensated for in the CAISO s Proxy Cost calculation or the CAISO O&M adder. While all other ISOs allow for bidding of start up and minimum load costs, when a unit is mitigated to cost in PJM it is permitted to recover maintenance costs and additional labor expenses. 5 PJM specifies the following categories of start-up costs for hot, intermediate, and cold starting conditions for cost-based units. Under cold-start conditions, for example, the following costs are considered: 1. Total fuel-related cost from first fire (initial reactor criticality for nuclear units) to breaker closing (including auxiliary boiler fuel) priced at the cost of fuel currently in effect, plus (+) shutdown fuel cost defined as the cost of 4 There is also an O&M adder for commitment to minimum load, but this is a variable cost factor not directly related to the cost of start-up. See CAISO BPM for Market Instruments at page 27, available at: 5 PJM Manual 15, (Cost Development Guidelines), pages ( PJM Cost Development Guidelines Manual ), available at: June 26, 2009 Page 3 of 5

4 fuel expended from breaker opening of the previous shutdown to shutdown of equipment needed for normal cool down of plant components, excluding normal plant heating/auxiliary equipment fuel requirements. 2. Plus (+) station service from initiation of start sequence to breaker closing (total station use minus normal base station use) priced at the Station Service rate. 3. Plus (+) station service after breaker opening during shutdown (station service during shutdown should be that associated with the normal unit auxiliary equipment operated during shutdown in excess of base unit use, this station service is not to include maintenance use or non-normal uses) priced at the Station Service rate. 4. Plus (+) additional labor costs in excess of normal station manning requirements that are incurred when starting the unit. 5. Plus (+) Start Maintenance Adder The CAISO s Proxy Cost option reasonably considers the fuel cost and station service components (items 1 through 3), but does not provide an opportunity to recover either the additional start-up labor costs or start-up maintenance costs that PJM allows generating units to recover when mitigated. The PJM Start Maintenance Adder, for example, compensates a resource for the start-up portion of the cost of labor and materials not otherwise recovered. 6 In the interest of quickly accommodating these additional Start-up Labor and Maintenance cost components, and avoiding the delay associated with changing the Master File and related software, the CAISO should explore how these costs could be accommodated within the existing Master File parameters. One approach could be to use the existing auxiliary power component of the start-up cost calculation, and allow adjustments, within some reasonable limits, to accommodate these additional costs We recognize that some additional process may be necessary to implement these changes. However, we stand ready to assist the CAISO as required in implementing this change. B. The CAISO Should Consider Using a Resource s First Bid Segment One option that several participants have discussed by with CAISO staff is to modify the Minimum Load Energy cost used for commitment decisions to be the greater of a) the Minimum Load Energy Cost as calculated under the Proxy Cost or Registered Cost options, and b) the value of the energy generated at PMin if 6 Id. at pages 24 and 60. June 26, 2009 Page 4 of 5

5 that energy were valued based on the first bid segment. While not a substitute for dynamic bidding, this approach would help protect the generating unit from being required to start and run at minimum load at a compensation level that fails to meet costs. The CAISO should explore whether this option can be implemented quickly as part of the short-term proposal. C. The CAISO Should Request an Effective Date Coincident with its Tariff Filing Recognizing the need for urgent action, and that the CAISO Board meeting is not until late July, we recommend that the CAISO make its tariff filing no later than August 1, 2009, and request that FERC accept the CAISO s tariff changes and establish the filing date as the effective date, subject to refund. LONGER TERM PROPOSAL The most efficient means for committing units is to allow resource owners flexibility to bid start-up and minimum load costs, thereby providing the ISO with an economic basis for commitment. Therefore, we believe that in the longer term, the CAISO should allow dynamic bidding of start-up and minimum load costs. This flexibility should be implemented as soon as possible. While hourly bidding provides maximum flexibility, daily bidding will be a vast improvement that allows for resource optimization. Therefore, if the flexibility to allow hourly bidding would delay implementation, then the initial roll-out should allow daily bidding. Hourly bidding could then be accommodated as soon as possible thereafter. In the interest of expeditiously implementing an efficient, market-based approach to economic unit commitment, we support providing for hourly bidding of Start-Up and Minimum Load costs while retaining the Registered Cost bid cap until such time as dynamic mitigation can be implemented. The rationale for deferring any feature of the longer term proposal (i.e., dynamic mitigation or hourly bidding) should be explained when the longer term proposal is taken to the Board in September. CONCLUSION We appreciate the opportunity to submit these comments and again thank the CAISO for its prompt attention to this issue. We look forward to working through the issues with the CAISO staff, and to completing changes to the Start-Up and Minimum Load functionality as soon as possible to allow suppliers the ability to fully mitigate the risk of uneconomic starts. June 26, 2009 Page 5 of 5