On June 27, 2024, FERC accepted Midcontinent Independent System Operator Inc.’s (“MISO”) proposed tariff revisions that sought to implement a downward-sloping Reliability Based Demand Curve (“RBDC”) in the MISO Planning Resource Auction (“Auction”) beginning with the 2025/2026 Planning Year. FERC determined that MISO’s proposal is not only consistent with its acceptance of similar sloped curves in other Regional Transmission Owners/Independent System Operators capacity markets but that MISO’s proposal to adopt a downward-sloping RBDC will reduce volatility in Auction Clearing Prices, increase the stability of the capacity revenue stream over time, and render capacity investments less risky, thereby encouraging greater investment and at a lower financing cost.
Since the 2009/2010 Planning Year, MISO has used a vertical demand curve to represent the market’s demand for capacity. However, on September 29, 2023, MISO proposed tariff revisions to not only implement the downward-slopping RBDC, but also to implement an RBDC Opt Out mechanism, which will allow a Load Serving Entity (“LSE”) to opt out of the Auction for three consecutive years, and to revise its shortage and near-shortage condition pricing Tariff provisions to implement the RBDC proposal. In MISO’s proposal, MISO explained that the shift in the changing resource mix and the use of the vertical demand curve have resulted in various issues, including inadequate price signals, a disincentive to investment in resources, inefficient resource planning, and reduced reliability as a result of recent auctions. To combat these various issues, MISO explained that the RBDC and the downward-slopping demand curves are expected to produce accurate price signals in the Auction that express the marginal contribution of incremental capacity to reliability and explicitly tie capacity prices to reliability value.
MISO further explained that its RBDC proposal will result in multiple benefits in the MISO region, including (1) mitigating excess price volatility and associated risks of capacity shortfall associated with a vertical demand curve; (2) improving price formation by properly balancing procurement costs and volumes to establish prices in proportion to incremental reliability value; (3) improving investment and retirement decisions by using price signals to properly time resource entry and exit; (4) improving pricing and resource decisions on a seasonal and locational basis by having more accurate and consistent signals to guide technology choices that most meaningfully support reliability needs; and (5) improving system reliability and economic efficiency across the MISO footprint.
In the order, FERC accepted MISO’s proposals to (1) implement a downward-sloping RBDC; (2) establish an RBDC Opt Out mechanism; (3) implement the existing state regulatory authority override of the MISO-determined Planning Reserve Margin; (4) revise Zonal Resource Credit (“ZRC”) Shortage and/or Near-Shortage Condition pricing and price caps; and (5) incorporate certain implementation details in its Business Practices Manual (“BPM”). In particular, FERC determined that MISO’s downward-sloping RBDC will reduce volatility in Auction Clearing Prices, increase the stability of the capacity revenue stream over time, and render capacity investments less risky, encouraging greater investment at a lower financing cost. Additionally, FERC determined that MISO’s proposal will result in capacity price signals that reflect the marginal reliability impact of incremental capacity additions, provide better incentives for efficient resource entry and exit, and as a result, improve resource adequacy and economic efficiency across the MISO footprint.
In a concurring opinion, Commissioner Clements approved the downward-sloping RBDC but expressed a longstanding concern about the design of MISO’s seasonal capacity auction.
A copy of the order, issued in Docket No. ER23-2977, is available here.