United States: Enhancing The Efficiency Of Resource Adequacy Planning And Procurements In The Midcontinent ISO Footprint

Last Updated: November 27 2015
Article by Kathleen Spees, Samuel A. Newell and Roger Lueken

Executive Summary

We have been asked by NRG, an independent power producer (IPP), to evaluate options for achieving resource adequacy more efficiently in the Midcontinent Independent System Operator (MISO) footprint. NRG is concerned that MISO's current non-forward capacity construct and utilities' procurement practices do not adequately recognize the value of IPPs' resources even when they cost less than utility-planned projects.

We are similarly concerned about the current resource adequacy construct and planning practices within MISO, but from a resource adequacy and total cost perspective. The MISO centralized resource adequacy construct is not likely to support sufficient market-based investment to meet the capacity needs of retail choice states, due to the mechanism's reliance on a non-forward auction with a vertical demand "curve" and a relatively low price cap. We anticipate that this design will not produce prices high enough to attract merchant generation investments until reliability is unacceptably low. Further, the lack of forward visibility means that the shortage might not be identified until it is too late to address through administrative intervention. Any resulting shortages for retail choice customers could impair reliability of the local zone (and possibly all of MISO unless traditionally regulated states maintain sufficient excess capacity).

Most of the MISO system is traditionally regulated, with utilities planning sufficient supply to meet their own needs. Thus, regulated utilities do not face the same under-investment challenges as retail choice states. However, utility planning is hindered by a lack of transparent information about neighboring utilities' commitments, regional supply and demand, and transmission availability. Resulting plans could end up being resource-inadequate if they have counted on procuring resources and using transmission that turns out to be unavailable. To avoid this possibility, utilities may plan conservatively, without relying on resources that they do not own or that are remote. But such uncoordinated planning can come at the expense of economic efficiency. Utilities may incur extra costs by investing in retrofits or new generation without comparing to a transparent forward capacity price (no such price yet exists in MISO) and without conducting competitive solicitations to see whether lower-cost alternatives are available from IPPs or neighboring utilities.

To address these concerns, we propose a set of possible solutions at both the regional MISO level and at the regulated state and utility levels. The solutions we propose recognize the predominance of regulated states in MISO, with only a minority of states relying on unregulated merchant investment under retail choice. We recognize that any enhancements to traditional mechanisms need to maintain the regulated states' ability to oversee utility resource planning decisions while ensuring that these decisions are cost effective, support state policy objectives, and complement MISO mechanisms. Thus, we do not consider the mandatory forward capacity market approach that we have found to be effective in largely restructured regions. We recognize that regulated states do not want to be required to participate in centralized capacity auctions. Their biggest concern appears to be the risk that state-approved resources might not clear in the auctions and thus might not be counted toward capacity obligations. Such an outcome would undermine state and utility planning processes designed to meet resource adequacy needs and other policy objectives.

At the MISO regional level, we identify three complementary options to increase forward capacity transparency to inform planning for regulated customers and to support merchant investment for retail choice customers:

(1) Hold forward capacity auctions that are mandatory for retail choice loads but voluntary for regulated entities;

(2) Develop a more active and transparent voluntary forward capacity market beyond the period of auctions noted above, by supporting the bilateral market support and/or administering voluntary centralized auctions; and

(3) Enhance the current resource adequacy survey by the Organization of MISO States (OMS) and MISO so that it will represent a binding plan rather than a voluntary indication.

At the state and regulated utility level, we recommend more fully incorporating "market tests" into resource planning, particularly to test the timing and cost-effectiveness of major investments against market alternatives. Such market tests would either confirm the cost effectiveness of a resource plan, or else identify alternative ways to meet resource adequacy needs and other policy objectives more cost-effectively.

In its most simplified form, a market test would compare the levelized investment costs (minus net energy value) of proposed utility generation investments against a transparent forward capacity price. Currently, transparent prices are only available from MISO's centralized nonforward auctions, and little capacity pricing information is available one or more years forward. We therefore recommend that utilities compile market data on capacity prices by either: (a) gathering quotes from third-party brokers with visibility into bilateral bids or offers several years into the future; or (b) regularly procuring or selling at least small quantities of the standard capacity product for up to five or more years forward. (We do not recommend relying solely on simulated or estimated capacity price projections without real market information.) Such improved capacity pricing data would help utilities and commissions better evaluate short- and medium-term resource planning decisions. In many cases, the market data may support utility plans such as low-cost plant uprates. In other cases, the market data may suggest that a major new generation project should be delayed.

For major long-term generation investments or those that do not clearly pass the simplified market test, a formal solicitation for capacity can be conducted to help determine whether the investment is cost-effective. Some utilities already conduct solicitations, but very few we are aware of in MISO result in selecting a competitive market alternative over a self-build project.

Ideally, a solicitation would be open to many types of solutions to the identified need, and it would apply fair and transparent evaluation criteria. However, there are often tradeoffs between openness and transparency. For example, a more open solicitation may allow for solutions that differ so much in their attributes that comparing them becomes quite complicated. We recognize that there is not a single recipe for conducting a cost-effective and productive solicitation, but there are several guiding principles and best practices that can be considered.

Solicitations would ideally allow offers over a range of terms and resource types to determine: (1) whether the in-service date for a new build can be postponed by procuring lower-cost supplies on a short- or intermediate-term basis, thereby reducing investment costs; and (2) whether market-based capacity purchases are less expensive than building new generating plants, as in cases where long-term power purchase agreements (PPAs) might be available at a lower cost. To ensure the most cost-effective solution is selected, it is also important that competitive solicitations be designed to provide a level playing field among all potential bidders. Solicitations for capacity should ideally be open to offers from new and existing resources of all technology types, including generation and demand response. Ideally, solicitations should also admit capacity-only offers as well as bundled energy plus capacity offers, and they should consider allowing contracts of any term including as little as one year.

When evaluating long-term market-based supply offers against a utility's self-build option, the evaluation criteria would be similar to those applied in existing integrated resource plan (IRP) processes. Similar to the short-term market test described above, this longer-term resource evaluation would compare the levelized capacity costs of each offer. However, any offers that are not for a standard capacity product would need to be adjusted for economic equivalence by translating the offers into an equivalent capacity-only offer that accounts for the expected energy value as measured against energy forward curves. The utility may also wish to evaluate the relative costs by comparing the present value of revenue requirements (PVRR) across a range of scenarios. Full PVRR comparisons are more complicated, however, making it difficult for competitive bidders, commission staff, and consumer advocates to fully understand or validate the results of competitive solicitations. We therefore emphasize the importance of complementing this exercise with the simpler capacity cost test.

Other adjustments to offers obtained in utility solicitations may also be needed to allow for an apples-to-apples comparison, accounting for factors such as: (1) costs not included in the offer price, such as network upgrade costs; (2) the "imputed debt" effect of PPA payment obligations that increase the risk of utility debt and equity, similar to the effects of adding debt to the utility's books; (3) the option value of using short-term market-based supply to defer a major investment until uncertainties are resolved; and (4) other non-price attributes such as environmental objectives and risk profiles. The solicitation should clearly define these factors in advance so that competitive bidders will have a reasonable opportunity to address them in their offers.

Pursuing some or all of these solutions has the potential to mitigate the concerns regarding reliability and economic efficiency within the MISO footprint.

To continue reading this article, please click here

This report was prepared for NRG.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions