Resource Adequacy – What Is It and Why Should You Care?
Resource Adequacy, commonly referenced as “RA” for short, is a term that is often heard but frequently not well understood in the electricity sector. In the simplest terms, RA is just a regulatory construct developed to ensure that there will be sufficient resources available to serve electric demand under all but the most extreme conditions.
In the wake of the California Electricity Crisis of 2000-01, the state determined that it was necessary to develop a system that would prevent the kind of power shortages, extreme price spikes, and rolling blackouts that occurred during that turbulent period. The Legislature enacted Section 380 of the Public Utilities Code, which requires the PUC, in cooperation with the Independent System Operator (“CAISO”), to adopt a program that would require all retail Load Serving Entities (“LSEs”, which include utilities, ESPs and CCAs) to “maintain physical generating capacity and electrical demand response adequate to meet its load requirements, including, but not limited to, peak demand and planning and operating reserves.”
The PUC and CAISO have adopted a series of decisions over years to develop the RA program as it exists today. While some other markets in the US, such as PJM and the New England ISO, operate centrally cleared capacity markets, California’s market is bilateral, based on individual transactions between LSEs and resource owners. At the most basic level, LSEs are required to own or contract with sufficient resources to meet their share of the CAISO system’s peak demand, plus a Planning Reserve Margin (“PRM”) of 15%. This “System” RA obligation ensures that those resources will be available to serve CAISO demand when needed. A (supply or demand) resource that commits to provide RA undertakes a “must-offer” obligation to bid or self-schedule its capacity into the CAISO market. The actual dispatch of resources to meet load in real time is performed on an economic basis, with the lowest (variable) cost resources committed first. Thus, an RA resource must be offered into the market, but it may not be dispatched to serve load if there are cheaper non-RA resource bids available.
The RA program also requires each LSE to procure a certain amount of its RA from “Local” resources that are sited in certain load pockets where supply is needed due to insufficient transmission to serve the entire load (e.g., SF Bay Area, LA Basin, San Diego, etc.). Finally, as one means of dealing with the so-called Duck Curve problem, each LSE must procure a certain amount of its RA from “Flexible” resources that can ramp up or down on short notice to meet variations in load and intermittent energy production.
For resource owners, the RA program provides an additional source of revenue beyond just actual energy sales to help cover their fixed costs of providing service. To qualify to sell RA, a resource must register with the CAISO and be tested to determine if it is “deliverable” to load when the transmission system is stressed by high demand. Each resource is assigned a Net Qualifying Capacity (“NQC”) value, which defines the amount of RA that it can sell. For intermittent resources like wind and solar, this value is typically well below the nameplate capacity of the facility, reflecting the probability that they will be generating at the time of the system peak. Demand response and storage resources are eligible to provide RA, while energy efficiency is generally subtracted from the load forecast. The CAISO also recently amended its tariffs to allow aggregations of distributed resources to participate in its markets.
Pausing to reflect, it’s worth noting that even a high-level summary of California’s RA program is rife with acronyms, terms of art, customs and conventions. Because of its birth out of chaos and its highly-regulated history, I think it’s fair to say California’s RA program is unique. This fact will be important to keep in mind when we next turn “Mike’s Corner” to consider a potential expansion of the ISO to other Western states, and how the RA program might fit into a larger regional grid.
