Dive Brief:

• Demand-side resources in the Midcontinent Independent System Operator’s market face tougher non-performance penalties under a proposal the Federal Energy Regulatory Commission largely accepted on Friday.
• The new penalty framework, set to take effect on June 1, will apply to Load Modifying Resources, which are demand response and behind-the-meter generation assets that receive capacity payments for agreeing to respond to MISO orders during grid emergencies. The new penalty structure caps a series of FERC-approved changes to MISO’s rules in the wake of several enforcement cases involving the grid operator’s demand response program, according to MISO.
• In a joint concurring statement, FERC commissioners Judy Chang and David Rosner said MISO should be open to additional changes to its demand response rules, including if the severity of the new penalty framework drives “well-performing” demand-side resources out of the market.

Dive Insight:

Demand-side resources play a key role in MISO’s ability to maintain a reliable grid. In its most recent planning resource auction, LMRs backed by demand resources cleared 9.1 GW of capacity, while those backed by behind-the-meter generation contributed 4.3 GW of capacity for the summer season. Together, they made up 9.4% of all planning resources in that season, according to the grid operator.

However, there was a string of FERC enforcement actions starting in 2023 involving demand response participants in MISO. In one case, Voltus agreed to pay a $10.9 million penalty and return $7.1 million in profits to settle allegations that it registered uncontracted and over-stated demand response resources with MISO. In other cases, Big River Steel agreed to pay nearly $22 million and Northern Indiana Public Service Co. and Linde Inc. agreed to pay $66.7 million to settle market gaming charges. Also, FERC ordered Ketchup Caddy and its owner to pay about $27 million for using bogus demand response resources to make offers in MISO’s capacity market.

MISO’s existing LMR penalty structure does little to discourage fraud and other manipulative behaviors because LMRs are called on so infrequently compared to the capacity payments they receive, FERC said in its order, citing the grid operator.

Among the changes in the approved penalty framework, MISO will expand existing participation restrictions; differentiate between partial and complete performance failures; and add a new financial penalty based on auction clearing prices.

In its decision, FERC said that while MISO’s proposal represents a “significant change” in the scale of the penalties underperforming LMRs face, it disagreed with protestors — Advanced Energy United, American Municipal Power and the Michigan Public Power Agency — that the penalties were too extreme.

“While there may be instances in which multiple components of the proposed penalty structure apply concurrently, we find that this layering is not overly severe or unduly punitive because the proposed penalties will incentivize LMRs to perform when called and backfill LMR capacity that MISO otherwise expects to be available for deployment, thus increasing system reliability,” FERC said.

However, FERC gave MISO 30 days to address an inconsistency in its proposed process for calculating two types of penalties for underperforming LMRs.

Commissioners Chang and Rosner urged MISO and market participants to monitor the effects of the new performance penalties and previously approved LMR reforms.

“If performance incentives or penalties create excessive economic risks for resources to participate, they will exit MISO’s markets, which in turn, would significantly increase the cost of meeting resource and energy adequacy,” Chang and Rosner said. “We strongly encourage MISO to continue to improve its market rules to ensure that all valuable demand-side resources have adequate opportunities to participate and help MISO meet its resource and energy adequacy targets at the lowest cost possible.”

FERC “got this right,” Rao Konidena, president of Rakon Energy, a consulting firm, said in an email to Utility Dive. “MISO needs LMRs it can count on when load shed is on the line, and FERC was deliberate, even sending MISO back to fix inconsistencies in its tariff language.”

But, stiffer penalties could push good resources out of the market, he said.

Also, while it’s an issue outside FERC’s order, demand-side aggregators depend on utilities and other load-serving entities for node designations, with no firm timelines for getting them, according to Konidena.

“Barriers to getting in on the front end and stiff penalties on the back end are a recipe for losing demand response exactly when we need it most,” he said.