USA Law and Practice Contributed by: David P. Flynn, Lindsey E. Haubenreich, Thomas F. Puchner and Dennis W. Elsenbeck, Phillips Lytle LLP
small power production facilities that meet specific operating and ownership standards may become QFs, and their power output must be purchased by an electricity utility. An avoided cost is the cost of the power pur- chased from the qualifying facility that is low- er than the cost of the energy that the buying utility would generate itself or purchase from another source. QFs are determined by FERC and are commonly limited to facilities whose primary energy source is wind, hydro, solar, biomass, thermal or waste resources. Wholesale rates can also be set by the market- place through bilateral contracts or power pur- chase agreements. Before an entity can make sales at such market-based rates (MBR), they must obtain MBR authority from FERC. FERC will review wholesale contracts to ensure that there is adequate competition in the wholesale market guaranteeing that contracts were freely negotiated. FERC also engages in oversight over wholesale markets by regulating the terms and conditions of wholesale market sales. RSOs and areas outside a regional operating authority The US wholesale market is comprised of seven regional, centralised RSOs, and a patchwork of decentralised geographic areas that operate outside a defined, regional operating authority. FERC has encouraged the creation of RSOs, which dispatch generation as necessary and have operational control, but not ownership, of transmission assets necessary to adminis- ter wholesale markets. RSOs are required to maintain operation of the grid (among other things), and are subject to enforcement by the North American Electric Reliability Corporation (NERC), which is the FERC-designated electric- ity reliability organisation of the USA.
The seven RSOs serve roughly two thirds of the USA. Certain states in the South, Mountain West and Northwest did not join an RSO and continue to operate independently through individual util- ity control areas where wholesale sales are made on a competitive basis primarily by power pur- chase agreements and bilateral contracts. The utilities in these control areas remain subject to certain aspects of FERC’s jurisdiction, and individual control area operators must co-ordi- nate among themselves to ensure region-wide service reliability. Certain service jurisdictions located in regions not within RSO regions have recently joined a quasi-RSO wholesale market called the Energy Imbalance Market. Locational marginal pricing In the seven RSO regions, wholesale prices are set by the centralised market using locational marginal pricing (LMP). LMP sets the marginal cost of energy for certain locations (or nodes) based on the operational characteristics of the nodal transmission system itself, incorporating the financial value of congestion, energy losses and the actual energy being transmitted. Secu- rity-constrained economic dispatch ensures that least-cost energy is provided to each node based on operational, reserve and transmission constraints to address reliability and system needs. Competitive auctions RSOs typically also run capacity markets out- side the traditional wholesale energy market to ensure reliable service through competitive auc- tions. In capacity markets, generators will submit bids one year or more in advance to be paid for their willingness to provide electricity at any time within the year in order to meet peak demand. Certain sales may be made on a cost-of-service basis in limited circumstances where competi- tion does not provide adequate price signals.
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