California's Resource Adequacy program is a significant source of revenue for resources. It's designed to ensure that the California Independent System Operator (CAISO) has access to enough capacity to meet the needs of the future power system.
In this article, you’ll understand the essentials of providing Resource Adequacy:
- How the program works.
- How - and how much - resources are able to earn through Resource Adequacy contracts and delivery.
- Bonuses and penalties.
- Different types of Resource Adequacy requirements - and how they apply to different technology types.
- And the timeline for confirming Resource Adequacy obligations, demonstrations, and delivery.
What is Resource Adequacy?
In 2004, California introduced the Resource Adequacy (RA) program as a planning and procurement mechanism. It ensures that CAISO has sufficient capacity available in the market to meet future electricity requirements.
Through the program, resources enter into bilateral agreements with Load Serving Entities (LSEs) - owners and operators of the distribution system delivering electricity to consumers - to help meet capacity targets. These targets are set by CAISO and the Local Regulatory Authority.
California's largest LSEs are five investor-owned utilities governed by the California Public Utilities Commission (CPUC), which acts as their Regulatory Authority. These LSEs make up 90% of the load in the CAISO balancing area.
47 publicly owned utilities cover portions of the remainder of California and serve as their own Local Regulatory Authorities. Other LSEs include Rural Electric Cooperatives, Community Choice Aggregators, and Electric Service Providers.
The California Energy Commission provides a complete list of LSEs and their contact details on its website.
Must-offer obligations
When a resource enters a Resource Adequacy agreement with an LSE, it contracts a portion of its capacity into a must-offer obligation.
This means they must constantly offer their agreed capacity in the wholesale market for the entire month they are contracted for. In return, they receive payment from their partnered LSEs for being available.
Suppliers secure these contracts for several years of delivery. They form a steady source of predictable income that developers can secure prior to building a given project.
It de-risks a resource's revenue away from more volatile merchant markets. This makes it easier to access lower-cost lending from financial institutions.
How is a resource paid for providing Resource Adequacy?
Resources receive compensation from their partnered LSEs for the capacity they agree to make available in the market each month. In other words, they are paid for making economic offers into the wholesale market - regardless of whether or not CAISO chooses to award them.
In 2022, the average value for providing Resource Adequacy in CAISO's unconstrained areas was between $4.29/kW/month and $14.67/kW/month throughout the year.
And, the top 85th percentile of contracts earned up to $30/kW/month in September - more than twice the average.
If a resource does dispatch (due to its economic bid clearing in the day-ahead or real-time market), CAISO issues payment using the locational clearing price as a typical energy or ancillary award.
How much could a resource earn through the Resource Adequacy program?
Resource Adequacy contracts are private agreements. Typically, a supplier and LSE won’t disclose the value for the payments they agree on. And, as a result, the revenue that individual resources earn from this can vary widely.
For example, suppose a resource provided a fixed capacity towards Resource Adequacy each month.
In 2022, assuming the contract paid the weighted average prices of contracts for each month, this resource would receive a normalized revenue of $86,790/MW/year.
Or, valued at the 85th percentile, it would earn $137,500/MW/year - roughly 58% higher.
Can a resource still provide Resource Adequacy if it doesn't manage to contract with an LSE?
Beyond the bilateral negotiations, resources can provide Resource Adequacy capacity as part of the Competitive Solicitation Process (CSP).
When LSEs cannot meet their annual or monthly capacity targets, CAISO gives them a deadline to attempt to cure their deficiency. But, if the LSE cannot meet this deadline, CAISO runs an auction where resources can offer to provide the deficit capacity.
If CAISO selects a resource to provide the capacity, the LSE pays that resource at its bid-in price. These payments can end up being higher than they otherwise would have been - had the LSE negotiated an earlier agreement with the resource.
Bonuses and penalties for performance
CAISO uses the Resource Adequacy Availability Incentive Mechanism (RAAIM) to incentivize high-performing resources - and penalize underperforming resources.
Each resource with an RA contract must meet or exceed an availability standard, as per its obligation.
A “standard” is assigned to each individual resource, each month. The standard sets the expected amount of time the resource should be delivering on its must-offer obligation.
If the amount of time that a resource is available (i.e. bidding into the wholesale market) falls 2% below its agreed standard, it will face penalties. Conversely, if the amount of time that a resource is available ends up being 2% (or more) above the standard, it is eligible for bonuses.
It encourages resources to minimize any planned downtime or unplanned outages as a result.
However, if a resource does undergo planned downtime or an outage, its Scheduling Coordinator can substitute its commitment with capacity from other resources it controls.
This allows the resource to maintain its availability standard and avoid penalties.
What are the types of Resource Adequacy capacity resources provide?
Resources can meet three types of Resource Adequacy requirements for an LSE.
System capacity (shown in blue, above) meets the California Energy Commission's peak demand forecast for each LSE - plus an additional planning reserve margin set at 17%. Resources can provide system capacity for any LSE, regardless of location.
Local capacity (shown in green) helps to alleviate constraints in areas at risk of facing outages during periods of congestion. These requirements for Local capacity are determined annually - and remain the same throughout the year.
When combined, Local and System capacity fall under the Generic Resource Adequacy umbrella. A resource can offer Generic RA capacity to any number of LSEs, up to its net qualified capacity (NQC). However, they cannot sell the same portion of capacity again across different hours.
Batteries and fossil fuel generators have consistent NQCs year-round. Because of this, they can use the Resource Adequacy program as a reliable source of revenue throughout the year.
The third capacity type is Flexible Resource Adequacy. For Flexible RA, resources offer dispatchable capacity to manage load variations. This capacity is increasingly important to integrating intermittent energy production from renewable resources.
Resources can contract flexible capacity up to their Effective Flexible Capacity (EFC), as measured by CAISO. It is calculated using a resource's NQC, minimum generation capacity, start-up time, and weighted ramp rate.
To qualify as a flexible resource, it must be able to ramp and sustain it’s energy output for a minimum of three hours.
The CPUC and CAISO prescribe a set amount of each type of capacity that LSEs need to secure, divided into annual and monthly targets. LSE must secure capacity from resources they own or by establishing agreements with suppliers.
How does the new "Slice of Day" framework change things?
Starting in 2025, the Resource Adequacy program will adopt a "Slice of Day" framework. This defines each LSE's RA obligations for each hour of the day based on its specific gross load profile, replacing the current system of a fixed requirement for each month.
The new framework will also allow solar and wind resources to vary their commitment for each hour of the day. By doing this, more intermittent renewable energy will be able to contribute to California's reliability - and support the development of new projects by providing more opportunities for RA payments.
Under the new framework, existing contracts will continue largely as they are. Resources will continue to have a must-offer obligation - based on their operational capability, and the amount of monthly RA capacity sold.
What is the timeline for a resource after obtaining an RA contract?
Resource Scheduling Coordinators must inform CAISO of their annual Resource Adequacy obligations for each LSE they have contracts with - by the end of October. For monthly targets, these demonstrations take place approximately 45 days before the start of the following month.
Resources present these demonstrations to CAISO through the Customer Interface for Resource Adequacy (CIRA) tool. Market participants can find a guide for using CAISO’s CIRA tool here.
Learn more about CAISO
Looking to dive deeper into how the California ISO operates? Check out our other articles: