FERC Fines Battery Storage Operator for CAISO Tariff Breaches

CAISO Battery Storage Tariff Rule Violations

The energy transition increasingly relies on battery storage systems like the Crimson Battery Project, comprising two large-scale batteries. These systems are governed by complex tariffs and regulations that ensure their proper integration into energy markets. The Sonoran Entities' non-compliance with CAISO tariff rules illustrates the risks of operational mismanagement and the importance of adhering to prescribed regulatory frameworks.

We break down the key components of the Case and provide insights on key takeaways and compliance considerations.

[1] Sonoran Entities Ownership and Structure

Ownership of Sonoran Entities

• The Sonoran Entities - Sonoran West Solar Holdings, LLC (Sonoran 1) and Sonoran West Solar Holdings 2, LLC (Sonoran 2) - are subsidiaries of RE Crimson Holdings LLC.
• RE Crimson Holdings LLC is 80% owned by Axium Crimson Holdings LLC and 20% owned by Recurrent Energy Development Holdings, LLC, a subsidiary of Canadian Solar Inc.

Project Composition

• Crimson 1: A 200 MW* (800 MWh) battery energy storage system.
• Crimson 2: A 150 MW* (600 MWh) battery energy storage system.

*200 MW and 150 MW indicate the per hour technical capacities of the batteries.

Third-Party Contractor Services Framework

The Sonoran Entities operated in collaboration with key contractors and service providers:

• Caerus Commodities Partnerships LLC:

1. Provided energy optimisation services by developing Day-Ahead market bids for the Crimson Battery Project.
2. Worked with the Sonoran Entities to maximise market participation within CAISO rules.

• APX, Inc.:

1. Acted as the scheduling coordinator, responsible for submitting Day-Ahead bids into CAISO via its portal.
2. Facilitated coordination between CAISO and the Sonoran Entities to ensure operational alignment.

• Canadian Solar O&M (US), LLC:

1. Provided operations and maintenance services.
2. Played a key role in managing outage communications, including submitting "outage cards" that outlined operational parameters such as Maximum Stored Energy.

 RegTrail Insights

The layered ownership and collaboration with third party services highlights the interconnected nature of energy infrastructure investments, involving multiple companies and specialised energy-focused entities. It is a reminder for those firms utilising third parties to review their current compliance governance processes.

The case facts reveal systemic issues in the Sonoran Entities’ operational and market practices and is an opportunity for firms with third party operations to review their collaboration with third-party contractors. Specifically, the involvement of multiple third-party contractors underscores the complexity of coordinating large-scale battery operations. Miscommunication or oversight between the Sonoran Entities and their contractors may have contributed to inaccuracies in market submissions.

[2] Overview of CAISO Day-Ahead Market Operations

• State of Charge. Under CAISO’s rules, the State of Charge is forecasted for the Day-Ahead Market as the Initial State of Charge, representing the battery’s expected energy level at midnight of the next operating day. It is a critical metric reflecting the stored energy in a battery system at any given time.

“At all times, a battery has what the CAISO Tariff calls a 'State of Charge' which is a number representing the then-available stored energy of the battery. Under the CAISO Tariff, when a battery submits a Day-Ahead bid at 10:00 am, it has the option of forecasting its State of Charge at the beginning of the next operating day (i.e. midnight), which is called the battery’s 'Initial State of Charge' or 'Day-Ahead Initial State of Charge'.

According to CAISO, during the Relevant Period, CAISO’s market engines would model the day-ahead Initial State of Charge as a physical constraint which would be considered in determining what awards the battery would be eligible to receive in the Day Ahead market for each hour in the next operating day.”

[3] Case Facts

Overview

• The case centres around two battery energy storage systems: Crimson 1 (200 MW/800 MWh) and Crimson 2 (150 MW/600 MWh).
• These assets are part of the Crimson Battery Project, indirectly owned by Canadian Solar Inc. and operated in collaboration with contractors for scheduling, energy optimisation, and maintenance.
• During the investigation period, the Sonoran Entities submitted bids to the CAISO that included parameters such as Initial State of Charge and Maximum Stored Energy. These parameters are critical for market efficiency, as they enable CAISO to optimise resources in the Day Ahead Market.

For those who may be new to battery energy storage and terminology in relation to the CAISO case:

• "Maximum Stored Energy" parameter refers to the highest amount of energy, measured in megawatt-hours (MWh), that a battery storage resource can store. This parameter is crucial for accurately modelling a battery's operational capabilities within the market. It defines the upper limit of a battery's state of charge (SOC) and ensures that the battery is not dispatched beyond its physical storage capacity.

1. Physical Constraints. Batteries have a maximum energy storage limit determined by their design and chemistry. Exceeding this limit can damage the battery or pose safety risks. CAISO uses the "Maximum Stored Energy" parameter to define this limit in its market systems, ensuring the battery never receives dispatch instructions that would require storing energy beyond this capacity.
2. A value of 0 MWh means the battery's energy reserve must be completely depleted or reduced to a zero state of charge (SOC). This value would be required for example if there was a planned outage or maintenance e.g. during a scheduled outage for the battery system itself, the operator might require the battery to be empty to ensure safe conditions for maintenance or repairs.

• “State of Charge” (SOC) represents how much energy is currently stored in the battery, expressed as a percentage or in megawatt-hours (MWh). For example, if a battery can store a maximum of 100 MWh and it currently holds 50 MWh, its SOC is 50%.
• “Initial State of Charge”. Under the CAISO Tariff, when a battery submits a Day-Ahead bid at 10:00 a.m., it has the option of forecasting its State of Charge at the beginning of the next operating day (i.e. midnight), which is called the battery’s “Initial State of Charge” or “Day-Ahead Initial State of Charge”.
• Market Dispatch Implications. CAISO optimises grid operations by dispatching energy resources based on their capabilities. For batteries, this includes charging (absorbing energy from the grid) and discharging (delivering energy to the grid). If the "Maximum Stored Energy" parameter is set to 100 MWh, CAISO ensures that market instructions will not require the battery to charge beyond this limit. For example, if the battery has 90 MWh stored, the market might only allow a maximum 10 MWh charging instruction to avoid exceeding the limit.
• Bid Cost Recovery (BCR) is a settlement mechanism used by CAISO to ensure that eligible resources participating in the electricity market recover their bid costs when they are dispatched by the market.

As BCR was at the centre of the violations, we provide a detailed explanation of how BCR works:

1] What is BCR?

• BCR ensures that market participants (e.g. power plants, batteries, or other resources) that submit bids and are dispatched by CAISO do not operate at a financial loss due to the market's instructions.
• It compensates resources for any shortfall between their market revenues and their costs, as reflected in their submitted bids.

2] Purpose of BCR:

• To encourage participation in the market by providing a financial safety net.
• To ensure resources that follow market dispatch instructions are not penalised if market conditions lead to lower-than-expected revenues.
• To maintain reliability by keeping diverse resources economically viable.

3] How Does BCR Work?

• Resources submit bids to the CAISO market, detailing their willingness to generate electricity, store energy, or provide other services. These bids often include:

1. Start-up Costs: Fixed costs incurred when starting up the resource.
2. Minimum Load Costs: Costs of operating at a minimum level.
3. Energy or Ancillary Service Costs: Variable costs of energy production or other services.

• If a resource is dispatched by CAISO based on its bid but its revenues from market settlements (e.g., from energy, ancillary services, or capacity payments) do not fully cover the costs submitted in its bid, BCR makes up the difference.

4] Key Elements of BCR:

• Eligibility. Only certain resources are eligible for BCR, typically those dispatched by CAISO based on their market bids.
• Cost Verification. CAISO verifies the costs claimed by the resource to ensure they are consistent with the bid submitted.
• Revenue Calculation. CAISO calculates the revenue the resource earned from market activities.
• BCR Payment. If there’s a shortfall, CAISO provides the resource with a payment equal to the difference.

Identified Negligence During the Relevant Period

• Forecasting Errors. The Sonoran Entities often submitted Initial State of Charge parameters that differed significantly from the batteries’ actual operational state. These forecasts were inflated, reflecting higher stored energy than was physically available.

“The Sonoran Entities submitted Initial State of Charge values indicating the batteries would be available to receive discharge awards at midnight and the early morning hours of the following day when the batteries were typically at lower charge levels that were often close to 0 MWh.

On average, the Initial State of Charge values submitted on behalf of the Sonoran Entities on such dates were 480 MWh and 426 MWh higher than Crimson 1 and Crimson 2’s telemetered State of Charge at midnight, respectively.”

• Incorrect ‘Maximum Stored Energy’ Submissions. On several occasions, the Sonoran Entities submitted “outage cards” indicating Maximum Stored Energy = 0 MWh, requiring full discharge before outages.

“During the Relevant Period, the Sonoran Entities, for at least the following four dates, submitted outage cards including Maximum Stored Energy = 0 MWh: (a) 24 October 2022; (b) 28 November 2022; (c) 14 January 2023; and (d) 15 January 2023.

A Maximum Stored Energy value of 0 MWh indicates that the battery needed to be fully discharged (or emptied) in advance of the outage.”

• Market Awards and Uneconomic Gains. Misrepresentations allowed the Sonoran Entities to receive awards to discharge energy at or near CAISO’s offer cap of $1,000/MWh. These awards were classified as uneconomic, leading to inappropriate Bid Cost Recovery (BCR) payments totalling over USD $2.47 million during the Relevant Period.

“During the Relevant Period, the Sonoran Entities frequently submitted to CAISO biddable Initial State of Charge parameters that reflected a value that was other than a 'forecasted starting physical position' - i.e. other than the actual state of charge the batteries were forecasted to hold at the start of the real time market.

• • The Sonoran Entities submitted Initial State of Charge values indicating the batteries would be available to receive discharge awards at midnight and the early morning hours of the following day when the batteries were typically at lower charge levels that were often close to 0 MWh. On average, the Initial State of Charge values submitted on behalf of the Sonoran Entities on such dates were 480 MWh and 426 MWh higher than Crimson 1 and Crimson 2’s telemetered State of Charge at midnight, respectively.
  • Because the Sonoran Entities had Day Ahead discharge bids at or near the CAISO offer cap of USD $1,000 during such hours, the Day-Ahead awards were uneconomic and resulted in Day Ahead BCR payments that the Sonoran Entities would not have obtained if they had submitted an Initial State of Charge that was a forecasted starting physical position and correct Maximum Stored Energy values.
  • As a result, the Sonoran Entities received BCR payments totaling USD $2,473,265 as follows: (a) USD $164,684 for October 24, 2022; (b) USD $128,002 for November 28, 2022; (c) USD $1,081,378 for January 14, 2023; and (d) USD $1,099,202 for January 15, 2023.”

4] CAISO & FERC Violations

Misrepresentation of Initial State of Charge

• The Sonoran Entities frequently submitted Initial State of Charge parameters in Day Ahead Market bids that did not reflect the batteries’ actual energy levels at the start of the real-time market (midnight of the next operating day).
• The inflated forecasts overstated the batteries’ operational readiness, indicating they could perform at levels significantly beyond their physical capabilities.
• On average, reported Initial State of Charge values exceeded actual stored energy by 480 MWh for Crimson 1 and 426 MWh for Crimson 2.

Inaccurate Maximum Stored Energy Reporting

• The Sonoran Entities submitted "outage cards" with Maximum Stored Energy values set at 0 MWh during four key dates (24 October 2022; 28 November 2022; 14 January 2023; and 15 January 2023).
• A Maximum Stored Energy value of 0 MWh implies the battery must be fully discharged before an outage.
• However, this was not required under CAISO rules, and the inaccurate reporting facilitated discharge bids that distorted market outcomes.

“Relative to each such [0MWh] outage, the Sonoran Entities would not have been required to fully discharge the relevant battery energy storage system in advance of such outage. As a result of such Initial State of Charge reporting and the Maximum Stored Energy reporting for such outages, the Sonoran Entities received Day-Ahead awards to discharge to sell energy prior to the start of such outages”

Violation of CAISO Tariff rules §30.5.6.1 & §37.3.1.1

• The Sonoran Entities’ submissions misrepresented the physical and operational conditions of the Crimson Battery Project, violating CAISO’s core tariff provisions:

1. CAISO Tariff §30.5.6.1. Requires Day Ahead bids to include the forecasted State of Charge, reflecting a resource's starting physical position.
2. CAISO Tariff §37.3.1.1. Mandates that Market Participants submit bids for resources reasonably expected to perform at specified levels based on available information.

• These inaccuracies enabled the Sonoran Entities to secure awards to discharge energy in the Day Ahead Market that would not have been obtained with accurate reporting.

Uneconomic Market Awards

• The misrepresented parameters directly led to Day Ahead Market awards for uneconomic discharge bids at or near CAISO’s offer cap of USD $1,000/MWh.
• These awards, totalling USD $2.47 million were classified as uneconomic because the batteries could not deliver the promised energy, yet the Sonoran Entities received compensation under CAISO’s BCR mechanism.

Violation of FERC Regulation §35.41(b)

• This regulation requires market participants to provide accurate, factual information and prohibits submitting false, misleading, or incomplete information in communications with FERC or entities like CAISO.
• The Sonoran Entities’ actions violated this rule by:

1. Submitting false Initial State of Charge values;
2. Misreporting Maximum Stored Energy levels; and
3. Omitting material information about the batteries’ actual operational capabilities.

[5] FERC Enforcement Actions

FERC’s approved settlement included the following penalties and corrective measures:

• Civil Penalty. USD $1 million payment to the US Treasury.
• Disgorgement. USD $2.47 million in improper revenues, plus interest, returned to CAISO for customer benefit.
• Compliance Monitoring. Submission of annual compliance reports for at least one year, with a potential extension to two years.

“Each compliance monitoring report shall:

(1) Identify any known violations of Commission regulations that occurred during the prior year, including a description of the nature of the violation and what steps were taken to rectify the situation;

(2) Describe all compliance measures and procedures the Sonoran Entities instituted or modified during the prior year related to compliance with Commission regulations; and

(3) Describe all Commission-related compliance training that the Sonoran Entities administered during the prior year, including the dates such training occurred, the topics covered, and the procedures used to confirm which personnel attended.”

• Training Programmes. Development and implementation of comprehensive compliance training and procedural updates to ensure adherence to CAISO and FERC regulations.

“The Sonoran Entities also shall develop new training on compliance with the CAISO Tariff and Commission regulations for the Sonoran Entities’ managers, employees, and contractors involved with offering the resources into the CAISO market.

Training shall remind managers of their accountability for reporting potential violations and for encouraging all employees to do the same. The Sonoran Entities shall provide compliance training to the individuals conducting all energy sales and/or communicating information on behalf of the Sonoran Entities to CAISO, the CAISO Department of Market Monitoring, or the Commission.”

• Compliance Officer Appointment. Designation of a Compliance Officer to oversee implementation of comprehensive regulatory compliance program and conduct ongoing assessments.

 RegTrail Insights

Key Takeaways & Compliance Considerations

Firms operating in ISO’s such as CAISO can use this case as a refresh in governance over activities with both Regional Transmission Operators (RTOs) or Independent System Operators (ISOs). While the FERC enforcement relates to battery storage and capacity, the lessons learned can apply to any type of energy product.

Key Takeaways from the Enforcement Decision are as follows:

1. Accuracy in Market Submissions Is Paramount. Market participants must ensure the accuracy of submitted parameters like State of Charge and Maximum Stored Energy. Misreporting undermines market efficiency and exposes companies to severe penalties.
2. The Role of Compliance Programmes. A robust compliance programme is critical for preventing violations. The Sonoran Entities' failures underscore the need for continuous training, clear protocols, and rigorous internal oversight including governance over third party relationships.
3. Economic and Reputational Costs. The penalties imposed highlight the financial consequences of non-compliance. Beyond monetary losses, such cases damage trust with regulators and stakeholders.
4. The Importance of Cooperation with Regulators. The Sonoran Entities’ cooperation with FERC during the investigation resulted in a settlement rather than prolonged litigation, demonstrating the benefits of transparency in regulatory matters.
5. Broader Implications for Energy Transition. As energy systems integrate more storage, the complexity of operational compliance increases. Market participants must align practices with evolving regulations to support the energy transition effectively.

Suggested Compliance Governance Enhancements

To prevent similar violations, energy companies can adopt the following strategies:

1. Invest in Training. Educate personnel on regulatory requirements and the operational specifics of their assets.
2. Enhance Internal Oversight. Establish independent compliance teams to audit and verify market submissions.
3. Use Technology. Implement automated systems to ensure accurate data reporting and minimise human error.
4. Engage with Regulators. Maintain open lines of communication with regulatory stakeholders like CAISO and FERC to stay updated on regulatory changes.