Electricity market design is critical to keeping the lights on and managing costs as New England builds a cleaner power system. EPSA offers proposals to prioritize reliability in the most cost-effective way possible.
Like many areas across the U.S., New England is grappling with how to decarbonize its electric grid to address climate concerns. But as the region continues to increase state-subsidized renewables on the grid, its power system could be faced with another pressing issue: keeping the lights on.
In December, ISO-New England President and CEO Gordon van Welie warned that the winter will bring electric reliability hurdles while discussing the grid operator’s Winter Outlook. He noted three variables that could lead to challenging operating conditions this winter: pipeline natural gas availability, the availability of other fuels, and weather conditions.
“We have managed to keep the lights on here through a combination of skill and luck.”Gordon van Welie, president and CEO, ISO-New England
Van Welie’s warning underscores a message competitive power suppliers have been sharing for some time: grid operators and policy leaders must prioritize reliability while considering market design changes and decarbonization efforts. The region’s competitive power market was carefully designed to meet electric demand at the least cost, leveraging competitive forces to drive efficiency and innovation. Yet since 2006, regional leaders and the Federal Energy Regulatory Commission have rejected a number of power generator proposals to enhance reliability – and they are currently pushing to undo the Minimum Offer Price Rule (MOPR), a market rule designed to protect price signals from the suppressive effects of subsidized resources. Well-functioning and transparent price signals are critical to ensure market-based reliability.
What’s driving reliability concerns?
As the ISO points out, two system variables – natural gas availability and the availability of other fuels (specifically fuel oil and LNG) – may pose challenges that are already baked into this winter’s risks. The global price of oil and LNG remain at elevated levels which could affect storage and deliveries into New England. Layer in the region’s natural gas pipeline constraints that occur when there is simultaneous demand for natural gas from both heating customers and electricity generators, and the region could be faced with a serious problem should the weather take an unexpected turn.
The ISO projects that procedures similar to 2017/2018 limited emergency measures may be required. Should this winter resemble the weather of 2013/2014 the ISO noted that implementation of all available emergency procedures – including controlled outages – may be required. Such measures would come with tremendous costs—both financial and human. While planning for worst case scenarios is part of responsible RTO operations, it is unacceptable for grid operators to accommodate the impacts of state policy decisions on their systems to a point where power outages could be unavoidable.
Getting Market Design Right for Reliability
While New England seems locked into a tenuous situation this winter, the region does not need to continue down this rocky road in perpetuity. While obstacles continue to block the buildout of needed natural gas infrastructure, New England can take steps to ensure that the lights stay on. The New England Power Pool is currently debating the removal of the MOPR from ISO-NE’s tariff, with stakeholders considering a host of proposals that could fill the void. One proposal would merely remove the MOPR and offset this action with no other policy changes. Such a decision would result in a wave of costly and intermittent state subsidized resources flooding into the market and further challenging the economics of the dispatchable resources that are currently critical to preserving reliability. That path forward would represent a precarious route for an electric system that already faces the aforementioned challenges – as well as threatening the overall ability of competitive forces to deliver optimal outcomes and increasing reliance on subsidies.
A better approach would be to implement a replacement plan that prioritizes system reliability. Market design must afford the opportunity for all resources necessary to maintain reliability to recover their costs. It would further ensure that reliability is preserved in the most cost-effective way possible. The ISO should also expedite its efforts to develop a capacity accreditation framework to be put in place simultaneously with the removal of the MOPR. While ISO-NE typically clears about 34,000 megawatts in its capacity auction, in the winter of 2017-2018 it struggled to serve a 22,000-megawatt load. This indicates that, in reality, the ISO may not have the capacity surplus that it appears to have on paper. This issue stems from counting capacity merely by nameplate value, rather than the actual energy that each resource can physically deliver. Accurate accreditation of resources would have to mitigate this problem by giving the ISO a more granular window into the capacity value of each resource on its system. While this issue isn’t unique to New England the impact of getting it wrong is more immediate there.
No More Rolling the Dice
While New England may not face the worst outcomes this winter, it is clear that continuing down its current path would be rolling the dice in future winters. That is an unacceptable risk the region cannot afford to take. Competitive power suppliers take their obligation to provide reliable electricity extremely seriously and, as always, have been gearing up for the winter – having made maintenance improvements and fuel supply arrangements throughout the Fall. The market to date has provided resources to meet demand, with more than adequate electric generation capacity projected to meet consumer needs through the 2021-22 season. To foster those private sector efforts and competitive wins, New England States and ISO-NE should change course – and protect markets to preserve cost-effective reliability before it is too late.
An EPSA overview of New England’s competitive power market and policy recommendations for how ISO-NE can evolve while maintaining reliability and the cost benefits of competition.