A dangerous tipping point for New England's wholesale electricity market
The following is a Viewpoint from Dan Dolan, president of the New England Power Generators Association (NEPGA).
The New England wholesale electricity market is reaching a crisis point, having failed to meet the needs of individual states they serve and the electricity resources the markets are supposed to support.
As states are authorizing long-term contracts outside the marketplace to meet their policy mandates, a number of power generation resources are now unable to recover necessary costs to deliver the electricity services required to serve consumers.
On the current trajectory, the state of the New England electricity market will rapidly worsen, requiring further out-of-market actions to adequately compensate generators in order to preserve grid reliability.
State subsidies will beget reliability subsidies, driving consumer costs ever higher and doing away with future market-based investments for new or existing power generation.
Because appropriately-structured competitive markets remain the lowest cost compliance means to achieve emissions reductions and the best opportunity for innovation in a dramatically changing industry, NEPGA is now calling for the revitalization of a market structure that integrates state policies and ensure that reliability is maintained through competitively-priced electricity.
Subsidized resources expand
State-subsidized contracts for thousands of megawatts of new resources are hitting the competitive market and are set to exceed 60% of all electricity consumed in New England over the next several years.
NEPGA acknowledges that states have the right to pursue energy policies to meet their policy objectives. However, so long as a significant portion of the generating industry relies on the wholesale market to support continued investment, that market must remain fair, balanced and non-discriminatory.
The ongoing state activities are compounded by ISO-New England’s persistent over-mitigation of market offers and a failure to proactively develop market-based solutions that integrate these state mandates.
A well-functioning market is predicated on the requirement that it can deliver fair and adequate compensation for the services provided. But today’s New England electricity market is coming dangerously close to failing that test.
Fair and adequate compensation?
In the face of this looming crisis, ISO-New England’s changes to the market design have been inadequate.
Instead of pushing to aggressively meet state policies through markets, the ISO has sought to incorporate out-of-market actions. In addressing "fuel security," the ISO went around the market with its repeated Winter Reliability Programs, and then effectively declared Pay for Performance a failure before its implementation.
With major market redesigns occurring seemingly annually, ISO-New England’s proposals occupy months (and, collectively, years) of consideration by stakeholders and policymakers, yet leave us all effectively running in place. This is simply not good enough.
The most recent illustration of the ISO’s flawed approach is the situation of the Mystic Generating Station. Mystic, the second largest power plant in New England, was unable to recover its costs for operations despite being a highly efficient resource in a critical load pocket.
Mystic’s owner was ultimately forced into a position where retirement was the only financially prudent choice it saw. ISO-New England followed by taking the unprecedented step of offering a cost-of-service contract to retain Mystic for fuel security. Instead of then working concurrently to preserve competitive pricing, the ISO’s action is masking the true costs of the Mystic facility and entering the plant as a price-taker in the upcoming Forward Capacity Auction, undermining proper price formation and harming other plants in the region.
Benefits at risk
The persistent failure to address the incoming crisis in the New England market cuts to the core of whether any semblance of a competitive wholesale market will be preserved. If immediate action is not taken to address the accelerating cycle of out-of-market activity, the remarkable benefits New England consumers have reaped from competition will be upended, requiring a return to consumers bearing the costs of resource investments.
The choice is straight-forward: maintain reliability through a game of chicken — with plants announcing retirement only to be handed cost-of-service contracts to keep them around — or ensure opportunities for facilities to competitively bid against each other to supply needed electricity services.
While harmonizing state policies with competitive markets is the existential challenge facing wholesale electricity markets nationwide, the problem is especially acute in New England today. The status quo must not persist, nor can the recent history of failed market designs and uncompetitive market mitigation.
It is time for ISO-New England to make a deliberate shift away from its historic cycle of out-of-market triage and toward a durable market that provides competitively-priced reliability while working with the states and their public policy mandates.
This will require reinvigorated and dynamic leadership from ISO-New England, as well as the support of the Federal Energy Regulatory Commission. NEPGA stands ready to engage in a solutions-based discussion with the ISO, the New England states and all other stakeholders.
But it is clear that immediate action is necessary to preserve the New England competitive electricity market and ensure that the benefits of 20 years of competition endure and continue for decades to come.
Let us accept that challenge. Now.