The following is a contributed article by Dan Dolan, President of the New England Power Generators Association.
Over a year ago, I wrote an op-ed calling for a dramatic shift by ISO New England in the design of the wholesale electricity markets they operate. This call focused on designing a market that will be needed to support reliability with the growing scale of state-sponsored resources, as well as meeting state environmental mandates through the markets.
Much has changed as we start the New Year.
Since the New England Power Generators Association's (NEPGA) call for a change in focus, New England state and federal officials have made their own related statements. NEPGA appreciates the support from policymakers for designing a competitive market to provide a sustainable, durable platform with state environmental objectives in mind.
To that end, NEPGA shares the goal expressed by the eight U.S. Senators who urged last November that the region devote attention to "achieve the states' ambitious climate goals."
NEPGA also agrees with the ISO New England response to the senators' letter that the first, best and most efficient mechanism to meet the state climate objectives is to put a meaningful price on carbon dioxide emissions. Such a price should be implemented on a multi-sector basis to achieve the carbon reduction goals at least cost for consumers, driven by electrification of transportation and building heating.
Just like today with the Regional Greenhouse Gas Initiative, a higher cost on emissions could be incorporated into power plant energy market offers and would not require Federal Energy Regulatory Commission approval. NEPGA is hopeful that New England legislators and governors, in the absence of federal action, can make concrete progress soon to put a meaningful price on carbon dioxide emissions.
A carbon price solution with a CASPR transition
Such a price could serve as the means to valuing the development of low- and carbon-free resources, reducing the need to rely upon state contracts to achieve emissions and clean energy goals. As more clean energy is developed with in-market revenues, the need for state contracts would be reduced or eliminated, and the use of the Competitive Auctions for State Policy Resources (CASPR) should likewise be reduced.
In the meantime, however, CASPR provides a market-based pathway for new resources receiving above-market payments under state-sponsored contracts. It does so while largely maintaining the regional reliability-needs market structure in which all other generation continues to compete.
As ISO New England has stated, "CASPR is a second-best solution."
In 2018, NEPGA supported the CASPR proposal as a compromise to enable state-supported resources to access the markets working through buyer-side market power protections by pairing resource procurements with early retirements of predominantly fossil-fueled facilities. That compromise left most feeling unsatisfied.
Generators understood this only minimized, but did not eliminate, the harm to economic price formation in the competitive markets. Others have been concerned that the pathway might not be direct or rapid enough to integrate state-mandated resources.
FERC's recent order addressing PJM's capacity market and its Minimum Offer Price Rule makes CASPR even more important in New England, to integrate state-chosen resources while preserving near-term price signals for needed non-contracted facilities.
Despite being an imperfect path, CASPR is today critical to the well-functioning role of the competitive Forward Capacity Market.
On a broader scale, yet more change is coming to New England.
State legislative mandates for offshore wind, provincially-owned hydro, and other contracts have the potential to reach nearly 70% of the annual energy demand in New England over the next several years. These contracts for energy, however, still require other resources to help preserve the capacity needed to maintain reliability on the electric grid.
That is because unlike energy, capacity ensures that resources are committed to be available, with no excuse for non-delivery. If a power plant does not provide electricity (or reserves) during critical peak periods, then that plant is penalized severely; potentially up to tens of millions of dollars for just a single day.
The requirements and penalties established by the Forward Capacity Market are there to help ensure that consumers receive the performance and services that they pay for, when they most need them. Such requirements do not exist in the energy contracts that have been signed under New England state laws, making the Forward Capacity Market a vital complement to the states' policies to maintain resource adequacy most efficiently and cost-effectively provided at a regional scale.
Properly valuing changing reliability needs
With the magnitude of the changing resource mix, it is also clear that the current market design does not adequately recognize and value the full range of services needed to maintain reliability.
In light of this, ISO New England's ongoing development of market improvements through its Energy Security Improvements initiative is a positive first step.
The proposed reforms are largely composed of expanding energy reserve products, co-optimizing day-ahead and real-time reserves, and improving pricing during times of scarcity. These changes are targeted at improving fuel security in the region, but the changes may also serve as a critical foundation to improve the market's ability to respond to growing amounts of intermittent resources.
NEPGA appreciates the progress that has been made by ISO New England and the NEPOOL stakeholder community in recognizing these challenges; although more work still needs to be done even after these changes are implemented, and we anticipate further regional discussions in this direction.
More than a year since NEPGA's call for a change in ISO New England's and the region's focus to design the market that will be needed in light of major state energy procurements, we see progress.
Proposed market improvements are a promising start. The ISO appears to have shifted into giving the needed attention to these long-term needs. But much more work remains to integrate state decarbonization policies into the marketplace.
We must look beyond the symptom of the market challenges and begin addressing the underlying issues. The best way to do that is to embed the primary policy driver of the state-sponsored resource entry — carbon dioxide emissions reductions — into market signals.
On that score, NEPGA in 2020 will be redoubling its efforts to put a meaningful price on carbon emissions on a multi-sector basis to help continue the remarkable track-record of reduced emissions in power generation and to spur electrification in other sectors to begin the needed improvements there.
For now, mechanisms like CASPR within the Forward Capacity Market can ensure that reliability is maintained through competitive processes, sustaining needed investments, and creating as many cost efficiencies for consumers as possible, while accommodating the state-mandated procurements.
Coupled with the work begun with the Energy Security Improvements, these various pieces of the puzzle can provide a durable marketplace that provides reliable, resilient electricity to electrify broader parts of the economy and meet our climate responsibilities.
This is no easy task; and the challenges are real. But we see a clear pathway toward meeting our collective obligations. Let's continue the work.