ISO-NE insists that its Winter Reliability Programs are a cost-effective interim means for fuel assurance prior to implementation of its Pay-for-Performance market-based solution in 2018.
The New England Independent System Operator (ISO-NE) currently relies on its Winter Reliability Program (WRP) to maintain electric system reliability and mitigate system operation challenges caused by natural gas constraints. The ISO is challenging a FERC ruling that would instead require a market-based solution beginning this year.
Generators Push for Market-Based Program to Replace Successful Out-of-Market WRP
The ISO-NE WRP provides out-of-market payments to generators to help ensure reliable winter operations. The New England Power Generators Association (NEPGA) is pushing for rapid implementation of a market-based mechanism to ensure efficient wholesale price formation in the winters prior to 2018. The ISO is pushing back, stating a temporary market-based solution would be a costly alternative to the already successful WRP.
In September 2014, the Federal Energy Regulatory Commission (FERC) ordered ISO-NE to “initiate a stakeholder process by January 1, 2015 to develop a proposal to address reliability concerns for the 2015-2016 winter and future winters, as necessary” (Docket No. ER14-2407-000). FERC did not direct ISO-NE to complete any tariff revisions for a market-based solution, despite the NEPGA request. NEPGA stressed that because the out-of-market payments are not offered to all generation resources, the WRP “interferes with the ability to find an efficient price” to meet demand.
The September order also accepted ISO-NE’s proposed tariff revisions regarding dual-fuel capability, unused fuel inventory, market monitoring, and demand response (DR) to support its 2014-2015 WRP. It noted that FERC recognizes ISO-NE’s winter reliability challenges and the temporary nature of the proposed tariff provisions but favors a long-term, market-based solution to address the challenges.
Several months later, in January 2015, FERC granted a New England Power Generators Association (NEPGA) request to clarify the September ruling, and it ordered ISO-NE to develop a market-based solution beginning with the 2015-2016 winter (Docket No. ER14-2407-003), if the ISO deems a winter reliability solution necessary. According to NEPGA, ISO-NE had incorrectly interpreted the September ruling as allowing continued out-of-market solutions for three consecutive winters after the 2014-2015 winter, which NEPGA said contradicts the urgency with which FERC called for a market-based proposal. In its clarification, FERC reestablished its preference for a market-based solution, as it aims to ensure the most efficient wholesale market price formation possible.
On February 19, ISO-NE requested a rehearing of the order stating that market-based solutions under existing obligations are potentially less effective, inefficient, controversial, and expensive compared to its out-of-market WRP. It stated that FERC erred in requiring a market-based solution and foreclosing the development of a more effective out-of-market, temporary solution to maintain system reliability. ISO-NE stated that FERC did not impose a requirement that the proposal be market-based. It said that the impending two-settlement capacity market design will provide a market-based solution, and, in the interim, it is appropriate to allow flexibility in evaluating and reaching consensus on the region’s WRP objectives. ISO-NE does expect that outcome – an extension of its current program or another alternative – to be a market-based solution. The problem with implementing a market solution this year, is that ISO-NE’s Markets Committee meetings – held on November 13, 2014, December 9, 2014, and January 13 – did not result in a consensus solution, indicating that it was becoming increasingly infeasible to develop a new market in time for the next winter, particularly, if an auction mechanism is required. In the meetings, generator groups pushed for a resource-neutral, market-based solution possibly with strict performance penalties (not unlike the pay-for-performance design). At the final meeting, no solutions were presented and since a consensus was not reached, the ISO stood by its desire to continue with the WRP design, if needed.
ISO-NE Seeks Continued WRP Through 2018
ISO-NE predicts that a WRP is necessary to ensure fuel adequacy until its Pay-for-Performance (PFP) market design takes effect in 2018, which will provide the long-term market-based solution. ISO-NE did state that it is committed to evaluating the feasibility of implementing a market-based solution for the remaining (2016/2017) winter before PFP takes effect. The feasibility study would consider costs associated with a potential solution and its impact on resources that have cleared in the capacity market and have current obligations.
Under the PFP rules, resources that underperform during times of system stress will provide payments to resources that overperform. The PFP model defines generators’ obligations and compensation requirements, and resolves reliability issues resulting from inadequate penalties and incentives by strengthening performance incentives in the Forward Capacity Market (FCM). ISO-NE’s ninth FCM auction, which concluded on February 2 to secure capacity commitments for the 2018/2019 delivery year, implemented major reforms, including PFP.
While the two-settlement capacity market design could help address winter reliability concerns in the future, that design will not be fully implemented until the 2018-2019 Capacity Commitment Period.
2014-2015 WRP Expands on Successful 2013/2014 Program
ISO-NE stated that it intends to address the 2014-2015 winter through market improvements and FERC clarification that generators have a fuel procurement obligation to meet expected dispatch. It decided to pursue a WRP spurred by significant natural gas pipeline constraints, retirements of Vermont Yankee and Salem Harbor, difficulties in maintaining oil inventories, and gaps in generator obligations. The 2014-2015 WRP was modified to only pay generators for unused fuel at the end of season instead of receiving upfront payment for fuel procurement. The program was designed to compensate generators for adopting ISO’s assessment instead of their – possibly less conservative – fuel procurement estimates. ISO-NE maintained DR provisions to include DR resources that are currently not participating in the wholesale markets or have capacity in excess of Capacity Supply Obligations already committed in the region’s FCM. It added a liquefied natural gas (LNG) component to improve fuel neutrality, allowing generators that contract for LNG to receive an end-of-season payment to offset the risk of unused LNG contract volume. It achieved expected results with sufficient fuel inventory to begin the winter as well as oil inventory that enabled the region to withstand severe weather. ISO-NE’s January report showed improved 2014-2015 WRP resource participation that includes:
- 79 oil and dual-fuel units with a total of approximately 4.48 million barrels of reported inventory levels
- Six natural gas-fired units submitted verification of LNG contract purchases totaling approximately 500,000 million British thermal units (MMBtu)
- Three new DR assets that can provide 14 MW of demand reductions if needed
- Six units – with a total combined capacity of approximately 1,775 MW – intend to become dual-fuel capable by next winter (four units – totaling approximately 1,000 MW – could be available this winter with two already commissioned)
Infeasibility of Interim Market-Based Solutions
ISO-NE said that the objective of its WRPs has been to improve fuel security, while the objective of NEPGA’s proposed market is to compensate generators for reliability during the winter.
ISO-NE said that two approaches to develop market-based solutions under existing obligations – adding obligations and increasing incentives – would be infeasible in the short-term. The ISO states that the current obligations are “too narrow to create a comprehensive market structure.” According to ISO-NE, NEPGA’s proposal to layer obligations on existing structure would be equivalent to a smaller-scale PFP version. This would be resource intensive, expensive, and involve protracted regulatory processes, litigation, and displacement of other project priorities. ISO-NE finds it imprudent to replicate efforts given the new PFP market design that will take effect in three years. In addition, despite the efforts, the resulting market may not provide the same benefits as the current WRP. This is because a new market mechanism will have too many unknowns related to amount of participants, exemptions, incentives, and penalties.
Among other complexities related to market structure a mandatory auction approach makes it difficult to resolve issues related to reviewing offers, requiring demand curve, and treating previously-cleared resources.
A second approach, increasing incentives for existing obligations, could be less disruptive but would remain unpredictable compared with the WRP. The incentives model would increase Reserve Constraint Penalty Factors (RCPFs) that set the proxy reserve market clearing price when resources are inadequate or when the cost of reserves exceeds the RCPFs. The option would result in less disruption to project priorities, incur costs proportional to lifespan, and strengthen real-time performance incentives during winter scarcity. However, it may not provide the same fuel assurance as the current WRP and would rely on resource owners’ judgment for appropriate actions, which are unpredictable due to varying system conditions. Triggering RCPFs would also increase energy market prices because of the inherently linked reserve and energy markets.
Insight for Industry: Expansion of Current WRP
ISO-NE will work to enhance the current WRP structure to include resources such as coal and nuclear units that can provide fuel assurance. The expansion will ultimately resemble a market-based solution by increasing resource diversity and meeting fuel adequacy in an efficient and time-limited manner.
ISO NE intends to file an expanded WRP version with FERC. If rehearing is not granted or FERC does not act by June 1, ISO-NE will propose an increase in RCPFs.
- 79 oil and dual-fuel units with a total of approximately 4.48 million barrels of reported inventory levels
- Six natural gas-fired units submitted verification of LNG contract purchases totaling approximately 500,000 million British thermal units (MMBtu)
- Three new DR assets that can provide 14 MW of demand reductions, if needed
- Six units – with a total combined capacity of approximately 1,775 MW – intend to become dual-fuel capable by next winter (four units – totaling approximately 1,000 MW – could be available this winter, with two already commissioned)
Originally published by EnerKnol.
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