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Monday
Jan122015

Resources’ participation in 2014/2015 Winter Reliability Program improves fuel adequacy this winter

For the second year in a row, ISO New England has implemented a Winter Reliability Program (WRP) designed to address concerns about the ability of power system resources to perform when dispatched, especially during cold weather conditions. The program provides incentives for oil and dual-fuel generators (i.e., units that can run on either gas or oil) to increase oil inventories, for natural-gas-fired generators to contract for liquefied natural gas (LNG) to augment pipeline gas, and for new demand-response resources to be available. Another component of the WRP that will help bolster reliability beyond this winter is the incentive for gas-fired generators to invest in dual-fuel capability.

The 2014/2015 WRP has several similar elements to the 2013/2014 program, including the demand-response component, as well as permanent rules related to dual-fuel generator audits and the partial elimination of higher-cost fuel requirements. The program also has some fundamental differences. Last year’s program included a set target for incremental energy and used an as-bid design, where generators submitted bids showing how much electricity they would produce if needed and then purchased the fuel to meet their commitment. This year the ISO did not set a target for incremental energy; rather, participation was voluntary. The compensation structure also is different from last year: this year the ISO established a set rate that will be paid to participating resources for any unused oil inventory or unused LNG contracts after the winter season.

2014/2015 WRP participation

79 oil and dual-fuel units are participating in this year’s program and have reported their oil inventory levels totaling approximately 4.48 million barrels of oil. However, some generators exceeded the cap for compensation through the program (the maximum inventory eligible for compensation at each generator is the lesser of 95% of their usable fuel storage capability or enough oil to operate for 15 days at full load). Therefore, the maximum amount of oil inventory eligible for compensation through the program is about 3.82 million barrels.

Six natural-gas-fired units have submitted verification of their purchase of LNG contracts totaling approximately 500,000 million British thermal units (MMBtu).

Three new demand-response assets will be able to provide 14 megawatts (MW) of demand reductions, if needed.

Finally, six units with a total combined capacity of about 1,775 MW have submitted their intent to become dual-fuel capable by next winter. Four units, totaling approximately 1,000 MW, may be available sometime this winter (two of the four have already been commissioned).

ISO New England is satisfied that the response from resources to participate in the 2014/2015 WRP will help improve fuel adequacy during cold weather.

Compensation

The program incentivized resource participation by offsetting some of the carrying costs for unused oil or LNG contracts at the end of the season.

Participating oil or dual-fuel generators that have oil leftover at the end of the winter will receive a payment rate of $18 per barrel. Given the level of resource participation, the maximum cost of the oil component of the program is about $68.7 million (assuming none of the program oil is burned). Generators will not receive payment in addition to what they earn in the energy market for oil that is burned.

Natural-gas-fired generators that contract for LNG will receive an end-of-season payment to offset the risk of unused contract volumes. The set rate for unused contracts is $3/MMBtu, which is based on the unused oil rate, converted to dollars per MMBtu. The maximum cost of the LNG portion of the program is $1.5 million (assuming that none of the LNG contracted for is used).

DR participants will receive monthly payments to be available. The payment rate is set at $1.80/kilowatt-month, which is equivalent to the unused oil inventory rate. The cost of the DR component of the program is $75,600.

In total, these components of the program could cost up to $70.28 million.

This figure does not include the cost of the dual-fuel commissioning provisions of the program, which are recouped separately (as part of Net Commitment-Period Compensation, or NCPC, charges). The maximum cost for commissioning in 2014/2015 is $3.56 million, and the maximum cost for 2015/2016 is $2.19 million.

2013/2014 WRP

In the 2013/2014 WRP, the ISO accepted bids for oil inventory and demand resources equivalent to about 1.9 million MWh (more than three million barrels of oil). Participating oil and dual-fuel generators burned more than 2.7 million barrels of program oil. After adjusting for resource unavailability, the final cost of last year’s program was approximately $66 million; initially, the cost was estimated to be about $75 million.

Having adequate oil inventory in place last winter was critical in keeping the lights on, especially during times when the gas pipelines were severely constrained and also when oil was more competitively priced than natural gas, which resulted in many oil plants running more than usual and for extended hours. (See this article for a recap of the operational challenges and price volatility experienced last winter).

Next steps

The ISO has made a number of longer-term changes to the region’s wholesale electricity markets that will improve incentives for generators to firm up their fuel supply and improve their overall performance, but those changes will not go into effect until 2018. FERC directed ISO New England to work with stakeholders to determine an appropriate solution for the winter periods prior to 2018; those discussions began in November and the ISO plans to file a proposal with the Commission this summer.