November 2, 2018

ISO-NE is implementing near-term changes in both operations and markets to help address the risk of winter energy shortages

Coming soon: New estimates of the region’s fuel inventories and the cost of preserving fuel for times when it’s needed most

ISO New England’s efforts to address the region’s growing fuel security risks are continuing with two new initiatives to be deployed before winter 2018/2019 begins. One will forecast the region’s available energy supplies for the next 21 days, and the other will provide a market mechanism that will help ensure that limited fuel supplies are used when they are most valuable for system reliability and cost-effectiveness.

Both initiatives grew out of the two weeks of extreme cold weather during winter 2017/2018, when the reliability of New England’s power system rested heavily on power plants that can generate electricity with oil stored in onsite tanks. Days before warmer weather was forecasted to arrive, it became apparent that some of these power plants might run out of fuel before they could refill their tanks. In fact, the region’s oil-fired and dual-fuel generators started the cold spell with their oil tanks 68% full, in aggregate, and toward the end of the two-week period were down to approximately 19% (adjusted for oil that was unusable due to outages, reductions, or emissions)—and some tanks were nearly empty. An oil delivery can take a week or more to arrive after it’s ordered, or longer if barges are unavailable or waterways are frozen, or tanker trucks are being used to deliver oil to companies that serve heating customers.

Operating Procedure 21

On November 26, 2018, as the winter season approaches, ISO New England will begin publishing a 21-day look-ahead energy forecast accounting for the inventories of oil, coal, natural gas, and other fuels at New England power plants, as well as anything that could limit their availability, such as emissions restrictions. The forecasts will describe expected conditions, from normal to conditions requiring declaration of an energy alert or an energy emergency.

These revisions to Operating Procedure 21 — Energy Inventory Accounting and Actions During An Energy Emergency (OP-21) grew out of the cold spell, when generators’ oil inventories began running dangerously low at a time when it was difficult to get oil deliveries. However, the status of declining oil inventories was not widely known outside the ISO. This operational energy forecast is designed to raise the awareness of resource owners and other market participants, government officials, and regulators when the region’s power system may start running low on oil and other fuels. With sufficient advance notice, it’s hoped that resource owners will evaluate their fuel supplies and take action to ensure they have enough fuel to operate or will lock down arrangements to have more fuel delivered in time.

The revisions to OP-21, including an expanded generator fuel survey (OP-21A), were accepted by the NEPOOL Reliability and Participants committees after extensive discussions during the summer and early fall. Additionally, these changes were presented to regional stakeholders, including power plant operators, at the 2018/2019 Winter Generator Readiness Seminar presented by the System Operations Department on October 30, 2018.

Energy Market Opportunity Costs

The second initiative, in the daily energy market, will provide each generator with an estimated opportunity cost that can be incorporated into its offer price for the next day. Each morning, the next day’s opportunity costs will be calculated for each generator and provided to resource owners. The opportunity cost represents the net revenue or profit that would be lost if the generator used up its fuel early in lower-priced hours, rather than preserving the fuel to generate during later, more profitable hours when prices are expected to be higher.

The ISO-calculated opportunity cost estimate will enable resources to price their daily energy offers in a way that will preserve fuel for later periods, when it may be needed more—and they can earn more. The Energy Market Opportunity Cost (EMOC) initiative, which will be implemented on or around December 1, 2018, also grew out of the ISO’s experiences last winter. During the cold spell, energy and reserve prices were driven higher by the high cost of natural gas to fuel generators, but those prices did not reflect the value of saving diminishing stocks of fuel oil as the cold spell continued.

Facilitating market participants’ ability to incorporate opportunity costs into their daily offers will provide a market-based approach that improves reliability and system cost-effectiveness by preserving fuel for the times when it will be needed most. That should reduce the need for ISO system operators to take out-of-market actions to “posture” resources—that is, to tell resources to preserve fuel by not operating—as happened during the winter 2017/2018 cold spell.

The opportunity cost initiative has been discussed with the NEPOOL Markets Committee several times, though no vote is required on the project to estimate each resource’s opportunity costs automatically.

EMOC customer readiness

Lead market participants of oil-fired and dual-fuel generators with short-term fuel supply limitations can view the Energy Market Opportunity Cost (EMOC) Project Customer Readiness page to the learn more about required customer actions and training opportunities related to this project.

Winter energy security efforts

Both forecasts are expected to help bolster power system reliability. The EMOC effort will improve reliability and cost-effectiveness by reflecting the actual costs of preserving fuel when there are limited energy supplies. The forecast of the region’s fuel inventories over the next 21 days will help resource owners respond to impending fuel shortages by ensuring they acquire enough fuel to operate.

These near-term initiatives will join the group of extensive changes ISO New England has made in both power system operations and the wholesale power markets since a 2004 cold snap revealed serious fuel security risks that could jeopardize power system reliability in winter.

The ISO’s Annual Work Plan outlines several other initiatives to address the region’s winter energy security risks. In addition to the two near-term initiatives, the ISO has medium-term and longer-term initiatives underway.

The medium-term projects include the ISO’s proposal to establish interim tariff rules allowing retention of resources needed for fuel security. That proposal was filed at the Federal Energy Regulatory Commission (FERC) on August 31, 2018. The ISO is also working with stakeholders to develop an interim compensation mechanism for resources retained for fuel security.

For the longer term, the ISO is continuing its work with stakeholders—which commenced soon after the ISO issued its Operational Fuel Security Analysis report in January 2018—to design a solution to address the region’s winter energy security risks through the competitive markets. That solution is due to be filed at FERC by July 1, 2019.

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