ISO-NE releases discussion paper on energy security challenges, solutions

On April 1, 2019, ISO New England released a paper detailing the ISO’s perspectives on the region’s energy security challenges and long-term market solutions to addresses those challenges. Over the past several years, the region has seen resources with onsite fuel storage replaced by resources that rely on “just-in-time” delivery of their energy sources, such as natural gas and renewables.

Though this transition is leading to a cleaner, greener regional power grid, it presents reliability risks during periods of prolonged cold weather, when natural gas pipelines are constrained. While the grid has remained reliable thus far, the ISO expects that industry trends will increase these risks over time unless proactive solutions are developed.

Over the past several months, the ISO has taken interim measures to maintain the reliability of the system while long-term solutions are developed. The release of this paper marks an important step in the development of those long-term solutions.

The paper begins with an examination of the underlying problems facing the power system and their root causes, with a focus on whether the region’s wholesale markets provide adequate financial incentives for resource owners to make supply arrangements that would be cost-effective and benefit the power system during periods of heightened risk.

Problems and causes: a Catch-22 for generators

As currently constructed, the region’s wholesale markets do not provide sufficient financial incentives for market participants to undertake these arrangements.

In effect, given how New England’s power system has evolved, generation owners now face an economic “Catch-22”. For example, if a generator does not make a costly supplemental fuel supply arrangement ahead of time, high real-time wholesale market prices will prevail when the region’s gas pipelines are tightly constrained and renewables’ output is low. During these instances, the generator would not immediately profit if it lacks fuel to operate.

Those price signals typically would motivate widespread investment to profit in such circumstances. And yet, if the generator does invest in a supplemental fuel supply arrangement – at least, to a level that meaningfully reduces the system’s energy supply risk – then the investment may prevent the high market price from ever occurring, thus undermining the expected return on the investment.

Current market designs also fail to efficiently coordinate the use of limited stored energy, such as oil or LNG, to meet demand for power across multiple days. The ISO has made efforts to improve access to information regarding fuel inventories and allow resources to add opportunity costs to their energy market bids, but there is presently no market mechanism to coordinate generators’ multi-day production schedules, in the least-cost, most-reliable way.

Solutions

The paper proposes a set of market design improvements to address these problems. Broadly, the ISO is recommending the expansion of the existing energy and ancillary service markets to reliably and cost-effectively address a power system becoming more reliant on just-in-time energy supplies.

Building upon the existing competitive wholesale electricity structure, the ISO envisions three core components to achieve these goals. They are:

• Multi-day ahead market.  Expand the current one-day-ahead market into a multi-day ahead market, optimizing energy (including stored fuel energy) over a multi-day timeframe and producing multi-day clearing prices for market participants’ energy obligations.
• New ancillary services in the day-ahead market.  Create several new, voluntary ancillary services in the day-ahead market that provide, and compensate for, the flexibility of energy ‘on demand’ to manage uncertainties each operating day.
• Seasonal forward market.  Conduct a voluntary, competitive seasonal auction that provides asset owners with both the incentive, and necessary compensation, to invest in supplemental supply arrangements for the coming winter.

Taken together, these three market changes will help signal, through transparent market prices, the costs of operating a reliable power system as the region’s generation fleet continues to evolve.

Next Steps

The publication of the white paper will serve as a catalyst for further discussions among the ISO and stakeholders regarding these challenges and proposed solutions. These discussions will continue over the summer, and the ISO is aiming to file its long-term proposal at FERC by October 15, 2019, with the changes to be implemented on June 1, 2024.