The next step forward: ISO-NE files Energy Security Improvements with FERC

June 2020 Update: On June 15, ISO New England filed comments with the Federal Energy Regulatory Commission (FERC) in response to various comments submitted regarding the ISO’s Energy Security Initiative (ESI) proposal (filed on April 15). The ISO’s recent comments continue to stress the importance of creating a market-based solution to the region’s energy-security challenges and highlight the disparate nature of some of the submitted criticisms – some of which question the expense and scope of the ESI proposal while others do not believe the ESI is sufficiently expansive.

ESI helps ensure enough flexible supply is available each day to manage uncertainties in an increasingly energy-limited power system

After an extensive stakeholder process spanning several years, ISO New England filed its Energy Security Improvements (ESI) proposal with the Federal Energy Regulatory Commission (FERC) on April 15, 2020. The ISO asks FERC to respond to this filing by November 1, 2020, and proposes that the Energy Security Improvements take effect on June 1, 2024, by which time the ISO can implement the ESI market administration processes and develop new software and IT systems.

As New England transitions to a power system dominated by resources reliant on just-in-time delivery of their energy sources, such as natural gas and renewables, ESI will help ensure a reliable supply of electricity during periods when supply and production is limited.

Included in the ISO’s 500-plus page filing is an alternative proposal supported by the New England Power Pool (NEPOOL) that amends the Energy Security Improvements in three discrete ways, but otherwise adopts the ISO’s design.

ESI is a comprehensive, fuel-and-technology-neutral, market-based solution to long-term energy security challenges

Historically, the majority of resources comprising the New England fleet had large, ready stockpiles of fuel, ensuring that they could run whenever committed or dispatched. In the event of a contingency such as a large loss of generation or surge in demand, the ISO has always relied on the flexibility of this fleet to operate, without a day-ahead commitment or any market-based compensation for the reliability services they provide.

However, today’s generation fleet looks markedly different from the fleet of twenty years ago. Because of consistently low natural gas prices and New England states’ incentives for renewable resources, the power generation fleet is increasingly made up of resources with “just-in-time” energy sources (pipeline gas, wind, and sun), rather than fuel stored on-site (oil, coal, nuclear). (See our Resource Mix webpage for more on the region’s clean-energy transition).

While there has been no loss of load attributable to insufficient energy supplies to date, the ISO’s operating experience reveals a growing concern that resources with just-in-time inputs, combined with a constrained fuel delivery infrastructure, may not be able to produce energy in the event of an unexpected, extended loss of supply. Given the evolving generation fleet, the ISO can no longer rely on resources in real-time that were not committed the day ahead. Rather, it must act to create market-based incentives to drive resources to take steps prior to the operating day to ensure availability.

Therefore, to address the region’s energy security challenges, the ISO’s proposal focuses on three interrelated problems in the current market structure. Doing so will create incentives for the region’s fleet to invest in the energy supply arrangements and technologies needed to run the grid reliably and efficiently. Specifically, ESI would:

• Align incentives for energy supply arrangements so that market participants will take action to improve their resources’ ability to provide energy in real-time when needed by the power system
• Improve operational certainty by increasing energy available to the power system to withstand an unexpected, extended large generation or supply loss, during stressed system conditions
• Ensure sufficient energy is scheduled through the wholesale market to meet the ISO’s forecast load for the next day

The details: ESI will compensate reliability services in the day-ahead markets

Reliability standards require the ISO to have next-day operating plans in place that ensure the power system can manage uncertainties and supply limitations that can arise during the operating day.

In studying the energy security problem and the existing markets and operations environments, the ISO identified that it is effectively counting on resources to provide reliability services to meet this operating plan without providing compensation for these reliability services. These uncompensated reliability services fall into three distinct categories that correspond to specific reliability requirements:

• Energy to meet the gap between the ISO’s forecast load in real-time and day-ahead energy supply awards
• Operating reserves for fast-start and fast-ramping generation contingency response
• Available reserves to replace a long-duration supply loss or unanticipated increases in demand

To fill these identified market gaps, the ISO proposes to formalize the three categories of operational capabilities identified above into specific ancillary services, and allow market participants to compete to provide those capabilities in the ISO’s Day-Ahead Energy Market. These new ancillary services are:

• Day-Ahead Energy Imbalance Reserve (EIR) to compensate all generators that work to satisfy the ISO’s load forecast
• Day-Ahead Generation Contingency Reserve (GCR) that align with the existing real-time operating reserves and provide a day-ahead means to ensure energy reserves are available
• Day-Ahead Replacement Energy Reserve (RER) to restore depleting operating reserves within reliability standards’ prescribed timeframes and to address load forecast errors realized during the operating day

ESI settlement uses an option structure that is common to financial markets

The ESI proposal procures the three products discussed above as options on real-time energy. Under this framework, the option seller receives an up-front payment. In exchange for this payment, the ISO has the option to “call” on its resource’s electric energy during the operating day in order to meet operational needs of the power system.

In taking this day-ahead payment, the option seller is subject to the possibility of a closeout cost that occurs when the real-time energy price is higher than the option strike price. (The strike price is a pre-defined value, set before sellers specify their option offer prices and the market clears.)

This option structure provides stronger incentives for resources that sell options to be available to provide energy in real-time when the system requires than other structures the ISO evaluated, such as a forward sale of ancillary services that uses the two-settlement approach employed for energy.

To ensure cost-effective outcomes, the Option Offers will be co-optimized (i.e., simultaneously-cleared) in the Day-Ahead Market, together with all energy supply offers and demand bids.

The amended proposal

The NEPOOL-supported alternative amends the ISO’s proposal in three distinct aspects.

1. With regard to the RER, the NEPOOL alternative limits the calculation of the RER quantity and resulting costs to the three winter months of December through February. The NEPOOL alternative sets the RER quantity to zero during the nine non-winter months.
2. The NEPOOL-supported proposal removes the ability for the ISO to increase the RER amount in case its load forecast is in error.
3. The NEPOOL-supported alternative amends the way the option strike prices would be calculated and eventually settled.

The ISO does not support these amendments because they undermine the efficacy of the ESI design in addressing the region’s energy security concerns.

The ISO seeks to sunset existing out-of-market programs

To address energy security in the short-term and bridge the gap to implementing ESI, the ISO implemented two out-of-market actions.

The most notable of these actions was to temporarily retain Mystic Station from retiring using a special FERC-approved cost-of-service agreement. This action was intended to delay the retirement of one of New England’s largest generating resources and its reliable on-site fuel source (the loss of which would pose an unacceptable risk to power system reliability in winter), and provide the region with time to develop long-term solutions to the region’s energy security problem.

The ISO also developed a temporary Inventoried Energy Program, to be in effect for the winters of 2023-2024 and 2024-2025. This mechanism provides revenues for resources to maintain inventoried energy that contributes to reliable operations during cold winter conditions.

To allow the design to operate most effectively, the ISO proposes to eliminate the Fuel Security Retention Mechanism and the Inventoried Energy Program for Forward Capacity Auction #15 (FCA #15), whose auction will take place in February 2021 and corresponds to the June 2024 through May 2025 Capacity Commitment Period.  In each case, sunsetting is conditional upon FERC’s acceptance of the Energy Security Improvements Tariff provisions effective November 1, 2020 for implementation on June 1, 2024.

Procedural history

Following the announcement of Mystic Generating Station’s planned retirement and the ISO’s request to retain this facility for fuel security, FERC directed the ISO to develop a long-term market design that better addressed energy security in the region. The ESI proposal is the culmination of the ISO’s review and discussions with stakeholders over 24 meetings. On April 2, 2020, the Participants Committee voted not to support the ESI proposal, with 39.9% in favor. However, NEPOOL garnered sufficient support for its alternative proposal, which was approved with 61.70% in favor.

The ISO is not required by law to file the alternative proposal but agreed early in the stakeholder process to file any alternative proposal that received at least 60% support from NEPOOL.

Additional background: Managing energy security to date

In New England, interstate natural gas pipeline constraints, combined with the retirement of many older (oil and coal-fired) power plants, have heightened the region’s energy-security concerns. The ISO does not have authority over pipelines or other fuel infrastructure that supply New England’s power plants. Instead, the ISO has the ability to develop market rules that result in accurate pricing signals that incentivize power suppliers to make investments in their generation facilities and fuel-supply arrangements to operate reliably and have an opportunity to be compensated through the market.

Over nearly two decades, the ISO has made many successful market and operational enhancements to improve gas system and electric power system coordination; improve power plants’ performance; and lead generation owners to make more resilient fuel-supply arrangements across all system conditions (and, at times, working to delay the retirement of key facilities still needed for reliability). ESI is the next step forward to address energy security challenges and enable a reliable, clean-energy transition.

Read ISO New England’s 2020 Regional Electricity Outlook (REO), an annual report looking at the trends affecting New England’s power system and the innovative solutions the ISO is pursuing to ensure reliable electricity for homes and businesses as the region moves along its decarbonization journey.