ISO-NE finalizes study analyzing potential market designs for the future grid

ISO New England today finalized the Pathways Study: Evaluation of Pathways to a Future Grid, a report prepared by Analysis Group looking at the ability of different market design frameworks to meet regional decarbonization goals.

In early 2021, the ISO’s Board of Directors directed the ISO management team to pursue an analysis to assess policy and market frameworks that could help in the evolution of the regional power grid. The ISO retained Analysis Group to conduct the study, which is part of a broader initiative to assist the region’s transition to a future grid that is efficient, clean, and reliable.

Analysis Group worked with ISO staff, the New England states, and regional stakeholders to develop assumptions and scenarios before exercising its independent judgment in carrying out the modeling work and the production of study results.

The analysis focused on four “paths”:

• Status Quo: a continuation of current unilateral state policies that incentivize the development of clean energy resources using long-term contracts
• Forward Clean Energy Market (FCEM): a centralized, forward market that compensates non-emitting resources
• Net Carbon Pricing (NCP): pricing carbon emissions from generators and returning the carbon price revenues from emitting resources to electricity consumers; and
• A Hybrid Approach: a combination of a carbon price with an FCEM that provides compensation only to new clean energy resources

The analysis focused on the tradeoffs in economic and regulatory considerations between each of these approaches, accounting for the particular circumstances of New England’s electricity grid, the multi-state region it covers, and the region’s natural resources.

Key takeaways

Analysis Group determined that all four policy approaches are capable of achieving substantial levels of decarbonization, albeit with different trade-offs. In addition, each of the approaches differs in the level of coordination needed among the six New England states, as well as in the level of complexity in implementation.

Coordination required

The status quo approach, since it relies upon individual states or groups of states handling procurement themselves, requires the least amount of regional coordination. An FCEM would require a moderate level of coordination, while NCP and a hybrid approach would require a moderate to high level, according to the analysis.

Total social costs

The analysis estimates the social costs of achieving decarbonization goals, accounting for capital, fixed, fuel, and other variable costs of developing and operating a decarbonized New England grid.

Analysis Group found that NCP met the decarbonization goals with the lowest social costs between 2021 and 2040. Total social costs under the FCEM were 9% higher than NCP, while the social costs under the hybrid approach were 5% higher, according to the analysis. The status quo approach led to 40% higher social costs by 2040.

Incentives for energy storage

Negative pricing in the energy market occurs often in the status quo, FCEM, and hybrid approaches, though less frequently in the hybrid. These negative prices, which occur when generators pay to operate so they can satisfy power purchase agreement requirements or earn clean energy certificates, can create a situation in which energy storage resources are used inefficiently.

Referred to in the study as churning, energy storage resources could be incentivized to consume otherwise-curtailed variable renewable energy and earn net revenues through energy losses. In effect, with negative prices, the battery is paid to consume energy and then pays to discharge that energy. Due to energy losses in the storage process, the resource is paying to sell back less electricity than it was paid to absorb, thus earning a profit.

While this is a profitable endeavor for the storage resource, it does not provide any societal benefit, as the process does not displace any emitting resources and can lead to degradation of the battery itself over time.

Incentives for reductions in carbon intensity

NCP and, to a lesser degree, the hybrid approach provide incentives for emitting resources to reduce their carbon intensity. The FCEM and status quo do not provide these same incentives.

Factors differentiating pathways

The below table, an abridged version of the one appearing on pages ES-3 and ES-4 of the Pathways Study, further breaks down the key factors differentiating the decarbonization policy approaches.

Policy Factor	Status Quo	FCEM	Net Carbon Pricing	Hybrid Approach
Cost Allocation Flexibility	Low	High	Moderate	Moderate/High
Cost-effective CO2 Emission Reduction	Low	Moderate/High	High	Moderate/High
Incentives for Reductions in Carbon Intensity	No	No	Yes (efficient)	Yes (less than efficient)
Cost-effective Incentives for Clean Energy Investment	N/A	Partial	Yes	Yes
Transparent Price Signals	No	No	Yes	Yes
Creates Potential Distortions in Market Offers	Yes	No	No	No
Negative Pricing	Yes	Yes	No	Yes (less frequently than Status Quo and FCEM)
Price Discrimination	Yes	No	No	Yes

Next steps

The Pathways Study provides the region with significant data and analysis to evaluate four approaches to meet the New England states’ aggressive climate and clean energy goals. With this critical information in hand, the region can seek consensus on a path forward.

ISO New England, the New England states, and the New England Power Pool (NEPOOL) will continue conversations about the pros and cons of these different approaches, with the shared goal of setting the region on a long-term path toward a reliable, clean energy future. The objective over the coming months will be to determine if there is consensus on a desired path—and, if so, to then address legal and jurisdictional issues not addressed by the study, as well as market design requirements.