ISO New England on Jan. 8 filed a proposal with the Federal Energy Regulatory Commission that it said is aimed at accommodating the entry of “new sponsored policy resources” into ISO-NE’s Forward Capacity Market, or FCM, while also maintaining competitively-based capacity prices.
This is the ISO-NE’s attempt to allow for state-sponsored policy resources in light of the growing effort by New England states to procure renewable resources, most notably, a 2016 Massachusetts law providing for the procurement of 2,800 MW of renewable energy.
ISO-NE noted that the NEPOOL participants committee did not vote in favor of the proposal, with a vote of 57.5% supporting, with only 2.85 percent of the end user sector and zero percent of publicly owned entities supporting the proposal.
“Over the past decade, the New England states have sought to reduce greenhouse gas emissions and meet climate goals through various mechanisms outside of region’s competitive wholesale markets, including mandates that state-regulated utilities enter into long-term contracts with renewable resource developers,” the grid operator noted in a news release related to the filing. It noted that in recent years, these efforts have accelerated.
ISO-NE said that these actions have consequences for the FCM -- specifically, resources that reflect their out-of-market contract revenue in their FCM offers can depress market prices for many years, “thereby altering the market’s ability to attract new, competitively-compensated resources and – if competitive new entry does occur – potentially raising its cost substantially,” ISO-NE said.
In order to address these issues, the current FCM rules subject new capacity resources to a Minimum Offer Price Rule, or MOPR, which requires these sponsored assets to bid into FCM at their unsubsidized cost.
The result, ISO-NE said, is that the MOPR precludes many of these resources from obtaining capacity supply obligations in the annual forward capacity auctions.
“The exclusion of these resources from FCM can lead to over-building of the system, where consumers pay both for these out-of-market policy resources and the capacity procured through FCM,” the grid operator said.
It noted that a few years ago, in response to this problem, the region adopted a renewable technology resource exemption, which allows up to 200 megawatts of renewable energy policy resources to bid into the FCM without the application of the MOPR. The ISO’s new proposal is intended to replace the renewable technology resource exemption, and improve on it by better protecting FCM prices, ISO-NE said.
Details of the proposal
Under the Competitive Auctions with Sponsored Policy Resources (CASPR) proposal filed at FERC, the capacity auction would occur in two stages, with the first stage (primary auction) clearing under current rules, with new resources subject to the existing MOPR and sloped zonal demand curves.
Cleared resources receive capacity supply obligations, or CSOs, while existing resources that submit priced retirement bids below the FCA clearing price are awarded CSOs.
The second stage, known as the substitution auction, would immediately follow the primary auction, in which capacity resources that retained CSOs in the primary auction and are willing to retire and exit the markets permanently may transfer their CSOs -- in their entirety -- to sponsored policy resources that did not clear the primary auction, and are willing to sell capacity in the second stage. A resource may offer to retire in the substitution auction even if it did not originally submit a retirement bid in the primary auction.
The cleared retiring resources offer amounts they are willing to pay a supplier to take on their CSO.
These offered payments form the demand curve, and the sell offers from the uncleared policy resources form the supply curve, which are now not subject to a MOPR.
Because of the MOPR operating in the first round and not the second, the expectation is that the retiring resource will receive a higher price for obtaining a CSO than they pay to transfer it, resulting in a net gain or a one-time severance payment to the retiring resource.
It is also possible that the two curves do not intersect, i.e. that the amount CSOs are willing to pay is below what the suppliers are asking as a price, and in those cases, the retiring resource receives a side payment, covered by load.
Only sponsored policy resources may participate in the substitution auction, which are narrowly defined as, “A new capacity resource that receives an out-of-market revenue source supported by a government-regulated rate, charge or other regulated cost recovery mechanism, and; qualifies as a renewable, clean or alternative energy resource under a renewable energy portfolio standard, clean energy standard, alternative energy portfolio standard, renewable energy goal, or clean energy goal enacted (either by statute or regulation) in the New England state from which the resource receives the out-of-market revenue source and that is in effect on January 1, 2018.” This definition does not include public power self-supply.
States argued for retention of renewable technology resource exemption
In its filing, ISO-NE noted that some of the New England states have argued for the preservation of the renewable technology resource exemption, either with or without CASPR, “because they want a guarantee that some amount of sponsored renewable resources will obtain CSOs each year.”
But the grid operator said that “such guarantees are antithetical to competitive markets; instead, CASPR is a market-based mechanism that will accommodate state entry over time, to the extent FCM can accommodate sponsored resources without suppressing competitively-based capacity prices.”
At the same time, ISO-NE said it “understands that the states have valid concerns about consumers paying for excess capacity. Accordingly, as with other markets, ISO-NE will assess the performance of CASPR.”
Should CASPR not achieve its intended purpose of accommodating state entry over time, “ISO-NE commits to working with stakeholders to refine or replace it,” the grid operator told FERC.
ISO-NE said that while the renewable technology resource exemption and substitution auction can coexist from an implementation standpoint, the continued presence of the renewable technology resource exemption “would wholly undermine the efficacy of the substitution auction.”
The grid operator argued that given the choice, sponsored new resources “would never use the substitution auction (where they would typically receive a lower first-year capacity price) if the RTR exemption (with its higher primary auction price) is available to them instead.”
But ISO-NE said it also “recognizes that abrupt changes to existing market rules can have adverse impacts on investments that are already underway.”
In order to minimize such adverse effects, it has agreed to phase out the exemption by allowing accrued exempt megawatts (currently 514 MW) to be used through Forward Capacity Auction 15, to be conducted in 2021.
ISO-NE is proposing for most of the rule changes to take effect in the 13th capacity auction, to be held in February 2019, which requires the tariff changes to take effect on March 9 of this year.
Comments are due by January 29 at the commission.