By Rich Heidorn Jr. and Michael Kuser

WASHINGTON — RTO capacity markets are in serious danger from state renewable procurements and subsidies for nuclear plants, speakers told FERC on Monday.

Jeffrey W. Bentz, director of analysis for the New England States Committee on Electricity, said failing to coordinate ISO-NE’s capacity market with state renewable procurements will lead to oversupply and excessive costs to ratepayers in the region.

“Maybe that’s not in the next three to five years,” he said on the first day of a two-day technical conference on the impact of state electricity policies on ISO-NE, NYISO and PJM. “But down the road, clearly we can see that train wreck coming and it would probably be the end of the markets as we know them today.”

New Hampshire Public Utilities Commissioner Robert R. Scott also had a warning: “It is not possible to fully preserve the benefits of competition … with a market design that seeks to replace low-cost resources with resources that cost more,” he said in his written testimony.

FERC scheduled the conference out of concern that the RTO/ISO energy and capacity markets could lose relevance — or have their pricing signals undermined — because of state plans to procure out-of-market renewable power and prop up nuclear generators (AD17-11).

The conferees discussed the grid operators’ efforts to address state-market conflicts, including white papers by PJM, and the New England Power Pool’s Integrating Markets and Public Policy (IMAPP). The conference also came as FERC has pending before it challenges to zero-emission credits for nuclear generators in New York and Illinois.

FERC staff indicated the high stakes posed by increasing tensions between state policies and RTO/ISO resource adequacy efforts, asking witnesses to consider whether there will be “a diminished role for the RTO/ISO.”

Taking Matters into Their Own Hands

During the hearing, some state officials said they had taken power procurement into their own hands because the capacity markets haven’t delivered the types of resources they desire.

Among the problems: the lack of a price on carbon emissions and no recognition of the value of fuel diversity.

“The market was only delivering one product: natural gas [generation],” said Robert Klee, the commissioner of the Connecticut Department of Energy and Environmental Protection, who said the dependence on gas caused reliability concerns during the winter peaks, when generators must compete for fuel with heating customers. “We’ve been pretty lucky to have mild winters the last few years. We don’t want to go back to the polar vortex.”

Klee said difficulties getting additional gas pipelines to supply the region’s generators had heightened state officials’ concerns.

Still, he suggested state procurements likely won’t provide all of the new power supplies needed for New England states planning to electrify transportation and building heating. “That’s a lot of growth,” he said.

Angela M. O’Connor, chair of the Massachusetts Department of Public Utilities, said the markets “have provided tremendous benefits” and that the capacity market has produced new generation to maintain reliability.

“But we are at a crossroads, and what the legislature requires us to do, we have to do,” she said, referring to mandates to reduce greenhouse gas emissions by 80% below 1990 levels by 2050, and procure hydropower and offshore wind.

“The wholesale markets [are] … not going to get us our large-scale hydro or the offshore wind — or, frankly, gas pipelines.”

Susanne DesRoches, deputy director of infrastructure policy for New York City, agreed. “We support the wholesale markets, but we see that innovation is needed,” she said.

Scott Weiner, deputy for markets and innovation at the New York State Department of Public Service, said the state is at an “inflection point.”

“Is there a role for the markets? Absolutely. Is it going to change? Probably. … The energy markets will always be there. The capacity market may not be.”

Seth Kaplan, senior manager of regional government affairs for EDP Renewables, said the markets were constructed with gas turbines in mind at a time when renewables had little market share. Given the changes since then, he said, “it’s not surprising that a square peg doesn’t fit into a round hole.”

Grid Operators Respond

Matt White, chief economist for ISO-NE, insisted the RTO had no intention of relinquishing its role as the guarantor of resource adequacy standards.

“We believe that resource adequacy requires a single point of responsibility and accountability. ISO-NE currently bears this responsibility. Another option is for the states to take on this role through local utilities; to date, however, the New England states have not expressed interest in assuming this role,” the RTO said in its written testimony.

NYISO CEO Brad Jones said that while the ISO supports New York’s ZECs, the program needs to be incorporated into the market. He said it could take three years to work out a solution.

Generators’ Concerns

That was too long for witnesses representing independent power producers.

“The challenge before the commission, the states and all other stakeholders is no less than the question of whether the power industry will continue to use competitive markets as the basis for investment decision-making,” Peter Fuller, vice president of market and regulatory affairs for NRG Energy, said in his written testimony.

In his response to questions, Fuller was a bit more optimistic: “We believe the markets can be adapted to give the states what they need … and figure out a way for those resources to have their role in the markets while not undermining the markets for those of us who have invested strictly on the basis of market revenues.

“I don’t think we’re are the tipping point yet,” Fuller said. “But if we don’t move fairly quickly [to] … ensure that markets can actually support the … renewable-based future … then we could very well tip over.”

John Reese, senior vice president of Eastern Generation, said the issue is particularly acute in NYISO, which has a one-year forward capacity auction, unlike the three-year auctions in PJM and ISO-NE. Eastern Generation operates almost 5,000 MW of generation in NYISO and PJM, including 18% of New York City’s capacity.

“I can’t wait for seven years or eight years for this to work out,” he said. “Regardless of which model we end up with, we need to be sending investment signals now!”

Déjà vu

John Shelk, CEO of the Electric Power Supply Association, lamented that policymakers had not accomplished more since FERC’s September 2013 technical conference on the Eastern capacity markets. (See Capacity Market Attracts Praise, Criticism at FERC.)

“The one area of agreement is exactly the place that we’re headed to that everyone said four years ago, ‘Don’t go there,’ which was tranches: ‘Let’s pick X amount of nuclear, X amount of coal, X amount of gas.’ Now it’s worse. Now we’re not just picking fuels, we’re picking specific [generating] units that otherwise would have exited.

“This may have started in New York last year … but in short order it was adopted in my home state of Illinois and as everybody knows, it’s now being actively considered in Ohio, Pennsylvania and New Jersey and Connecticut. So this isn’t just a threat to the market in New York.” (See related story, PJM Stakeholders Offer Vastly Different Takes on Markets’ Viability.)

Without changes, Shelk said, his members may have to seek state approval of “flexible energy credits” to support generators that provide the ramping needed to support variable resources.

New York regulator Weiner also called for urgency. “We’ll be having this same discussion two years from now unless there’s a recognition that things have changed,” he said.

LaFleur: FERC Will Act

In opening remarks Monday, acting FERC Chair Cheryl LaFleur acknowledged, “I’m very well aware that the wholesale markets … only can exist and continue through the buy-in of the states.

“I have said very many times there are three ways this could go: a designed market solution, a litigated outcome or a planned change in the regulatory construct of how we handle resource adequacy. The fourth outcome — an unplanned change in the regulatory construct, or unplanned and piecemeal regulation — is one that I think we should avoid because I think it would be a bad outcome for customers and market participants.

“Once we restore our quorum, this commission will almost certainly have to decide litigated complaints that are already pending before us, even as regions may be working on market solutions to file with us,” she continued. “While we can’t decide anything immediately because we lack a quorum, we must shape options and recommendations for a FERC 2.0 based on the record we develop today and tomorrow.”

[Editor’s Note: RTO Insider will have full coverage of the technical conference later this week and in the May 9 newsletter.]