By Michael Kuser

CARROLL, N.H. — New England regulators and market participants expressed optimism last week that they will find a way for wholesale markets to coexist with state energy policies, warning of dire consequences if they fail.

In a discussion Monday at the 70th Annual Symposium of the New England Conference of Public Utilities Commissioners (NECPUC), panelists discussed the proposals that have arisen from the New England Power Pool’s Integrating Markets and Public Policy Process (IMAPP).

Angela O’Connor, chair of the Massachusetts Department of Public Utilities, said IMAPP has been successful, although it has not yet resulted in a solution. At the FERC technical conference in May, she said, “New England appeared well ahead of other parts of the country in looking at solutions and trying to understand each other’s priorities.”

New England states are set to procure more than 3,600 MW of nameplate renewable generation, including Massachusetts’ requirement that its electric distribution companies solicit long-term contracts for approximately 1,200 MW of clean energy generation and 1,600 MW of offshore wind.

“The bottom line is, if New England does not find a way to harmonize markets and the requirements of state laws, it creates the risk that consumers will have to pay twice for resources — once through the regional markets, and again as the result of the requirements of the state laws,” O’Connor said. “For those who go to work every day thinking about consumers, that outcome is absolutely unacceptable and would most likely lead to the end of the competitive markets as we know them today.”

Tom Kaslow, chair of NEPOOL’s Participants Committee, said “collaboration is the cornerstone” of the power pool, adding that he hoped New England would develop a solution rather than leaving it “to be solved by the courts.”

“We are all in this together,” he said during lunch remarks Tuesday. “We either make this market work together or we don’t succeed.”

Although it is the Participants Committee that will ultimately determine whether to support proposals brought before it, Kaslow stressed his personal commitment to the regional efforts. “I will not accept failure, at least during my tenure as chair.”

In the ‘Urgent’ Camp

ISO-NE CEO Gordon van Welie said the RTO is working overtime on the issue in order to reach agreement on a proposal that could be submitted to FERC in time for the February 2019 capacity auction.

“We definitely put ourselves in the ‘urgent’ camp,” he said. “These contracts that the states are intending to sign are probably going to happen during the next 12 months or so. In 2018, we expect resources that are winning these [requests for proposals] are going to want to enter the capacity market in the following cycle. And the qualification process for that 2019 auction will commence in 2018. And so we ideally would like to have a rule set that can deal with that prior to the start of qualification in 2018.”

Because of the RTO’s minimum offer price rule (MOPR), resources receiving a power purchase agreement may have their prices reset to a higher level in the capacity auction, with the result that they likely would not clear. “And so that has an unfortunate consequence if the states are going to go ahead and contract for these resources anyway, which is you ultimately end up overbuilding the system,” van Welie said.

But allowing subsidized resources to participate in the auction without mitigation would drive capacity prices down, he said.

“I often get a lot of eye-rolling back at the ISO when I go back to the market design people and say we need a design that will make six states happy [along with] 460 market participants and it needs to be approved by the FERC,” van Welie said. “If we did nothing and we just rely on the status quo to exist, I think we’d end up creating investor uncertainty in the market because of the litigation that will result,” he continued. “It’s a very fragile premise, an investment incentive, and it can unwind extremely quickly. So we believe it is important for us to have a solution in place that will give the marketplace confidence that we can deal with this.”

Two Leading Proposals

The NECPUC panel focused on the same two proposals that were highlighted at the FERC technical conference. (See ISO-NE Two-Tier Auction Proposal Gets FERC Airing.)

The Competitive Auctions with Subsidized Policy Resources (CASPR) proposal, developed by the RTO and Market Monitor David Patton, would provide financial incentives for existing, high-cost capacity resources to transfer their capacity obligations to subsidized new resources and permanently exit the capacity market. It would involve a two-stage, two-settlement process with a substitution auction occurring immediately after the primary auction.

The plan would “accommodate the subsidized resources into the capacity market over time and also preserve competitive capacity pricing for unsubsidized resources,” van Welie said. “The key idea here is to coordinate the entry of subsidized capacity resources with the exit of unsubsidized resources … over time.”

A second proposal, a “Dynamic Clean Energy Market” backed by the Conservation Law Foundation, NextEra Energy Resources and Brookfield Renewable, would use forward capacity auctions to procure clean energy attributes unbundled from energy. Charles River Associates consultant Robert Stoddard briefed NECPUC on the proposal, which he helped design.

ISO-NE says CASPR falls into the “accommodation” category as a project that can be implemented relatively quickly. The Clean Energy Market is an “achieve” proposal that attempts to incorporate state policy into wholesale markets; it will take more time to evaluate to determine how it would work with the Forward Capacity Market and the MOPR, the RTO says.

‘Intriguing’ Proposals

“Both proposals are intriguing,” O’Connor said. “You’ll not be surprised that I have more questions than answers at this point.”

O’Connor said she was concerned that the RTO’s proposal would eliminate the annual 200-MW MOPR exemption for renewable resources. She noted the exemption has been supported by the six New England states and the RTO and approved by FERC despite opposition by some conventional generators. “I do question the notion of eliminating the one mechanism that gives me the certainty I need,” she said. “That said … CASPR has some tremendous advantages. We all know there are tradeoffs in these sorts of discussions.”

She suggested combining CASPR and the exemption might “increase the likelihood that CASPR will actually meet its objectives and really give the states the certainty … that we’re going to need.”

O’Connor also said she liked that the Clean Energy Market proposal “seeks to be mindful of the fact that states are responsible for executing their state laws.”

“The CLF, NextEra and Brookfield proposal, like many of the longer-term ‘achieve-style’ proposals are complex and raise questions for states about authority and other matters. They also require a significant investment of time and money to develop and implement.”

She said the New England States Committee on Electricity (NESCOE) is conducting analyses of the proposals, which will be released this fall.

IMAPP Chair William Fowler, president of Sigma Consultants, told NECPUC that 100 to 150 people attended each of the nine IMAPP meetings thus far. He said the next meeting of the group will be in September.

Stoddard and Mark Vannoy, chair of the Maine Public Utilities Commission, said integrated resource planning has moved from public utility commissions to legislatures.

“When legislators say now we want some biomass, or now we want some Massachusetts solar, they’re really getting back into integrated resource planning, so there’s tension about economic efficiency and other priorities,” Stoddard said.

Maine’s Concerns

“That’s the reality of the political economy in which we live,” agreed Vannoy. “There’s this insatiable appetite and I don’t expect that to change at the legislatures. The technology will change, but the desire to direct outcomes is not going to change. When we come to a multistate RTO, that’s where it becomes difficult because we have multiple states looking at a whole new set of complexities.”

The use of tailored mitigation strategies has been only partially successful in preventing the socialization of other states’ public policy decisions, Vannoy said. “It’s not an effective long-term approach … because it doesn’t provide regulatory certainty for market participants.”

Vannoy also expressed concern about the CLF proposal, saying incorporating incentives for clean energy into the RTO Tariff “might be a jurisdictional bridge too far.”

Environmental legislation in New England is often the result of compromises between policy goals of reducing greenhouse gasses and economic goals of creating and retaining jobs, he noted.

For example, Maine legislators last year approved spending $13.4 million in taxpayer funds to supplement the price that in-state biomass generators get from selling their power in the wholesale market, a subsidy projected to save almost 300 jobs. The legislation was coupled with the idea of “keeping people cutting wood, and is being judged on the basis of an economic result, while Vermont Tier II [distributed renewable generation] talks about connecting generation facilities of 5 MW or less to sub-transmission or distribution systems.”

Noting that Maine is the only New England state whose manufacturing load is greater than its residential demand, Vannoy said a carbon adder would make the state less competitive than other regions. Owners of large manufacturing operations such as Bath Iron Works and Texas Instruments have complained about the state’s high rates. Any rate increase would raise the risk of manufacturers of moving their operations to a Southern or Western state with cheaper power and higher carbon intensity, he said. “You’re not going to solve the carbon issue by shifting [manufacturing] to other parts of the country.”

Fuel Security

Van Welie also addressed concerns over fuel security, acknowledging that the CASPR proposal could accelerate the retirement of 6,000 MW of older, at-risk steam generators. The RTO needs about 22,000 MW to meet its winter peak, but its dependence on gas-fired generation is limited by pipeline constraints.

“When you look at what’s actually running those winter days, it’s a lot of oil, and historically we’ve had a lot of coal we used to use for winter reliability,” he said. “And so that begs the question: Where’s the energy going to come from in the future to maintain reliability in the winter?”

Van Welie said the RTO is seeking to quantify the risk through analyses that model what the system will look like in 2025 under sensitivities that consider higher and lower levels of retirements, LNG imports and renewables. (See Study: New Resources Could ‘Crowd Out’ Old in ISO-NE.)

Van Welie noted that the RTO’s out-of-market winter reliability program will end in winter 2017/18, with the region relying on its Pay-for-Performance initiative in the future.

“The question is, will the Pay-for-Performance mechanism, together with the stop-loss provisions inherent in that mechanism, be sufficient to drive the level of forward fuel arrangements that we require to get through winter with the pipeline constraints?”