How New England plans to keep the lights on this winter

Thursday, October 10, 2013

Concerns over the reliability of New England's electricity grid this coming winter have led the regional grid operator to develop a new program designed to ensure sufficient energy is available. While natural gas remains the dominant cost-effective fuel for electric generation in New England, grid operator ISO New England expressed concern over its ability to ensure a reliable supply of electricity in the event of a natural gas shortage or supply disruption. As a result, the grid operator launched a so-called Winter Reliability Program to compensate oil-fired generators, dual-fuel generators, and demand response resources for their promise to stand ready to serve if needed.  Is the program necessary?  If so, will it prove sufficient to protect consumers against power outages and high prices?

ISO New England's Winter Reliability Program plan was designed to address the reliability risks arising from constraints on the interstate pipeline system's ability to meet demands for natural gas deliveries into New England, increased reliance on natural gas-fired generation, and generating resource performance during periods of stressed system conditions.  While regional stakeholders are developing a longer-term fix for these risks, last winter highlighted the urgency of the problem, as natural gas pipelines supplying fuel to New England reached full capacity through the winter season, leaving natural gas more expensive and less available than it should be.

As a short-term solution, through its Winter Reliability Program, ISO New England will procure up to 2.4 million megawatt-hours of energy for the coming winter, from a combination of oil-fired generators, dual-fuel generators, and demand response assets.  In exchange for their commitment to provide power when called upon, the selected generators and demand response assets will receive payments regardless of whether they are actually needed this winter.

This program was conditionally accepted by the Federal Energy Regulatory Commission last month, after which the grid operator held its competitive bidding process. When the bidding settled, ISO New England had failed to procure commitments to provide as much energy as it had sought.  According to a FERC order accepting the bid results, market participants submitted bids totaling 2.29 million MWh, or 96 percent of the target, at a total offer price of $114.3 million.  ISO New England proposed to trim the offered supply farther, accepting bids from 20 participants for just 1.995 million MWh, or 83.1 percent of the target, for a total price of $78.8 million.

How did ISO New England reach this result?  According to the grid operator's filing to the FERC, the selected bids are all less than $31 per MWh-month.  ISO New England says that beyond this point, the supply curve became steeper, and the grid operator wanted to balance fuel security for the region against the costs to consumers.  But as the FERC found, ISO New England did not adequately explain its selection process, nor did it sufficiently describe why it cut off supply bids at $31 per MWh-month.  As a result, the FERC directed the grid operator to submit a compliance filing within 15 days describing its process in more detail.

Once ISO New England submits its compliance filing, we will have better insight into the selection process.  Further questions, such as whether the program will prove necessary or effective, cannot be answered until the winter season hits New England.  Will ISO New England's Winter Reliability Program yield consumers value in excess of its $78.8 million cost?

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