Keeping the lights on is what electric grid operators do around the clock – but challenges in New England are leading its grid operator to prepare for a winter when the availability of affordable electricity may be challenged. In preparation, ISO New England, Inc. has received federal approval for a new Winter Reliability Program for the 2014-2015 winter season.
ISO New England is the federally-designated regional transmission organization for almost all of New England. In this role, it is responsible for planning and operating electricity markets to balance supply and demand in real time.
The grid operator first turned to a Winter Reliability Program in 2013. ISO New England projected that a limited supply of natural gas and the retirements of several major generating plants would lead to a shortage of about 2 million megawatt-hours of energy during the winter months. To insure against this gap, the grid operator held a competitive process to procure up to 2.4 million megawatt-hours of energy for the winter season, 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 received payments regardless of whether they were actually needed.
In ISO-NE's eyes, the 2013-2014 Winter Reliability Program proved essential in maintaining reliability during the “polar vortex” and other unusually cold conditions. After adjusting for resource unavailability, the final cost of the 2013/2014 program was approximately $66 million, which came in below the original estimates of about $75 million.
While last year’s program was intended to be a one-time solution to bridge a reliability gap, this summer ISO-NE and regional stakeholder body NEPOOL identified additional challenges for the coming winter. Specifically, more severe pipeline constraints, difficulty replenishing oil inventories, and large-scale generator retirements continue to threaten the coming winter's reliability and expose consumers to the risk of price spikes.
As a result, ISO-NE asked the Federal Energy Regulatory Commission to approve another program to mitigate reliability concerns for the 2014-2015 winter. The new program, which the FERC accepted last month, combines features of last year’s program with further modifications. For example, the new demand-response component is much the same as in last year’s program, while permanent rules related to auditing dual-fuel generators and the partial elimination of higher-cost fuel requirements are based on similar features in last winter’s program.
On the other hand, the new program has been modified as a result of several market changes that will be in effect prior to winter 2014/2015 as well as the FERC's clarification of what generators must do to procure adequate fuel for their expected run times. The new program also adds a liquefied natural gas (LNG) component to improve fuel neutrality, and changes the basis for compensation from upfront inventory to actual unused inventory at the end of the winter. While participants in last year's program were paid on an as-bid basis, the new program provides compensation for the fuel inventory and demand response programs based on a set rate of $18 per barrel. This $18 price is designed to represent the carrying costs, price risk, availability cost and liquidity risk of the last resource needed to meet a cumulative inventory of 3.5 million barrels of oil.
The program also includes incentives for commissioning duel-fuel capacity: the ability to run on either oil or gas. Generators that have not operated on oil since at least December 1, 2011, and that demonstrate a plan for commissioning, or recommissioning a mothballed dual-fuel unit, by December 1, 2016, will be eligible for compensation to offset some of the associated costs.
The new program is moving forward. On September 9, 2014, the FERC issued an order accepting the region’s proposed 2014/2015 Winter Reliability Program. In the order, FERC requires ISO-NE to initiate a stakeholder process by January 1, 2015, to develop a proposal to address reliability concerns for the 2015/2016 winter and future winters, as necessary, to schedule meetings and submit progress reports, and to include certain analysis and recommendations in its Annual Markets Report.
For the proposed 2014/2015 program, the Analysis Group estimated costs for the separate components: the maximum cost of the demand response component would be about $2.4 million; the cost of the unused oil inventory and LNG contract volume components would be based on how much fuel remains unused, and assuming, at the high end, that 100% of the targeted amount of fuel is unused, the estimated cost would be $82.6 million; and the maximum cost for the dual-fuel commissioning program is estimated to be $12.9 million for units that commission by December 1, 2015. The dual-fuel auditing provisions are estimated to cost a maximum, annually, of $7 million.
Consistent with the Commission’s order on the first winter program, the costs will be allocated to real-time load obligation, which is paid by load-serving entities, rather than to regional network load, which is paid by transmission owners.
Requests to Participate in the Oil Program, LNG Program, or Demand Response Program were due to ISO New England Customer Service by October 1, 2014. Dual Fuel Commissioning Requests are due by December 1, 2014