ISO-NE Winter Reliability Program 2015 by the numbers

The operator of New England's electric grid is running a special Winter Reliability Program to address fuel security and power system reliability concerns, relating largely to natural gas pipeline constraints.  A December 2015 presentation by ISO New England, Inc.'s CEO provides initial cost and participation data on this winter's program.

More than 45% — about 13,650 MW—of the total generating capacity in New England uses natural gas as its primary fuel.  Out of this gas-fired capacity, ISO-NE's Winter Outlook has identified 4,220 MW of natural gas-fired generation at risk of not being able to get fuel when needed due to constraints on interstate natural gas pipelines.

As in 2013 and 2014, in 2015 ISO-NE again proposed a Winter Reliability Program to address concerns over reliability.  The 2015-2016 program includes 4 main components: oil, LNG, demand response, and dual-fuel commissioning.  According to a December 2015 presentation to the NEPOOL Participants Committee, program participation and expected cost exposure breaks down as follows:

Oil Program

• 81 units submitted intent to provide 4.464 million barrels
• Total eligible oil is anticipated to be 2.965 million barrels
• Total oil program cost exposure is anticipated to be $38.25M (@$12.90/barrel

LNG Program

• 8 units submitted intent to provide at least 1.42 million MMBTU
• Total eligible LNG is 1.278 million MMBTU
• Total LNG program cost exposure is anticipated to be $2.75M (@$2.15/MMBTU

Demand Response Program

• 7 assets submitted an intent to participate; 6 accepted by ISO-NE, to provide at least 26.5 MW of interruption capability
• Total DR program cost exposure is anticipated to be $132K

Dual-fuel Commissioning Program

•  6 units submitted intent to commission Dual Fuel Capability
• 4 units for 2014/15 (1,039 MW)
• 2 units for 2015/16 (735 MW)
• Total additional winter seasonal claimed capability represented: 1,774 MW

ISO-NE will release additional information on actual 2015/2016 Winter Reliability Program operations and costs over the winter period.

ISO New England's Winter Reliability Program 2014-2015

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.

Winter is coming.

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

How New England plans to keep the lights on this winter

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?