Accommodating State Clean-Energy Goals within the Competitive Marketplace

State efforts to promote clean-energy resources and cut carbon emissions have long-term implications for the wholesale electricity marketplace’s ability to secure reliable sources of electricity for New England.

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New market mechanisms are being sought to create a bridge between reliability needs and state environmental goals

power plant retirements

State Policies Are Driving the Growth of Clean-Energy Resources

Even with low to no fuel costs, most renewable resources are still relatively expensive to build and connect to the grid, so they aren’t competitive in the wholesale marketplace.

  • Federal and New England state efforts to cut carbon emissions—by using emission limits, the mandated use of green power, and tax credits and incentives—are spurring growth in these resources. See the states’ ambitious goals for increasing renewable energy and reducing greenhouse gas emissions.
  • The New England states are also pursuing long-term contracts for clean-energy and energy-storage projects.

While these out-of-market revenues are succeeding in attracting such projects, they’re also having an impact on the traditional resource types needed to meet the region’s electricity needs, balance intermittent renewable generation, and provide the grid-stability services that renewables don’t.

The Region Is Exploring Ways to Better Accommodate State Goals

  • The ISO has proposed changes in the Forward Capacity Market (FCM) called Competitive Auctions with Sponsored Policy Resources (CASPR) to help the FCM coordinate the entry of new clean-energy resources that are receiving public financial backing with retiring existing resources (more details below).
  • As the power system’s resource mix evolves, the ISO is also pursuing other innovative market refinements to ensure appropriate compensation for resources making critical contributions to reliability, such as by providing fast response, flexible operation, and voltage and frequency support. Follow projects to improve price formation using the Wholesale Markets Project Plan webpage.
  • With its Operational Fuel-Security Analysis, the ISO has sought for the first time to measure the potential effects of fuel-related variables—including increased renewables and the retirements of existing power resources—on the region’s ability to maintain a reliable supply of electricity in future winters. The report is intended to help support a regional discussion of fuel-security risks and potential mitigation efforts.

Why Are Capacity Market Changes Necessary to Accommodate Sponsored Capacity Resources?

Because out-of-market subsidies can undermine the competitive marketplace.

Competitive markets rely on accurate prices

Markets work well when their prices reflect the costs of building and operating power-supply resources. Accurate prices are a cornerstone of competitive markets that motivate and compensate resources to make cost-effective investments. (Learn more about New England’s competitive marketplace.)

Renewables that receive public financial support may artificially drive down energy-market prices

Public policies that subsidize renewable resources can interfere with accurate pricing in the energy markets because these subsidies offset operating costs. This enables subsidized resources to sell energy for artificially low prices, putting traditional generators that New England needs for reliability at a price disadvantage.

The capacity market must help sustain needed resources

To make up lost energy-market revenue and remain financially viable, power resources needed for reliability will have to raise their offers in the long-term capacity market. It’s critical, therefore, that state-subsidized renewables don’t also suppress prices in the capacity market by bidding at artificially low prices. To ensure accurate capacity pricing, the ISO has developed capacity market rules that prevent resources from bidding below their actual costs. As a reasonable balance between these rules and state actions, the capacity market allows a limited amount of state-subsidized renewable resources to enter the market and be counted toward meeting the region’s capacity needs.

Consumers may end up “paying twice”

However, as more state-subsidized renewables come on line, that limit will begin to exclude more and more such resources from the capacity market. This means they won’t be counted toward the region’s capacity needs; other types of resources will be developed and counted instead. This is an inefficient and potentially costly outcome for electricity consumers who ultimately will fund both the resources that clear the wholesale market and count as capacity resources, as well as the excluded renewables that are subsidized through state-mandated charges on retail electricity bills.

CASPR addresses this problem by adding a “substitution auction”

CASPR, if approved by the Federal Energy Regulatory Commission, will help by adding a second auction called a substitution auction to the capacity market. In that substitution auction, new clean-energy resources with long-term state contracts or similar state support can compete to buy the capacity supply obligations held by older, higher-emitting generators. The substitution auction thereby creates a space for these resources to compete without artificially driving down prices in the main auction. By pairing entry and exit in the substitution auction, over-supply concerns are reduced, while capacity market pricing and resource adequacy in New England is maintained. Read more about the proposal in “ISO-NE files proposal to harmonize competitive markets and state-sponsored resources.”

Ensuring the capacity market can both sustain the traditional generation resources needed for reliability and accommodate more state-subsidized renewables is a conundrum with no simple solution, and the ISO will remain engaged with regional stakeholders to address the issue. Learn more about the challenge in the ISO discussion paper, The Importance of a Performance-Based Capacity Market to Ensure Reliability as the Grid Adapts to a Renewable Energy Future.

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