FERC Inaction Translates to Inequity in ISO-New England
States exercise authority over electric generation resources, and the Federal Energy Regulatory Commission (FERC) oversees wholesale electricity markets. But this is not the end of the story. As states set more ambitious clean energy goals that influence what types of generation resources are built, integrating these resources into wholesale markets has become a source of contention.
Northeast states in particular are surging ahead with climate change action by pursuing clean energy policies. And Massachusetts, a longtime leader on clean energy, recently made history when Vineyard Wind was selected for a contract to deliver 800 MW of offshore wind power to the grid. This procurement – stemming from a 2016 Massachusetts law to diversify energy sources for the Commonwealth, stabilize rates, and reduce greenhouse gas emissions – represents the largest single procurement of offshore wind by any state in the U.S.
But Vineyard Wind’s recent experience in the regional capacity market operated by the Independent System Operator for New England (ISO-NE) shows the difficulties resources procured pursuant to state policy may face. A look at how this offshore wind project was able to participate – or not – in the regional wholesale market illustrates the tension between state and federal priorities, as well as between fossil-fuel-fired generation and cleaner technologies.
Sending signals: ISO-New England’s capacity market
ISO-NE is an Independent System Operator that administers electricity markets across New England. FERC is charged with ensuring that these markets produce just and reasonable rates under the Federal Power Act. One of the markets that ISO-NE operates is a capacity market – a market to procure resources to meet projected future demand for electricity. Resources that successfully compete in this auction become obligated to supply capacity and are paid the auction price, which is based on the bid submitted by the marginal unit (the last generator that clears the auction). ISO-NE conducts an annual auction held three years in advance of the relevant planning period. Capacity markets provide additional payments to resources and can help send signals to encourage the development of new resources or keep existing resources around.
Some incumbent generators and market operators object to state clean energy preferences as unfair market distortions – even though it is a market externality, fossil fuels’ carbon costs, that prompts states to support clean energy.
Many pages have been filed in many proceedings before FERC in an effort to ensure that the market is sending the right signals. A frequent concern – one often voiced by generator owners – is that prices are too low to support new investment. Resources that receive funding outside the market, such as from a state policy to support that resource type, may be able to submit lower bids, thus increasing available capacity without increasing prices. Some incumbent generators and market operators object to state clean energy preferences (although not necessarily other out-of-market support, such as fossil fuel subsidies) as unfair market distortions – even though it is a market externality, fossil fuels’ carbon costs, that prompts states to support clean energy.
Enter the MOPR (minimum offer price rule): a market rule requiring certain new entrants to submit minimum bids that are designed to reflect their actual operating costs. Originally applied to try to address other concerns, the MOPR is being increasingly broadened. When state-supported clean energy resources subject to the MOPR do not clear the auction, the clearing price is higher – which means that customers end up paying more to procure capacity from incumbent power generators. Plus, state clean energy goals are frustrated.
CASPR: ISO-NE attempts to adapt
In response to concerns about new generation sources being unable to compete in the wholesale market, ISO-NE recently implemented market changes to incorporate a new approach: the Competitive Auctions with Sponsored Policy Resources (CASPR) project. The idea is to provide a way for new “sponsored policy resources” – defined to include resources receiving out-of-market revenue supported by a government policy and that qualify as renewable, clean, or alternative energy resources under a state law or regulation – to compete for capacity obligations while still sending price signals to incent new generation.
In the first stage of the auction (the primary auction), the MOPR applies. Renewables bidding into the auction are subject to the MOPR unless they are exempted as a “renewable technology resource” (RTR). The RTR exemption is currently capped at 200 MW per year and will be phased out entirely after three years. Resources that clear the primary auction obtain capacity supply obligations.
The second stage is a substitution auction. Existing resources that acquired a capacity supply obligation in the primary auction and want to retire submit bids to find a new resource to meet the demand. Resources that are eligible to participate as sponsored policy resources submit offers to meet this demand. The existing resources will pay the sponsored policy resources to take on the capacity supply obligation, and they will exit the market. (Or, if the substitution auction price is negative, the state-supported resource would pay the existing resource to retire.)
A divided FERC approved CASPR, with two commissioners concerned about the broad application of the MOPR to state-supported resources. Requests for rehearing of this order remain pending.
While CASPR does allow some participation of state-sponsored resources in the capacity market, it does not fully open up the market to these resources. The ability of a resource to get a capacity supply obligation in the substitution auction depends on what resources seek to retire.
The MOPR and CASPR in action
“[FERC’s] inability to act demonstrates, at best, an indifference to the Commonwealth’s clean energy policies and the customers who will pay tens of millions of dollars in higher electricity bills. At worst, it betrays a bias and resolve in favor of retaining traditional resources to the detriment of new, renewable resources, regardless of the extra costs to customers.” — Massachusetts Attorney General Maura Healey
ISO-NE recently conducted the capacity auction covering 2022-2023, which was notable not only for the debut of CASPR, but also for a dust-up over the plight of Vineyard Wind’s 800-MW offshore wind project.
The problem for Vineyard Wind originated in the ISO-NE RTR eligibility requirements, which stated (at the time) that a resource must “qualify as a renewable or alternative energy generating resource in the state in which it is geographically located.” Vineyard Wind’s project will be located in federal waters off the coast of Massachusetts. ISO-NE proposed a clarification to allow the project to qualify, which FERC accepted, but too late for Vineyard Wind to comply with certain other market rules, necessitating a waiver of those rules. Vineyard Wind submitted a waiver request to FERC on December 14, 2018, requesting Commission action by January 29, 2019, in advance of ISO-NE’s February 4, 2019 auction.
By the end of January, the Commission had accepted ISO-NE’s revisions, including those to address the federal waters issue in future auctions, but had not acted on Vineyard Wind’s waiver request. On February 1, Massachusetts Governor Charles Baker sent a letter asking FERC to grant the waiver to allow the “highly cost-effective” and “important resource of clean energy for the Commonwealth of Massachusetts” to participate in the auction.
FERC did not act on the waiver request, and Commissioners LaFleur and Glick voiced their disappointment, stating: “All parties, including New England’s states, consumers, and auction participants, deserve better.” Massachusetts Attorney General Maura Healey toldFERC that its “inability to act demonstrates, at best, an indifference to the Commonwealth’s clean energy policies and the customers who will pay tens of millions of dollars in higher electricity bills. At worst, it betrays a bias and resolve in favor of retaining traditional resources to the detriment of new, renewable resources, regardless of the extra costs to customers.”
Prices in the primary auction declined as compared to last year’s auction, but they could have been even lower had Vineyard Wind participated in the primary auction.
Without the waiver, Vineyard Wind was not able to participate fully in the auction as it was subject to the MOPR (rather than being permitted to submit a lower – potentially zero – bid under the RTR exemption). It did receive a 54-MW capacity obligation in the CASPR substitution auction from an existing resource that will retire. The clearing price in the substitution auction was $0/kW-month, so the retiring resource retained the money it received in the primary auction, and Vineyard Wind was not paid.
Prices in the primary auction declined as compared to last year’s auction, but they could have been even lower had Vineyard Wind participated in the primary auction. This would-have-been boon to ratepayers was quantified by the New England Power Generators Association as a savings (or, as the Association put it, “impact (harm) to all capacity suppliers”) of $0.667/kW-month or $270,000,000.
In addition to raising consumer costs, FERC’s failure to act on Vineyard Wind’s requested waiver injected unnecessary uncertainty into the capacity auction, as parties submitted down-to-the-wire filings to urge FERC to act. Unable to get its requested relief in order to use the RTR exemption, Vineyard Wind has asked FERC to rerun the auction, a remedy that FERC has previously been reluctant to order in other cases (out of concern for undermining market certainty).
Renewables as a goal not a nuisance
Vineyard Wind’s plight demonstrates the struggles of FERC and the ISOs to incorporate resources procured pursuant to state policies into mandatory capacity markets. In addition to ISO-NE, PJM Interconnection (PJM) and New York ISO (NYISO) also have mandatory capacity markets and are taking different approaches on these issues. PJM has its own problematic proposal pending at FERC that would, among other things, pay fossil fuel generators even if they do not clear the capacity market. In contrast, NYISO is working on a carbon pricing proposal in conjunction with the New York State Department of Public Service that would aim to account for some of the externalities of fossil-fuel-fired generation.
Renewables and clean energy technologies are increasing in importance in many states that are taking action against climate change, and to the consumers served by these markets. And ISO-NE’s own study has shown the value of offshore wind to the region during extreme winter weather events. FERC and the ISOs should be focusing on how these important, state-desired resources can meaningfully participate in capacity markets, rather than creating barriers that fail to acknowledge market externalities and needlessly increase customer costs.