In its 2019 State of the Grid Report, ISO-NE revealed that the grid’s most pressing vulnerability is energy security. The ISO cited its “inadequate fuel delivery infrastructure” as the reason electricity demand during extended winters may go unmet.
As we highlighted in last year’s version of this book, New England’s winter fuel security is an energy supply problem not a capacity shortfall problem. ISO-NE has stated that as wind and solar sources increasingly contribute to the grid’s fuel mix along with more just-in-time fuel, the supply problem that has created a winter fuel shortage could become a year-round issue for New England.
ISO-NE believes market design is the answer.
ISO-NE market redesign proposal: incentivize generators
ISO-NE’s goal with redesigning its market is to compensate resources that help the system maintain its energy inventory.
Consider natural gas generators. Currently, the economics in New England are such that natural gas generators do not keep inventory for multiple days. Rather, they offer their capacity into the day-ahead market. Why? Economics. The generators feel it’s in their best financial interest to take positions in the capacity market and reap the reward from emergency conditions as opposed to what they would earn in the energy market.
Normally, that wouldn’t be a problem. That’s how the market is currently designed, after all. But remember, New England’s winter fuel problem is supply-related. The region has plenty of capacity. It needs more supply, particularly during extremely cold conditions.
OK, says ISO-NE, let’s introduce a proposal to redesign the market on the energy side and incentivize natural gas generators to keep more inventory that can be delivered in the winter, thereby alleviating the fuel security risk.
Problem solved. Right? Well…theoretically yes. But by altering the market on the energy side to incentivize generation, ISO-NE may unwittingly affect its capacity market in a negative way.
Unintended consequences for the New England capacity market
Natural gas generators typically take large positions in the capacity market, offering at a specific price that, when accepted, tends to establish capacity’s clearing price in New England’s forward capacity market.
If natural gas is incentivized in the energy market, as ISO-NE’s market redesign proposal intends, natural gas generators may become price takers in the capacity market. They no longer would have an interest in taking a large capacity position in the market. As a result, the price of capacity could fall from year to year.
As more renewables come online and ISO-NE looks to integrate more distributed energy resources onto its grid, a depressed capacity market poses problems. ISO-NE has proposals in the works to address these concerns.
ISO-NE’s Market Proposals
In April 2019, ISO-NE introduced three ideas to build on New England’s competitive wholesale electricity structure. The goal is three-pronged:
- Strengthen generation owners’ financial incentives to undertake more robust supply arrangements.
- Reward resource’s flexibility to mitigate energy supply uncertainties that take place throughout the day.
- Efficiently allocate electricity production across multiple days from resources that have limited (non-just-in-time) energy sources.
To accomplish these goals, ISO-NE introduced three new components that are currently under review. For commercial and industrial organizations looking to optimize their demand-side energy resources, these proposals are worth keeping an eye on because they by and large affect the region’s capacity market in what ISO-NE hopes is a positive way.
The Multi-day ahead market
This would be a voluntary market for forward energy transactions extending the current (single) day-ahead market several days in advance of the operating day, with daily offers rewarded with the price at which they clear on that day.
By extending the day-ahead market to several days, ISO-NE seeks to enable suppliers to refine their energy positions (adjusting due to changes in fuel supplies, costs, and delivery capabilities) prior to the delivery day. The ISO figures it can optimize the region’s limited energy supplies and avoid scarcity pricing conditions during extreme cold weather when the region might otherwise be forced to turn to costly, out-of-market resources.
While the multi-day ahead market is supply-side in nature, it may have a demand-side impact if it succeeds in thwarting the exceptionally high energy prices that trigger a demand response event. Without high prices, a demand response event is less likely to occur.
But that’s not necessarily bad news for DR participants. Although they are less likely to be dispatched to curtail their loads, DR participants will still be required to comply with a seasonal test for which they are paid.
New Ancillary Services in the Day-Ahead Markets
Most energy resources in New England operate during hours of the day for which they receive an energy supply award in the day ahead market. But what happens when one of those cleared day-ahead resources is unable to operate?
ISO-NE calls these instances “energy gaps” in the operating plan. The resources that were incentivized to run but can’t must be replaced by resources that were not incentivized to run.
The way the region’s energy market is currently structured, it simply isn’t profitable to procure fuel in the case of an energy gap. With new ancillary services in the day-ahead market, ISO-NE hopes to remedy the situation by rewarding flexible resources that can fill the gaps when emergency conditions arise.
Exactly how these new services will be rewarded is a detail the ISO is ironing out. ISO-NE has suggested, however, that these new ancillary obligations should be settled like a call option on real-time energy.
Seasonal Forward Market
The third component ISO-NE has proposed is a voluntary forward auction with the goal of facilitating investment in the supplementary energy supply arrangement several months in advance of each season. The aim here is to ensure there is adequate energy supply in the winter.
ISO-NE has some work to do on this front and admits as much. They are exploring a revamp of the existing Forward Reserve Market so that it essentially becomes a forward market for the new ancillary services we previously discussed and may be transacted in the day-ahead market.
This post was excerpted from the 2020 State of Demand-Side Energy Management in North America, a market-by-market analysis of the issues and trends the experts at CPower feel organizations like yours need to know to make better decisions about your energy use and spend.
CPower has taken the pain out of painstaking detail, leaving a comprehensive but easy-to-understand bed of insights and ideas to help you make sense of demand-side energy’s quickly-evolving landscape.