The Federal Energy Regulatory Commission (“FERC”) recently published two orders that approved capacity and reliability measures for the Independent System Operator New England Inc. (“ISO-NE”) and the New York Independent System Operator (“NYISO”). In contrast to its approval of NYISO’s measures as promoting transparent pricing and appropriate market signals for reserves, FERC approved ISO-NE’s out-of-market winter measures but urged that they be modified further to more closely resemble the market and market-based results. These contrasting orders reflect continued challenges in the Northeast to meet capacity and reliability needs and FERC’s emphasis on increased pricing transparency to spur the investment required to meet these needs.
ISO-NE’s 2018 Solution and Interim but Extended Out-of-Market Winter Measures
In June 2018, ISO-NE intends to implement a market-based winter solution in an effort to address certain reliability issues.1 It asserts that this Pay-for-Performance design, through a two-settlement system, will define clearly generators’ obligations and incentivize resource investments to ensure reliable performance during scarcity conditions. Under the two-settlement system, each supplier will receive a base payment, paid for by load, for taking on a forward obligation in the Forward Capacity Auction. Following settlement of the base payment, the ISO will make disbursements to suppliers during the delivery year via a second settlement, a Capacity Performance Payment, based on actual performance during scarcity conditions. Under this design, resources that provide more than their committed share of energy will receive positive Capacity Performance Payments. Those that provide less than their committed share will receive negative Capacity Performance Payments unless they meet their forward obligations through purchases from better-performing suppliers in the pool.2 This system will essentially tie a resource’s capacity revenue to its actual performance during scarcity conditions.
In the meantime, however, ISO-NE has struggled to find an interim market-based approach to adequately address its 2013-2014 winter reliability issues. During that winter, the Northeast experienced serious capacity and reliability problems due to record-setting cold temperatures, which resulted in historic demand levels, as well as a high amount of generation outages. In September 2014, ISO-NE adopted what it intended to be temporary, out-of-market measures to ensure winter reliability for the 2014-2015 winter. These out-of-market winter measures incentivized generators to secure oil and liquefied natural gas supplies and procure demand response resources by paying these resources the equivalent of unused fuel during winter. Specifically, it compensated generators that adopted the ISO’s pre-winter estimates of how much fuel was needed in upfront inventory to offset any of the generators’ unused fuel at the end of the winter.3 When it approved this stop-gap solution in September 2014, FERC advised ISO-NE that it needed “to abide by its commitment to develop a long-term, market-based solution to address reliability concerns for the 2015-2016 winter and future winters.”4
On January 20, 2015, ISO-NE sought rehearing of FERC’s approval of its out-of-market winter measures, requesting to extend their use. ISO-NE argued that this extension would better address reliability issues than adopting another attempt at a market-based winter solution. It also committed to discussing with its stakeholders ways to expand the out-of-market winter measures to include payments to all resources. In granting this extension, on April 17, 2015, FERC agreed, concluding that “an expanded version of the current winter program might better produce the desired results in terms of reliability than the introduction, at this point in time, of the market-based solutions examined by ISO-NE.”5
FERC emphasized, however, that it expected ISO-NE to work with stakeholders to expand the current out-of-market winter measures to include all resources that ensure fuel reliability, including nuclear, coal, and hydro resources. Under the expanded out-of-market winter measures, the ISO would compensate energy resources for their procurement of any unused fuel during the winter—rather than just oil and liquefied natural gas. It further required that, for any future out-of-market program that is not fuel neutral, ISO-NE must describe the fuel-neutral options it considered and why they were ultimately rejected.6 This requirement likely addresses industry criticism that the current out-of-market program hinders accurate price signals that meet demand, because out-of-market payments are not offered for all resources. Therefore, an expansion of the existing winter reliability measures would more closely resemble a market-based solution.
In his concurrence, Commissioner Clark noted that he voted for the order “as a matter of pragmatism” but expressed his frustration with “ISO-NE’s inability or reluctance to move a market-based solution through the stakeholder process that would relieve persistent winter reliability concerns.”7
NYISO’s Reliability Tariff Revisions
On April 20, 2015, FERC approved NYISO’s proposed tariff revisions, which seek to develop more efficient congestion management, reserve scheduling and pricing at times when NYISO is maintaining reliability under scarcity conditions.8 These technical changes will revise how NYISO pays for and obtains operating reserves. And, furthermore, these changes that more closely track market-based results contrast with ISO-NE’s interim out-of-market measures.
Seeking to address its own reliability challenges in the 2013-2014 winter, NYISO will now obtain through the wholesale market all of the reserves needed to restore its 10-minute reserves within 30 minutes of a loss of a large generation source. Currently, NYISO restores its 10-minute reserves by relying on latent reserves, which are “unscheduled reserves held by dispatched generators between their scheduled output levels and their upper operating limits.”9 NYISO emphasized that relying on latent reserves is riskier than its new approach because there was previously no incentive for supply resources to obtain such latent capability.10
In addition, NYISO will create a Southeast New York reserve zone to procure 1,300 MW of its 30-minute reserve requirement and limit its operating reserves on Long Island. These changes will better assure that operating reserves are deliverable when needed. NYISO further will revise the values it uses for its existing operating reserve demand curve, transmission storage cost, and regulation service demand curve.11 It asserted that these revisions ensure that reserves are held in the areas of greatest need and encourage resources to procure necessary fuel supplies to satisfy their obligations.
FERC conditionally approved NYISO’s tariff revisions and permitted them to take effect on or after November 1, 2015.12 The Commission accepted NYISO’s arguments supporting the proposed changes, noting that they “should improve market efficiency and pricing transparency, in addition to improving generator performance during critical operating periods.”13
FERC Continues to Press for Price Transparency, Accurate Price Signals, and Market-Based Solutions
Despite the out-of-market nature of the approved ISO-NE winter measures, the Commission has maintained pressure to move towards market-based solutions and more accurate price signals to incentivize appropriate investments. As reflected in the filings and Orders, each ISO faces significant challenges to ensuring reliability during scarcity conditions. In the wake of hard winters, both ISOs must incentivize additional investment to assure system reliability. As Commissioner Clark observed in his concurrence to the ISO-NE Order, pricing transparency is essential to “guide complex, multi-year investment, operational and retirement decisions.”14
But everything is not so rosy. Although FERC agreed to extend ISO-NE’s current out-of-market approach, it ordered the ISO to expand its subsidies for unused fuel during the winter to other energy sources to better imitate a market-based solution. It also expressed “serious concerns about whether ISO-NE will be able to implement a market-based solution that is cost-effective and provides an adequate level of reliability.”1