ISO Throwing Money at Misguided “Solution”
The regional grid operator, ISO-NE, has proposed to create a new compensation mechanism for resources that can contribute to winter energy security during the 2023/2024 and 2024/2025 winters. The proposal has been dubbed “Chapter 2B,” as it follows the cost of service contract given to the Mystic units (and potentially other units in the future) to ensure that they do not retire and is part of ISO’s three-part effort to address perceived winter energy shortfalls.
As a threshold issue, we do not believe there is enough evidence that the region lacks sufficient winter generation to warrant these costly, out-of-market initiatives. With the New England states’ increasing commitment to renewables, including the 1,500 MW of offshore wind already contracted for, we believe that the region will rely less on natural gas and we will not face winter energy shortfalls as often as ISO fears due to pipeline constraints.
Nevertheless, ISO’s Chapter 2B proposal would pay resources that have “inventoried” fuel and can be dispatched when the temperature drops below a certain level. Eligible resources would be electric storage, biomass, coal, certain demand response, hydro, firm natural gas, nuclear, and oil. Essentially, resources that could prove they have fuel available to dispatch when the trigger temperature is hit would be compensated. That’s it; there are no performance penalties, no rigorous qualification processes, and no guarantee that the electricity will be delivered when needed. ISO believes that this program, which will cost on the order of $100-150 million per year for the two years it is proposed to operate – costs consumers will shoulder – would be enough to keep the large nuclear and gas generators from closing down. We, and most other stakeholders, disagree. The program is too restrictive by technology type, does not provide enough of an incentive to influence a generator’s decision to keep running, and negatively impacts price formation in the energy market.
A better way to address perceived winter energy insecurity is to allow the market to deliver the solutions, not for ISO to choose winners and losers through unnecessarily restrictive regulations. For instance, the Pay-for-Performance mechanism was just recently introduced to the ISO energy markets, and is intended to ensure adequate electricity is delivered during times of system constraints. This mechanism imposes a hefty penalty on generators who commit to delivering electricity, but fail to actually deliver when the system needs it most. This will discourage generators from over-committing during the winter months. Why did ISO implement costly and unfair regulations to address fuel security when a market mechanism already exists? If ISO believes that its own markets are not delivering the fuel needed to keep the lights on, then they should propose market-based reforms and allow every technology to adapt to participate. Fair, market-based solutions, are always preferable to prescriptive, out-of-market measures.