The regional transmission organization’s proposal seeks to reconcile the increasing deployment of state-sponsored subsidized clean energy resources with competitive forward auctions.

Proposed New Auction Process in New England

The ISO New England Inc. (ISO-NE), the regional transmission organization serving Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont has filed proposed changes to its Transmission, Markets and Services Tariff with the Federal Energy Regulatory Commission (FERC).  The proposal would create a two-stage capacity auction designed to balance competitive pricing in its three-year Forward Capacity Market (FCM) with the entry of state-sponsored renewable electric energy resources into the FCM. ISO-NE’s proposal, known as Competitive Auctions with Sponsored Policy Resources (CASPR), emerged from the New England Power Pool (NEPOOL)’s Integrating Markets and Public Policy (IMAPP) initiative. IMAPP sought to reconcile states’ efforts to deploy new generation with existing generators’ concerns that resources receiving out-of-market revenues will suppress capacity prices. ISO-NE filed the CASPR proposal on January 8, 2018 even though it fell short of the support it needed to win endorsement by a vote of the ISO’s Participants Committee on December 8, 2017. Stakeholders have until January 29, 2018 to submit comments.

ISO-NE’s existing FCM rules subject new capacity resources to a Minimum Offer Price Rule (MOPR), which requires that subsidized generation resources bid into the FCM’s Forward Capacity Auction (FCA) at their unsubsidized cost. The FCM contains a Renewable Technology Resource (RTR) exemption to the MOPR, which allows for up to 200 MW per year of certain renewable resources to bid into the FCA at their subsidized (i.e., below market) cost. New England state regulators have argued that the MOPR can cause electricity consumers to “pay twice”: once for the cost of capacity that clears in the FCA, and a second time for additional capacity from subsidized resources that did not clear in the FCA (because those subsidized resources were required to bid at their unsubsidized cost).

Moreover, the New England states have increased their clean energy procurement targets, including through the Multi-State Clean Energy request for proposals for Connecticut, Massachusetts, and Rhode Island, which seeks to procure 460 MW in new renewable resources, and the 2016 Massachusetts Energy Diversity Act, which requires the procurement of up to approximately 2,800 MW of new clean energy generation resources, including a set-aside of up to 1,600 MW of new offshore wind generation resources. These procurement totals could significantly exceed the RTR exemption cap.

CASPR Proposal Details

Under the CASPR proposal, ISO-NE would conduct its FCA in two stages. In the first, or primary, auction, ISO-NE would clear the FCA as it does currently, with new capacity subject to the MOPR, but it would phase out the RTR exemption. Instead, ISO-NE would administer a voluntary secondary market, or Substitution Auction (SA), immediately following the primary auction. In the SA, existing generation resources willing to permanently exit the markets could elect to transfer their Capacity Supply Obligations (CSOs) to state-sponsored policy resources that did not acquire CSOs in the first stage. Furthermore, the MOPR would not apply in the SA, meaning that new state-sponsored policy resources could offer at their lower, out-of-market cost. ISO-NE proposes to coordinate entry of these state-sponsored resources to the exit of existing resources through a sealed-bid auction process, resulting in a “two-settlement” system whereby new resources can clear the FCA at lower prices and exiting resources can receive a “severance payment” for prematurely retiring. In this way, ISO-NE claims that CASPR will allow it to integrate “overbuild” from state-sponsored renewable energy resources while maintaining competitive prices in the FCM.

Initial Stakeholder Response

State regulators for the six New England states have expressed competing concerns over the final CASPR proposal. Connecticut, Rhode Island, and Vermont opposed it in the NEPOOL stakeholder process, asserting that ISO-NE has not shown that CASPR would improve upon the existing system. Massachusetts, New Hampshire, and Maine support the final CASPR proposal, claiming that it will not adversely affect their ratepayers. The ISO’s proposal also acknowledges concerns related to CASPR incentivizing retirement of older oil- and coal-fired generation, but asserts that such retirements would likely not materially impact availability of non-gas generation in the region, particularly if the older generation resources are replaced with non-gas resources.

A number of public power systems that are members of NEPOOL objected to the ISO-NE narrowing its definition of sponsored policy resources eligible to participate in the CASPR substitution auction. The new definition allows only renewable resources receiving out-of-market revenue under state rules enacted before January 1, 2018. ISO-NE adopted this narrower definition from a proposal by clean energy advocates, who argued that the original SA definition could have allowed any generation, including fossil fuel resources, to qualify for the secondary auction. The public power representatives claim that the revised SA eligibility definition is a departure from ISO-NE’s pledge to be “technology neutral.”

Next Steps

ISO-NE requested FERC approval of the “vast majority” of the CASPR revisions by March 9, 2018, ahead of the 13th FCA, and staggered approval of a small number of remaining changes, primarily for administrative convenience, by June 1, 2018.

Implications

ISO-NE’s CASPR proposal represents a significant next step in ongoing efforts in New England and other regions in the US with competitive organized, bid-based capacity markets to try to find ways to accommodate state-sponsored or otherwise subsidized generation resources. The CASPR proposal has engendered opposition from some stakeholders in the New England wholesale electricity markets and likely will be hotly contested before FERC. How FERC will respond to the proposal remains to be seen.

This article was prepared with the assistance of Peter Viola, an associate at Latham & Watkins in Washington, D.C., who is licensed to practice law in New York only (all of his work is supervised by a member of the D.C. Bar).