Rapid Transformation of the New England Power System and ... · Nuclear Oil Coal Natural Gas Hydro Renewables 2000 2018 Percent of Total Electric Energy Production by Fuel Type (2000

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A P R I L 8 , 2 0 1 9 | C A M B R I D G E , M A

Gordon van WelieP R E S I D E N T & C H I E F E X E C U T I V E O F F I C E R

Harvard Kennedy School

Rapid Transformation of the New England Power System and Implications for the Region’s Wholesale Electricity Markets

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ISO New England Has Two Decades of Experience Overseeing the Region’s Restructured Electric Power System

• Regulated by the Federal Energy Regulatory Commission (FERC)

• Reliability Coordinator for New England under the North American Electric Reliability Corporation

• Independent of companies in the marketplace and neutral on technology

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ISO New England Performs Three Critical Roles to Ensure Reliable Electricity at Competitive Prices

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Grid Operation

Coordinate and direct the flow of electricity

over the region’s high-voltage

transmission system

Market Administration

Design, run, and oversee the markets

where wholesale electricity is bought

and sold

Power System Planning

Study, analyze, and plan to make sure New

England's electricity needs will be met over

the next 10 years

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ISO-NE INTERNAL USE

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THE INTRODUCTION OF COMPETITIVE WHOLESALE MARKETS IN 1999

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• The region would utilize competitive markets as the most efficient means to ensure the availability of sufficient resources and the day-to-day optimization of the resources needed to meet demand

– And shield consumers from the risks of unwise investments

Wholesale Electricity Markets in New England Began with a Specific Objective

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Some assumptions were explicit (1, 2 and 3), others were implicit (4 and 5)

Color code roughly indicates our experience thus far, ranging from assumptions that generally played out as expected (green) to those that have not (red), and some in-between.

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Assumptions Underlying Wholesale Markets

1 Markets would reveal the cost of maintaining reliability (prices would be set by the marginal resource utilizing a uniform clearing price)

2 Competition would drive efficiencies and innovation

3 All resources would be compensated equally – through the market – for providing the required reliability services

4 Investors in merchant generation and transmission would be able to get energy infrastructure projects sited and developed on time

5 Fuel infrastructure would keep pace with demand for fuel; carrying cost of shared infrastructure would be paid by heating and generation industries

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New BrunswickHydro

Québec

New York

• 9,000 miles of high-voltage transmission lines (115 kV and above)

• 13 transmission interconnections to power systems in New York and Eastern Canada

• 17% of region’s energy needs met by imports in 2018

• $10.6 billion invested to strengthen transmission system reliability since 2002; $1.7 billion planned

• Roughly $16 billion of private investment in new resources through the market

– Mainly new gas generation, upgrades to existing generators, and demand resources

• A massive new shift is occurring towards a hybrid grid

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Today’s Power System in a Nutshell

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What Is a Hybrid Grid?There are two dimensions to the transition, happening simultaneously…

A shift from conventional generation to renewable energy

A shift from centrally dispatched generation to distributed energy resources

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2

COAL OIL NUCLEAR GAS

WIND SOLAR STORAGE & OTHER TECHNOLOGIES

Maintaining reliable power system operations becomes more complex with the shift to greater resources that face constraints on energy production

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THE SHIFT TOWARDS NATURAL GAS

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Dramatic Changes in the Energy MixThe fuels used to produce the region’s electric energy have shifted as a result of economic and environmental factors

31%

22%18%

15%

7% 8%

30%

1% 1%

49%

8%10%

Nuclear Oil Coal Natural Gas Hydro Renewables

2000 2018

Percent of Total Electric Energy Production by Fuel Type (2000 vs. 2018)

Source: ISO New England Net Energy and Peak Load by SourceRenewables include landfill gas, biomass, other biomass gas, wind, grid-scale solar, municipal solid waste, and miscellaneous fuels.

This data represents electric generation within New England; it does not include imports or behind-the-meter (BTM) resources, such as BTM solar.

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110,000

115,000

120,000

125,000

130,000

135,000

140,000

2000 2009 2018

Gig

awat

t-h

ou

rs (

GW

h)

New England Grid Energy Demand

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Closed or Retiring

Generation at Risk

Since 2013, More Than 5,200 MW of Generation Have

Retired or Announced Plans for Retirement in the Coming Years

• Include predominantly coal, oil, and nuclear resources

• Another 5,000 MW of remaining coal and oil are at risk of retirement

• These resources have played an important role in recent winters when natural gas supply is constrained in New England

Source: ISO New England Status of Non-Price Retirement Requests and Retirement De-list Bids; August 17, 2018

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Power Plant Emissions Have Declined with Changes in the Fuel Mix

Year NOx SO2 CO2

2001 59.73 200.01 52,991

2017 15.30 4.00 34,969

% Reduction,2001–2017

74% 98% 34%

Year NOx SO2 CO2

1999 1.36 4.52 1,009

2017 0.30 0.08 682

% Reduction,1999–2017

78% 98% 32%

Reduction in Aggregate Emissions (ktons/yr)

Reduction in Average Emission Rates (lb/MWh)

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Source: Draft 2017 ISO New England Electric Generator Air Emissions Report, January 2019

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• Few interstate pipelines and liquefied natural gas (LNG) delivery points

• LNG provides peaking supply

• Regional pipelines are:– Built to serve heating demand,

not power generation

– Running at or near maximum capacity during winter

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But the Natural Gas Delivery System Is Not Keeping Up with Demand

Pipelines

LNG facilities

Marcellus shale

Source: ISO New England

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tric

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Wholesale Electricity at New England Hub (Real-Time LMP) Natural Gas

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Natural Gas and Wholesale Electricity Prices Are LinkedMonthly average natural gas and wholesale electricity prices at the New England hub

Hurricanes hit the Gulf

Before the Recession and

Marcellus Shale gas boom

Winter 2012/2013

Winter 2013/2014

Winter 2014/2015

Winter 2017/2018

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90-Day Winter Period: December through February

Hourly Hub LMP vs 8-city Weighted Average Temperature Winter 2017 - 2018

LMP Temperature

Wholesale Electricity Prices Surged Last Winter as Temperatures Plunged in December/January Cold Spell

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Energy Market Values Vary with Fuel Prices While Capacity Market Values Vary with Changes in Supply

12.1

5.9

7.36.7

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6.0

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$0

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

Energy Market

Ancillary Markets

Forward Capacity Market

Annual Value of Wholesale Electricity Markets(in billions)

Source: 2018 Report of the Consumer Liaison Group; *2018 data is preliminary and subject to adjustmentNote: Forward Capacity Market values shown are based on auctions held roughly three years prior to each calendar year.

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10.5 ₵/kWh

6.6 ₵/kWh7.6 ₵/kWh

7.0 ₵/kWh6.0 ₵/kWh

8.4 ₵/kWh9.5 ₵/kWh

7.1 ₵/kWh

5.9 ₵/kWh

7.3 ₵/kWh

9.4 ₵/kWh

21.20 (CT)

16.12 (ME)

21.57 (MA)

19.64 (NH)20.55 (RI)

17.98 (VT)

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ce

nts

/kW

h

Annual Average Retail Price of Electricity for Residential Customers in Each New England State (cents/kWh)

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Retail Electricity Prices Follow Wholesale Prices, But Are Also Influenced by Individual State Policies

Source: U.S. Energy Information Administration, Electric Power Monthly, Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, by State; 2018 Report of the Consumer Liaison Group, the New England all-in wholesale electricity price is derived by dividing total wholesale electricity costs

by real-time load obligation (presented for illustrative purposes; does not reflect actual charge methodologies)

New England All-In Wholesale Electricity Price

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THE SHIFT TOWARDS CARBON-FREE ENERGY

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States Have Set Goals for Reductions in Greenhouse Gas Emissions: Some Mandated, Some Aspirational

80% 80% 80%75%-80%

80% 80% – 95%75% – 85%

Connecticut MassachusettsRhodeIsland Maine

NewHampshire Vermont NEG-ECP

Percent Reduction in Greenhouse Gas (GHG) Emissions Economy Wide by 2050*

Aspirational Goal

0%

* MA, RI, NH, and VT use a 1990 baseline year for emissions reductions. CT and the NEG-ECP use a 2001 baseline. ME specifies reductions below 2003 levels that may be required “in the long term.” For more information, see the following ISO Newswire article: http://isonewswire.com/updates/2017/3/1/the-new-england-states-have-an-ongoing-framework-for-reducin.html.

100%

The New England states are promoting GHG reductions on a state-by-state basis, and at the regional level, through a combination of legislative mandates (e.g., CT, MA, RI) and aspirational, non-binding goals (e.g., ME, NH, VT and the New England Governors and Eastern Canadian Premiers).

Legislative Mandate

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%)

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me

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State Renewable Portfolio Standard (RPS)* for Class I or New Renewable Energy

Renewable Energy Will Grow State policy requirements are a major driver

VT: 2018 – 55% 2020 – 59% 2025 – 63% 2030 – 71%2035 – 75%2040 – 75%

RI

MA

CT

NH

ME

Notes: State RPS requirements promote the development of renewable energy resources by requiring electricity providers (electric distribution companies and competitive suppliers) to serve a minimum percentage of their retail load using renewable energy. Connecticut’s Class I RPS requirement plateaus at 40% in 2030. Maine’s Class I RPS requirement plateaus at 10% in 2017 and expires in 2022 (but has been held constant in this chart for illustrative purposes). Massachusetts’ Class I RPS requirement increases by 2% each year between 2020 and 2030, reverting back to 1% each year thereafter, with no stated expiration date. New Hampshire’s percentages include the requirements for both Class I and Class II resources (Class II resources are new solar technologies beginning operation after January 1, 2006). New Hampshire’s Class I and Class II RPS requirements plateau at 15.7% in 2025. Rhode Island’s requirement for ‘new’ renewable energy plateaus at 36.5% in 2035. Vermont’s ‘total renewable energy’ requirement plateaus at 75% in 2032; it recognizes all forms of new and existing renewable energy and is unique in classifying large-scale hydropower as renewable.

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Energy Efficiency Is a Priority for State Policymakers

Ranking of state EE efforts by the American Council for an Energy-Efficient Economy:

– Massachusetts 1

– Rhode Island 3

– Vermont 4

– Connecticut 5

– Maine 14

– New Hampshire 21

• Billions spent over the past few years and more on the horizon

– Nearly $4.9 billion invested from 2011 to 2016

– ISO estimates $10.5 billion to be invested in EE from 2019 to 2027

2018 State Energy-Efficiency Scorecard

Source: American Council for an Energy-Efficient Economy

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2,900

6,700

0

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3,000

4,000

5,000

6,000

7,000

8,000

Jan. 2010 Thru 2018 2028

Me

gaw

atts

(M

W)

Cumulative Growth in Solar PV through 2028 (MWac)

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StateInstalled Capacity (MWac)

No. of Installations

Connecticut 464.3 35,889

Massachusetts 1,871.3 90,720

Maine 41.4 4,309

New Hampshire 83.8 8,231

Rhode Island 116.7 5,993

Vermont 306.3 11,864

New England 2,883.8 157,006

December 2018 Solar PV Installed Capacity (MWac)

Note: The bar chart reflects the ISO’s projections for nameplate capacity from PV resources participating in the region’s wholesale electricity markets, as well as those connected “behind the meter.” The forecast does not include forward-looking PV projects > 5 MW in nameplate capacity. Source: Final 2019 PV Forecast (March 2019); MW values are AC nameplate.

ISO New England Forecasts Strong Growth in Solar Photovoltaic (PV) Resources

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The Variability of Solar PV Was On Display Last WinterDuring the cold spell, clouds and snow cover reduced output from regional solar power, adding to grid demand

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Potential vs. Actual Estimated Output from Behind-the-Meter Solar Power

Note: Output derived from statistical sampling of actual meter readings. Winter irradiance potential reflects the energy that PV capacity could produce at this time of year with clear skies and no snow cover.

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MA 10 MW

ME2,243MW

NH28

MW

MAOffshore Wind

6,064 MW

All Proposed Resources Wind Proposals

Wind Power Comprises Nearly Two Thirds of New Resource Proposals in the ISO Interconnection Queue

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Source: ISO Generator Interconnection Queue (March 2019)FERC and Non-FERC Jurisdictional Proposals; Nameplate Capacity Ratings

Note: Some natural gas proposals include dual-fuel units (with oil backup). Some natural gas, wind, and solar proposals include battery storage.

VT30

MW

CT Offshore Wind

1,760 MW

Wind11,191, 60%

Natural Gas3,160, 17%

Solar3,079, 17%

Battery Storage

1,016, 5%

Hydro74, <1% Biomass

39, <1%Fuel Cell15, <1%

TOTAL18,573 MW

RIOffshore Wind

1,056 MW

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The states are seeking to develop (or retain) more than 5,000 MW of clean energy resources through large-scale procurement efforts to meet public policy goals

State(s)State Procurement Initiatives for

Large-Scale Clean Energy ResourcesResources

Eligible/ProcuredTarget MW

(nameplate)

MA, CT, RI

2015Multi-State Clean Energy RFP

Solar, Wind 390 MW

MA2017

Section 83D Clean Energy RFPHydro Import Approx. 1,200 MW

(9,554,000 MWh)

MARI

2017Section 83C Offshore Wind RFP

Offshore Wind1,600 MW (MA)

400 MW (RI)

CT 2018

Renewable Energy RFPOffshore Wind, Fuel Cells,

Anaerobic Digestion252 MW

CT2018

Zero-Carbon Resources RFPNuclear, Hydro, Class I Renewables,

Energy StorageApprox. 1,400 MW

(12,000,000 MWh)

RI2018

Renewable Energy RFPSolar, Wind, Biomass, Small Hydro,

Fuel Cells and Other Eligible Resources400 MW

States Accelerate Procurement of Renewable Energy

Note: Nameplate megawatts (MW) may be higher than qualified Forward Capacity Market (FCM) capacity MW.

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State Procurements Are Priced Above Wholesale Energy Market Prices, But Include Different Attributes

3.5

5.96.5

0.0

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2017 New EnglandAverage Wholesale

Energy Rate

2017 Levelized Costs 2017 Levelized Costs

Cen

ts p

er k

ilow

att-

ho

ur

Vineyard Wind*800 MW

20-year contract (MA)

New England Clean Energy Connect*

1,200 MW 20-year contract

(MA)

• States are directing their utilities to sign long-term contracts for clean and renewable energy; these contracts include an implied price on carbon

• Retail rates are likely to rise as states continue on a path to decarbonize the economy

*Sample of state procurements; contracts are pending final approval by state public utility commissions.

Wholesale Electric Energy

Rate2017

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THE IMPLICATIONS FOR WHOLESALE MARKETS

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Several Factors Complicate Market Design

• New England has clear carbon objectives, but lacks a meaningful price on carbon

– Renewable and nuclear resources are seeking out-of-market contracts to compensate for their energy and carbon-free attributes

– Ultimately, pricing carbon is a decision for policymakers, not the ISO

• “Above-market” contracts create distortions

– Provide out-of-market revenues to renewable resources; in turn, lowers energy market prices and creates a dependency on the capacity market

– Accelerated economic stress for existing generators; leads to the potential for premature retirements

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Several Factors Complicate Market Design, cont.

• Opposition to new infrastructure has multiple impacts

– Creates significant friction in the market, resulting in delayed market responses to price signals (it’s easier to retire than to build new)

– Retirements combined with delayed market responses can result in scarcity conditions

– Fuel infrastructure constraints result in energy constraints and price volatility during extreme cold periods; premature retirements of non-pipeline gas resources can exacerbate these conditions

– Frictions and fuel infrastructure constraints create a dependency on supply chains for importing oil and LNG that are logistically constrained

– The current market design does not price emerging energy scarcity conditions on a forward basis (to incent the supply chain to respond on a timely basis during adverse conditions)

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The Emergence of an Energy Constrained System Retiring and emerging resources exhibit very different characteristics

• Resources with onsite fuel storage are being replaced by resources that cannot always get fuel or are entirely weather-dependent

• The remaining nuclear power stations are at risk for retirement, until policymakers price carbon at the level implied in renewable energy contracts, or provide them power purchase agreements

• Regional energy storage is important; current electric storage technology is limited in the quantity of energy stored and is useful only for short-duration events (hours)

• Addressing “energy security” will become increasingly important as the New England power system shifts toward resources that face constraints on energy production

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• Problem 1. Incentives and Compensation (P1)

– Inefficiently low market incentives for resources that face production uncertainty to make advance fuel/energy supply arrangements

• Problem 2. Operational Uncertainty (P2)

– There may be insufficient energy available to withstand an unexpected, extended (multi-hour to multi-day) large generation/supply loss during cold conditions, particularly if that energy supply loss is non-gas generation

• Problem 3. Inefficient Schedule (P3)

– Premature (inefficient) depletion of energy inventories for electric generation, absent a mechanism to coordinate and reward efficient preservation of limited-energy supplies

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The ISO’s Long-Term Energy Security Improvements Are Designed to Address Three Inter-related Problems

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1. Change the Current Day-Ahead Energy Market to a Multi-Day-Ahead Market (M-DAM). Procure resources over a rolling, multi-day-ahead horizon (initially expected to be 2‒3 days; could be extended up to 7 days) to provide a forward price signal for resources to replenish fuel inventories when prospective supplies are tight and to avoid prematurely depleting limited energy (Focus: P3)

2. Three New Ancillary Services Co-optimized with Multi-Day-Ahead Market for Energy. These services, combined, provide the ‘margin for uncertainty’ in an increasingly energy-limited system and model the types of actions system operators need to take to ensure reliability over a multi-day horizon (Focus: P1 and P2)

• Replacement Energy Reserves – if a day-ahead cleared resource is unable to perform

• Generation Contingency Reserves – for fast-start/fast-ramping generation contingency response

• Energy Imbalance Reserves – when forecast load exceeds day-ahead cleared physical supply

3. New (Voluntary) Forward/Seasonal Market Ahead of the Winter Period. Procure replacement energy commitments, providing incentive for resources to arrange firm energy inventory logistics and a means to recover the costs of doing so

Long-Term Solution Focuses on Energy OptimizationMarket-based solution optimizes use of limited energy over extended periods at least cost

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Looking Forward…

• States will continue to invest aggressively in energy efficiency and renewable energy, gradually lessening dependency on fossil fuels

– Policymakers could make investments in resources to meet carbon-reduction goals go farther if those investments also help meet grid-reliability needs

• Demand for power from the grid will remain flat or slowly decrease for at least the next five years, driving more retirements

– However, the shift to electric vehicles and heating-system conversions may gradually reverse this trend

• While the current power system has a small surplus, imperfect coordination of the exit and entry of resources may lead to shortage conditions and price volatility

• The margin for error is small

– During cold weather, when fuel infrastructure is constrained, the region is vulnerable to large outages on the gas and electric systems

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Closing Thoughts…

• Wholesale electricity markets have served New England well, delivering efficiencies, innovation, new investment and reliability

• We have made many enhancements to create a framework for a successful transition; but there are still challenges to be addressed

• New England’s capacity for innovation and collaboration will be essential during the rapid transformation of the power system, and we look forward to working with our stakeholders on these challenges

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FOR MORE INFORMATION…

Subscribe to the ISO NewswireISO Newswire is your source for regular news about ISO New England and the wholesale electricity industry within the six-state region

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Download the ISO to Go AppISO to Go is a free mobile application that puts real-time wholesale electricity pricing and power grid information in the palm of your hand

Follow the ISO on Twitter@isonewengland

Log on to ISO Express ISO Express provides real-time data on New England’s wholesale electricity markets and power system operations

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