As New England power plants close, the operator of the electricity grid is speeding up efforts to eliminate price volatility and ensure the region has enough power to meet rising demand.
ISO New England has asked the Federal Energy Regulatory Commission (FERC) to approve a new method for running ISO auctions, which establish contracts with power plants to meet the electric needs of the region. The new method is meant to smooth over price instability while keeping power plants operating.
"It provides predictability in the marketplace and smoother prices," said Dan Dolan, president of the New England Power Generators Association (NEPGA). "It is the most rational way to run a capacity market."
The move comes after the latest auction in February failed to secure enough power plants to meet demand, causing prices to double or even quadruple in some instances and raising concerns about the rate at which power generators are closing in New England.
The root of the problem has actually been caused by falling power prices in New England. As the commodity cost of natural gas remains low and more power plants in the region convert to natural gas, the price of wholesale electricity drops. That means power plants operating on other fuels — notably coal and petroleum — don't generate power as often and when they do, the price they receive for their power is considerably less, putting financial strain on their bottom lines.
It's even forced several plants to shutter, cutting into the electricity supply.
ISO said the region lost nearly 10 percent of its electricity generating capacity in the months leading up to the February auction, including the petroleum-powered, 340-megawatt Norwalk Harbor Generation Station that closed in June. More power plants — notably the coal-fired 1,500-megawatt Brayton Point Power Station in Massachusetts and the 600-megawatt Vermont Yankee nuclear facility — are scheduled to close in the coming years.
"A number of non-gas units are feeling the pressure," Dolan said.
Because of the closures, ISO could obtain only 33,700 of the needed 33,855 megawatts of electricity in the February auction, which was trying to secure enough capacity to meet market demand in 2017-2018. ISO runs these forward capacity auctions to keep power plants available to meet anticipated demand. From these auctions, power plants are paid simply for being available to generate power if needed and not for actually producing electricity.
Because ISO failed to meet demand in the February auction, that triggered administrative pricing requirements, which established automatic, non-competitive prices for the 2017-2018 market. Existing power plants will be paid $7.025 per kilowatt month while new power plants will receive $15 per kilowatt month, quite the jump from the average $2.52 to $3.43 paid out in previous auctions.
Under ISO's new auction proposal, which is expected to be approved by FERC by June 1, the grid operator will use a different economic model to determine New England's electricity needs. The model, called the sloped demand curve, eliminates the administrative pricing requirements and looks at demand over a longer term to keep price swings in check, said ISO spokeswoman Lacey Girard. This differs from the current model, which sets the demand based on the maximum need for the system, even though that need might be reached only once in the course of a year.
"This is something we have been working on for awhile," Girard said.
NEPGA has been advocating switching to this model for more than 10 years, Dolan said, because every other energy market in the country uses it. FERC already had ordered ISO to make the switch, but the grid administrator hurried the process to ensure the new model is ready for the next forward capacity auction in February.
"Going to a sloped demand curve is absolutely critical," Dolan said. "In certain periods of time, prices won't be as low as they would have been … but it is also means they won't be as high as they were."
The new model will create some stability for ratepayer bills, although the forward capacity auction costs comprise only a small portion of wholesale electricity prices, Girard said. The bigger influence on wholesale prices is the daily energy market, where power plants are paid for the electricity they generate.
Those wholesale prices have been on the rise this winter because natural gas pipeline constraints limited power plants' ability to obtain the fuel they need. It also increased demand for coal and petroleum plants, sending electricity prices soaring: New England businesses and residents paid $5.1 billion for electricity in December, January, and February, nearly the same amount paid in all of 2012.
The winter price spikes and the lucrative February capacity auction might slow the rate of New England power plant closures, Dolan said, as it has become more economical to run a non-natural-gas facility.
The coal and petroleum windfall, however, is only temporary as the natural gas constraints are expected to be resolved in three or four years, and the six New England governors have teamed up to build out the region's needed energy infrastructure, with the goal of offering cheaper and cleaner power.
"The forward capacity issues identified by ISO speak to the importance of Governor [Dannel P.] Malloy's vision of having the six New England states come together to address energy challenges that transcend individual state borders," said Dennis Schain, spokesman for the Department of Energy & Environmental Protection.