The ISO’s Big Mistake: Not Counting Renewable Energy

Jerry Elmer

On October 3, 2014, the New England Power Pool (NEPOOL) voted overwhelmingly not to support the ISO’s forecast of New England electricity load for an upcoming year.  CLF is a member of NEPOOL, and strongly supported the NEPOOL action.  NEPOOL’s action is both very important and very surprising, but the story is complicated and requires a bit of explanation.

What is the ISO?

“ISO” is the acronym for the Independent System Operator-New England.  For background, you can read more about why CLF works with ISO.

In a nutshell, ISO is the entity that is responsible for keeping the lights on in New England.  ISO operates under the Federal Power Act, and is regulated by the Federal Energy Regulatory Commission (FERC).  ISO has an annual budget of around $178 million (raised from electricity tariffs), has hundreds of staff people, and is based in Holyoke, Massachusetts.

As it says on its website, ISO does three things.  First, it runs the entire electricity grid in New England in real time by turning on and off (and ramping up and down) nearly every electricity generator in New England.  Second, it runs the New England wholesale electricity markets; this sets the price(s) for electricity that all ratepayers will pay.  Third, ISO does future planning, so that the electricity grid here in New England will remain reliable for years into the future.

NEPOOL’s action on October 3 relates to the third of these functions – system planning for future reliability.  Specifically, NEPOOL rejected ISO’s estimate of New England electricity load (the total amount of electricity needed) for the year beginning June 1, 2018 (and running until May 31, 2019).  NEPOOL took this action for only one reason:  the ISO’s total, inexcusable failure to take renewable energy distributed generation into account in calculating its load forecast.

In two recent blog posts, I wrote about how ISO is working to integrate renewable energy into New England’s grid, here and here.

What is NEPOOL?

NEPOOL is the official stakeholder group associated with ISO.  By “official,” I mean is that ISO is legally obligated to consult formally with NEPOOL members before taking any major, new action, and NEPOOL members (like CLF) have a legal right to challenge ISO actions before FERC.

What is a “Forward Capacity Auction” – and Why Does It Matter?

Once a year, ISO holds what it calls a “Forward Capacity Auction” (FCA) for a one-year period of time three years in the future.  The purpose of these FCAs is to ensure that there will be adequate supplies of electricity (that is, enough power generators) in the region to meet the expected load.  ISO’s ninth FCA (called, appropriately enough, FCA-9) is going to be held in February 2015.  And, as I said above, in FCA-9, ISO wants to buy enough electricity to meet New England’s expected load for the year starting on June 1, 2018.  The technical term that ISO uses to describe what it wants to buy in these FCAs is “Installed Capacity Requirement” (ICR).  Don’t be frightened by the name or the acronym:  the ICR is the quantity of electricity generation (“capacity”) that is needed (“requirement”) to meet the expected load (electricity usage) during the relevant period.

The results of these Forward Capacity Auctions matter because a lot of money is involved.  Based on the clearing prices of the eight prior FCAs that ISO has conducted, we can expect FCA-9 to cost New England electricity ratepayers anywhere from $800 million to $2.2 billion!

What Happened on October 3 – and Why Does It Matter?

ISO is legally obligated to present its ICR prediction (how much electricity capacity it plans to purchase) to NEPOOL, and ISO did that on October 3.  ISO’s ICR prediction was 34,189 Megawatts (MW).  In other words, in the upcoming February 2015 Forward Capacity Auction, ISO wants to buy 34,189 MW of electricity, which ISO predicts will be enough future generating capacity (from enough individual generators) to meet all of New England’s electricity needs (“load”) for the period June 1, 2018 to May 31, 2019.

That purchase will cost New England ratepayers anywhere from hundred of millions to billions of dollars.

On October 3, NEPOOL resoundingly rejected ISO’s ICR forecast.  NEPOOL did so for one reason and one reason only:  ISO completely failed to take into account renewable energy Distributed Generation (DG) in its ICR forecast.

All the New England states have incentive programs of one type or another to encourage the growth of renewable energy.  As a result there has been phenomenal growth of renewable energy in New England for several years.  ISO has itself worked hard to forecast the anticipated growth of renewable DG over the next decade, and CLF has been an active member of ISO’s DG Forecast Working Group.

Nevertheless, when ISO calculated the ICR (amount of electricity capacity to buy) in the upcoming Forward Capacity Auction, ISO completely ignored its own forecast of how much renewable DG was getting built.  As a direct result of this failure, NEPOOL voted overwhelmingly to reject ISO’s forecast.

ISO’s Big Mistake

ISO’s big mistake was not accounting for renewable DG when it projected how much electricity to buy in the next Forward Capacity Auction.  ISO’s big mistake is important on several levels.

First, and most directly, ISO’s big mistake will cost ratepayers a lot of money.  For every 100 MW of renewable DG that ISO failed to count, New England ratepayers will overpay $200 million in the upcoming February 2015 FCA.  And ISO’s own estimate (which CLF believes is overly conservative) is that there will be hundreds of megawatts of renewable DG in New England during the relevant period (2018-2019).

Environmentalists promote renewable energy, in part, by citing the cost savings that can accrue from having renewables on the electricity grid.  Everyone knows that renewable energy costs money, but there can also be cost savings to ratepayers from having renewable energy on the electricity grid.  However, ratepayers reap those saving if – and only if! –  ISO accounts for that renewable energy in calculating its ICR.

By not accounting for the renewable DG that is actually on the electricity grid, ISO is forcing ratepayers to pay hundreds of millions of dollars for electricity that they don’t actually need.

There is another reason why ISO’s big mistake is important.  CLF is working hard to close down each and every one of the few remaining coal-fired power plants in New England.  When the ISO over-estimates how much electricity is needed in New England, it makes it harder to shut down dirty, old coal-fired power plants – because it makes it seem that those plants are needed to keep the lights on.

The Predictable Backlash

Immediately after the October 3 NEPOOL meeting, CLF wrote to the ISO to protest the ISO’s big mistake.  (The letter has some technical terms and acronyms in it, but now that you have read this blog you’ll be able to understand those terms!)

And CLF was not the only one to protest. The New England States Committee on Electricity (NESCOE) issued a statement also.

As CLF’s letter points out (page 2, paragraph 2) it is only a matter of time until one or more NEPOOL participants brings a legal challenge before FERC of the ISO’s big mistake.  The Federal Power Act – that governs the ISO, FERC, and all U.S. electricity markets – requires that all electricity rates be “just and reasonable.”  Overcharging ratepayers by hundreds of millions of dollars by ignoring the benefits of renewable energy is not just and reasonable.

Summing It Up

First, renewable energy in New England is here to stay.

Second, the reason renewable energy is here to stay is that each New England state has put into place financial and other incentives for renewable energy.

Third, ISO is just wrong to ignore its own forecast of renewable energy development when deciding how much electricity capacity to buy for the future.

Fourth, ISO’s big mistake costs ratepayers hundreds of millions of dollars.

Fifth, ISO’s big mistake makes it harder to close down dirty, polluting coal-fired power plants.

Sixth, the ISO’s big mistake is legally unsupportable if it is challenged before FERC.  And it is just a matter of time until that happens.

Focus Areas

Climate Change

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