Newly Released ISO White Paper Confirms the Value of Renewable Energy in New England Wholesale Electricity Markets

Jerry Elmer

ISO-NE, the nonprofit entity that runs the New England electricity grid, is circulating a 12-page White Paper on (in the ISO’s words) how “To Ensure Reliability as the Grid Adapts to a Renewable Energy Future.”  In a memorandum accompanying the paper, the ISO says that it is hoping to stimulate a broad discussion on the paper at meetings of stakeholders and regulators this month.

You can read background on what the ISO is and what it does, here.  And you can read the full ISO White Paper, here.

The ISO’s White Paper is both interesting and important.   As the title of the document makes clear, the entire paper is about the impact of and the importance of renewable energy in the wholesale electricity markets.  Of course, environmentalists and renewable energy developers have been discussing the importance of renewable energy for years.  So, it is nice to see that several of the things we have been saying are now receiving confirmation from the operator of the New England electricity grid!

I.  Renewables Are Going To Lower Electricity Clearing Prices in New England. For years the overall structure of the public debate about renewable energy has been that environmentalists argue that we need renewable energy to avert a climate-change disaster, while consumer advocates sometimes argue against paying a premium for the environmental benefits of renewable energy.  Now the debate is changing.  As I pointed out in a blog last year, renewable energy resources are now bringing down the cost of electricity for customers.

The just-released ISO White Paper confirms that what CLF and other environmentalists have been saying about this is true.  Specifically, the ISO says:

  • “State subsidies for renewable resources will put downward pressure on energy-market prices . . .” [Page 1, ¶ 2.]
  • And this: “Additional renewables are expected to decrease wholesale electric energy prices . . . .”  [Page 1, ¶ 3, emphasis supplied.]
  • And this: “As the penetration of wind and solar resources grows, the price-reducing effects of renewables on electric energy prices will increase.”  [Page 3, ¶ 5.]

The paradigm is changing.  Where once it was thought that customers would have to pay more for renewable energy, it is now widely understood that renewable energy is working to drive down electricity costs in New England.  And the important thing is that it is not the environmentalists that are saying this; it is ISO-NE, the entity that runs the electricity markets that set prices for all electricity customers in New England.

II.  Clean, Low-Cost Renewables Are Going to Drive Coal, Oil, and Nuclear Out of the Market.  This is another point that environmentalists have been making for years – and, here, too, it is wonderful to see the ISO confirming what we have been saying all along:

  •  Wind and solar will “in turn increase the financial pressure on . . . nuclear and coal.”  [Page 3, ¶ 5.]
  • “The addition of large quantities of renewable resources . . . will affect what resources retire . . . and not all resource types will be affected equally.  New England has already experienced a number of retirements of coal, oil, and nuclear units in recent years . . . . With the expected increased penetration of renewable resources, more such retirements should be expected in the future.”  [Page 7, ¶¶ 3, 4, 5.]

Points I and II, taken together, mean we are going to get a cleaner environment with less carbon pollution – and at a lower cost to electricity customers.

III.  New England’s Forward Capacity Market is Working the Way It Was Meant to Work.  There is another consequence of the large number of “retirements” of coal, oil, and nuclear power plants in New England:  the clearing prices in the last two “Forward Capacity Auctions” in New England (specifically, for FCA-8 in February 2014; and FCA-9 in February 2015) have been higher than the clearing prices for prior auctions run by ISO-NE.  (For background on what these capacity auctions are, and how the capacity market relates to the electricity market, read this.)   The fact of higher auction clearing prices in the last two auctions shows that the ISO-run Forward Capacity Market (FCM) is working properly, and in exactly the way it was designed to work and meant to work.  The FCM was carefully designed specifically to send appropriate price signals to create the proper economic incentives for the entry of new generation resources into the market when those resources are needed.

The reason that the first seven Forward Capacity Auctions (2007 through 2013) cleared at very low prices is that, back then, there was excess generation capacity in New England; thus, there was no need to incent new generation to enter the market.  The reason that the last two FCAs cleared at relatively higher prices is that the dirty old coal, oil, and nuclear plants are retiring; thus, the auction is sending the very price signals that it was designed to send and meant to send:  for new generation capacity to enter the market.  As I discussed in a blog post a few months ago, the capacity market is working the way it was meant to work.  And that conclusion is confirmed by the  ISO’s White Paper, on pages 8 through 12.

Summing It All Up:  ISO-NE runs the entire New England electricity grid in real time, and also runs the wholesale markets that determine the price of electricity for all customers in New England.  CLF has been working for years to push the ISO to more fully integrate renewables into the New England electricity grid and compensate renewable generators more fully for their contributions to the grid.  The underlying themes of the just-released ISO White Paper are about the impact and importance of renewable energy in the energy and capacity markets.  This is a big deal.  The ISO is recognizing – and not tacitly, either – the increasing importance of renewable energy in the New England wholesale electricity markets!

In a very real sense, this newly released White Paper is a validation of work that CLF has been doing at the ISO literally for years.  Hooray!

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