The ISO – and How Renewable Energy Can Save Ratepayers Money

Jerry Elmer

Everyone’s heard someone claim that renewable energy is too expensive. This criticism often overlooks one of the most important benefits of renewable energy – not the environmental benefits (which are also very important!) but the price-suppression benefits. CLF is an active participant in the ISO-NE, and, as such, we get to see some of the ways that renewable energy saves ratepayers money – and we sometimes see this in ways that many members of the public do not.

ISO-NE stands for “Independent System Operator – New England.” The ISO is a nonprofit corporation, licensed by the federal government, that both operates the New England-wide electricity grid and runs New England’s wholesale electricity markets. In other words, the ISO tells every electricity generator in New England (whether powered by coal, gas, oil, nuclear, wind, or solar) when to be on (or off) and how much electricity to put into the grid – and the ISO runs the markets that determine how much you and I will pay for that electricity.

You can read more about what the ISO is, and why CLF works on ISO committees and working groups. And I have written before about CLF’s work with the ISO; you can read those prior blog posts here (discussing distributed generation), here (discussing reducing carbon emissions), and here (discussing energy efficiency). CLF is one of the very few environmental organizations to work with the ISO, and no other environmental organization is as heavily engaged in the ISO as CLF is.

First, let’s look at the price-suppression benefits that renewable energy (like wind and solar) have now in our electricity markets. Then, let’s take a look at how the ISO is planning to change the New England wholesale electricity market in a way that may increase those price-suppression benefits in the future.

How Renewable Energy Suppresses Prices Now

Electricity in New England is priced hourly, with the price each hour set by the most expensive marginal resource for that hour. That is, during every one of the 8,760 hours in a year, the ISO “turns on” the least expense generators first, and turns on the most expensive generators last. (That’s why electricity prices are highest on the hottest afternoons of the summer – because the ISO has turned on those last, most expensive generators when there is the most demand on the system, and those generators are setting the clearing price for the entire system.) The layering of generator bids, for every hour of the year – with the lowest bids on the bottom and the highest bids on the top – creates what the ISO calls the “bid stack.”

Thus, every generator on the system is paid the same clearing price for the same hour of the same day. And that clearing price is set by the last, “marginal” generator at the top of the bid stack, the most expensive generator operating during that hour. Of course, the overall clearing price paid by ratepayers is lowered when more low-cost power is bid in; and the overall clearing price is raised when more high-cost power is bid in.

Most renewable energy projects bid in to the New England electricity wholesale energy market at zero dollars for every day and every hour that it is available. This makes sense when you think about it. Most conventional generators (say, coal, oil, or natural gas) bid a price into the ISO-run energy market that reflects the price of the fuel that they burn. Wind and solar generators have free fuel.

The fact that renewable energy projects bid in to the ISO’s energy markets at zero means that the clearing price for all electricity for all ratepayers in New England gets lowered because of the presence of renewable energy at the bottom of the “bid stack” (in fact, at zero). This lowering of electricity prices paid by ratepayers due to the presence of renewable energy on the grid (and its presence in the ISO’s bid stack) is called the “price-suppression effect” of renewable energy.

And the amount of this benefit can be significant. In a recent report by a leading international consulting firm, Charles River Associates (CRA), on the price-suppression effect of the 468 megawatts of wind power expected from the Cape Wind project, CRA estimated the benefit to ratepayers to be about $185 million annually, or about $4.6 billion over the expected 25-year life of the project. These figures are controversial, and other experts put the dollar value of the price-suppression effect of Cape Wind significantly lower. Nevertheless, the price-suppression effect of renewable energy is real – and the CRA estimate was accepted into evidence in 2010 by the Massachusetts Department of Public Utilities in the D.P.U.’s Docket 10-54, which examined the proposed contract between Cape Wind and National Grid. The CRA report is entitled “Analysis of the Impact of Cape Wind on New England Energy Prices,” and is dated February 8, 2010. (You can see the full text of the CRA report on the organization’s website.)

What the ISO Is Going To Change

These price-suppression benefits exist in the New England energy markets now, with renewable energy resources bidding in to the market at zero dollars per hour.

But on December 3, 2014, the ISO is going to begin allowing renewable energy generators to bid into the energy market at minus-$150 per megawatt hour! (Actually, all generators – even coal, oil, and gas generators – will technically be allowed to bid into the energy market at negative amounts; but in the real world, it is likely that only renewable generators will actually do that.) When renewable generators bid into the energy market at less than zero, those bids will be called “negative price offers.”

Of course, negative price offers have the very real potential of driving the overall clearing price of electricity in New England – the price for electricity paid by every ratepayer – down even further.

What do “negative-price offers” really mean? When a conventional generator (say, a plant that is fired by natural gas) makes a positive price bid into the energy market (say, $100/MWh), that generator is, in effect, saying, “I’ll sell my electricity into the market if the market will pay me $100/MWh for all the electricity I sell.” When a renewable generator (say a wind farm) makes a negative price bid into the energy market (say negative $100/MWh) that generator is, in effect, saying, “I’ll sell my electricity into the market – and I’ll give the market $100/MWh for all of my electricity the market takes.”

Pretty good, huh?

So, how can renewable energy generators stay in business if they are willing to pay the market to take their electricity? It’s simple. Renewable energy projects sell not only electricity, but also the Renewable Energy Credits (RECs) from their projects. But the projects can sell those RECs if, and only if, their electricity is going into the grid. Sometimes, the value of the RECs to the renewable project owner will be worth enough money that the project will be willing to sell its electricity into the grid at a negative price!

The Energy-Pricing Paradigm Is Changing!

Renewable energy has been around for decades. Over the past decade, as the public’s awareness of the climate change emergency has increased, environmentalists have had some success in promoting renewable energy. But for as long as environmentalists have been promoting renewable energy, the overall structure of the argument has been the same: sure renewable energy is clean and reduces carbon emission; but renewable energy is far more expensive than conventional power, and we just can’t afford it.

That paradigm is now changing. It won’t change all at once. But as the ISO introduces the new negative-price offers into the New England wholesale electricity markets, the general public (including government officials and, indeed, all electricity ratepayers) will more and more see the cost-savings from the price-suppression benefits of renewable energy.

And, wholesale electricity markets will see another consequence of renewable energy being recognized as more cost-effective than fossil generation as a result of the new negative-price offers: old, dirty, fossil-fuel generators will start losing market share and then they will start losing money. That’s why at every ISO meeting I have attended over the last two years at which negative-price offers have been discussed, the owners of dirty, old fossil-fuel plants have been noticeably discomfited. Those owners of dirty, old fossil fuel plants know something (correctly) that the general public is about to learn: the old paradigm in which renewable energy could be plausibly criticized as being too expensive is changing.

In the new paradigm, renewable energy will be not only cleaner than conventional electricity, but it will be cheaper, too. In fact, the ISO that runs the California electricity grid already allows negative-price offers from generators down to negative-$150/KWh; and the ISO that runs the New York electricity grid allows negative-price offers from generators down to minus-$1000/MWh.

Although the general public does not know these facts, the owners of fossil-fuel generators sure do! That’s why they are so unhappy that the ISO is introducing negative-price offers into New England – even though we ratepayers will benefit significantly.

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5 Responses to “The ISO – and How Renewable Energy Can Save Ratepayers Money”

  1. In the second paragraph of the second section you say “Thus every generator is paid the same clearing price for the same hour of the same day.” If that’s true then the renewable generators get paid the same as the non-renewable generators, if they bid a negative amount it will not effect the amount they are paid only the order in which they are selected. It has no effect on the selection order of the non-renewable generators oly which renewable generators are selected first. This cannot be correct. What am i missing?

    • Jerry Elmer

      Paul, you raise an interesting point and are absolutely correct when you say: “Renewable generators get paid the same as the non-renewable generators [and] if they bid a negative amount it will not [a]ffect the amount they are paid . . .”

      In addition, it is also correct that – at least for the foreseeable future – we are unlikely to see a negative clearing price in the energy market (even if renewable generators make negative-price offers into the market). This is because, for the foreseeable future, there is not enough renewable energy on the system for a renewable generator to be the last marginal unit committed by the ISO. This is true today even in months of the year and the hours of the day when load is lowest. (Remember: it is always the last generator to be turned on that sets the clearing price for everyone.)

      In order to see why negative-price offers in the wholesale electricity markets still matter – despite these facts – it is necessary to explain two additional concepts: “price takers” and “locational nodes.” You can learn more about these two concepts in a document found at:
      https://www.clf.org/wp-content/uploads/2014/09/Price-Takers-Locational-Nodes.pdf

      With an understanding of “price takers” and locational nodes”, we can now address the question.

      In the old days (before negative-offer pricing), when a conventional generator located in a transmission-constrained node bid into the market at zero (that is, was a price taker) that generator was pretty much guaranteed that he would be dispatched by the ISO – because nobody could bid lower than zero. Of course, once dispatched, that generator would get paid the clearing price for that hour.

      In the new system (after negative-price offers), when a conventional generator is located in a transmission constrained node together with a new renewable generator that can bid in to the energy market at less than zero, the conventional generator is no longer assured of being dispatched by the ISO.

      Over the long run, this means that dirty old fossil generators will be paid less money and will be driven out of the market by clean, newer – and cheaper – renewable energy resources. Owners of dirty old fossil-fuel generators know these facts (only too well). That’s why they are so upset that the ISO is introducing negative-price offers into the wholesale electricity market.

      The ability of renewable generators to make negative-price offers will give those generators an important economic edge over dirty fossil generators.

  2. Russ Aney

    Paul, while it may be hard to imagine currently, there is also the possible scenario (as has happened in Texas due to excess wind generation) where there is so much renewable energy being produced, that there is no demand for fossil-fueled generation, and the price goes to less then zero.

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