NEPOOL and IMAPP: a glimpse behind the closed doors

Imagine the future of New England being hashed out in a windowless hotel ballroom in a suburb of Worcester, in a private meeting the featured a smattering of public officials and a whole lot of corporate bigwigs.  Then picture the gathering being kicked off by the most powerful person in New England who is neither an elected official nor appointed by one.

That’s a fair description of the October 6, 2016 meeting of the innocuously named “NEPOOL IMAPP” forum.  The powerful person in question is Gordon van Welie, CEO of ISO New England – the federally regulated and ostensibly independent Regional Transmission Organization that operates the region’s electricity grid and oversees the wholesale markets where nearly all of our electricity is bought and sold.

Last week, van Welie was in New Hampshire warning that the region’s electricity grid is in a “precarious” situation, a comment that some observers erroneously took as a warning that the lights might go out during the winter, maybe as soon as this winter.  But at the October 6 meeting, van Welie made clear that what he’s really talking about is the future of electricity restructuring – i.e., the reliance on competitive markets rather than rate-regulated monopolies to deliver safe and reliable service at reasonable rates.

“What I am worried about is: Can we even have a wholesale market construct in the future?,” van Welie said to the crowd of about 100 people in that ballroom.

 It was a receptive audience, given that you had to be associated with a NEPOOL member to attend.  NEPOOL is the New England Power Pool, an organization that serves, under a byzantine governance structure approved by the Federal Energy Regulatory Commission (FERC), more or less as the legislative branch of ISO New England.  NEPOOL is populated by voting “stakeholders,” which in most instances mean corporations like Exelon, Calpine, NextEra and National Grid – companies with a big presence in New England and whose business models are premised on the continuation of the deregulatory experiment that began in the 1990s.

What are these companies, and van Welie, worried about?  Renewable energy.

IMAPP stands for “integrating markets and public policy” – and it is universally understood by the FERC and everyone regulated by the FERC that “public policy” in this context means “requirements adopted by states to rely more on renewables and less on fossil fuels.”  What has them especially spooked is the Massachusetts Energy and Diversity Act, signed into law two months ago by Governor Baker.  According to the governor’s press release, the legislation “requires utilities to competitively solicit and contract for approximately 1,200 megawatts of clean energy generation – base load hydropower, onshore wind and solar supported by hydropower, standalone onshore wind, solar, or other . . . renewable resources” and also “allows for the procurement of approximately 1,600MW of offshore wind.”

Why is this a problem?  Because this intitiative, similar requirements procurement of renewables in Connecticut and Rhode Island, as well as the renewable portfolio standards adopted by all six New England states, supposedly distort the two ISO New England markets – energy and capacity – through which companies like Calpine, Exelon and NextEra (owners of gas-fired and nuclear generators) make their money.  There is already a Rube Goldberg-type mechanism – called the Minimum Offer Price Rule (MOPR) – designed to limit the extent to which renewable resources propped up by state procurement requirements can bring down wholesale market prices.  In the view of the folks who run NEPOOL, and ISO New England, this isn’t good enough.

“Wholesale markets are quite vulnerable,” van Welie said.  “We are at a crossroads.”

In particular, van Welie offered a spirited defense of the Forward Capacity Market his organization oversees.  “Capacity” in this context is a completely inchoate product that is basically a promise, made by a generator, to be available to produce energy at a specified hour.  In a perfect world – i.e. a world in which wholesale energy were completely subject to the laws of supply and demand – such capacity payments would be unnecessary.  Instead, in times of scarcity the wholesale energy prices would simply increase until sufficient to lure new producers into the market.  But wholesale energy prices are not allowed to float freely and, even if they were, they would likely be too volatile for the bankers who put up capital to build new generators.  Rather than give up, stakeholders created a mechanism whereby load-serving entities must purchase capacity according to prices set three years in advance.  (As an aside, look for a big bump in electricity prices in 2017 thanks to capacity prices set three years earlier.)

“Twenty years from now, if we are going to be managing this hybrid system,” said van Welie, referring to a grid reliant principally on renewables but using conventional resources and perhaps battery storage as backup, “how do we create operational accountability?  The capacity market creates that mechanism for us. . . . It’s a very important piece of glue that’s going to hold things together from a reliability point of view. . . . We have to pay for that system somehow.  The Forward Capacity Market can act as a revenue balancing mechanism.”  By “revenue balancing mechanism” he means a system for making sure that nuclear power plants and gas-fired generators continue to get paid to be the backbone of the system.

What take-home for consumers – the folks who must pay for all of this?  There are several:

1.      Gordon van Welie isn’t afraid the lights are about to go out, either this winter or in any ensuing winter.  Nor should he be. Installed capacity requirements and other applicable standards assure that resources will be in place to meet peak demand, even in bitter cold.  What the ISO New England chief is really worried about is litigation – he speculated that lawsuits over this stuff could fly in about a year’s time – and, ultimately, the unravelling of the paradigm in which we rely on market competition to produce New England’s electricity.

2.     The regulators back him up.  “I’ve yet to meet a state commissioner who thinks the wholesale market is a dumb idea and we ought to tear it down,” van Welie said.  There were several in the room; none popped up to disagree.  Mr. van Welie referred at one point to the problem as one in which the market mechanisms do not “solve for” renewable energy mandates.  That’s exactly the same formulation used by FERC Commissioner Cheryl LaFleur when she spoke at the New Hampshire Energy Summit in Concord on October 3.  Though NEPOOL IMAPP has been billed as a stakeholder-initiated process, there is reason to think it’s really a top-down phenomenon in which the FERC has let ISO New England know, and ISO New England has let NEPOOL’s leadership know, that it wants markets to “solve for” renewables.  The skids are greased, in other words.

3.     There is particular danger for New Hampshire’s electricity customers.  The Granite State has not adopted mandatory renewable energy procurement standards the way the Massachusetts has.  Markets could be rejiggered to “solve for” renewables in a manner that causes New Hampshire customers to pay for renewable mandates adopted by other states.  The Conservation Law Foundation, an active participant in the IMAPP discussions, justifies this by stating that all six New England states are committed to reducing greenhouse gas emissions by 80 percent between now and 2050.  The basis for such a statement, as to New Hampshire, is that Governor Hassan signed the “Under 2 MOU” last October.  But an MOU is a “memorandum of understanding” – basically, a piece of paper that, unlike legislation, has no binding effect.

Is there a way out of this thicket?  Well, if you’re a consumer advocate who thinks customers deserve safe and reliable electricity at the lowest possible cost and with the fewest civilization-threatening externalities, you can’t help but wonder if the whole market paradigm should be allowed to collapse because it has required fix after fix after fix.  But that’s not a realistic scenario; you can’t sit through a NEPOOL meeting like this one without leaving convinced that the titans of the electric industry are not going to allow either a return to old-fashioned regulation or some new paradigm in which consumers, thanks to distributed generation and smart meters and other new technologies, control the grid.

There are, however, reasonable, pro-consumer voices in the room at these NEPOOL IMAPP meetings.  One of them is John Coyle, a Washington attorney who represents a coalition of municipally owned utilities in Massachusetts and Rhode Island.  He has issued a notably lucid disquisition about NEPOOL IMAPP.  Not only does Coyle crystallize the very real possibility that all of what’s under discussion is an impermissible usurpation of state authority (since the Federal Power Act does not give the FERC authority to promote renewable energy).  He also offers a menu of four modest but “targeted” reforms that don’t involve the kind of sweeping market reinventions that the big generation companies are touting.  The most intriguing:  “revisions to the Forward Capacity Market rules to accommodate capacity bidding by storage resources (batteries, flywheels, pumped storage hydro and other forms of chemical and mechanical energy storage).” This resonates nicely with a tentative proposal made to the IMAPP crowd by Paul Peterson, the Synapse Energy Economics consultant who advises the OCA on NEPOOL matters.

Though NEPOOL and its IMAPP process are all happening behind closed doors, the public is well-advised to keep an eye on this process as billions of dollars in ratepayer money – and the future of our electricity grid – are at stake.  No, the grid is not in danger of failing, in either the near or the long term.  And, as John Coyle succinctly stated in his memo, “the only tool is not a hammer, and not every problem is a nail.”

 

[Apology and disclaimer:  If you have read all the way to the end of such a long blog post, thank you!  Please keep in mind that this is not journalism but a series of subjective impressions that are based on imperfect knowledge and thus may be subject to correction.  The Office of the Consumer Advocate, of which I am the head, is an “end user” member of NEPOOL and thus we have a seat at this very big table and one small voice in the outcome.  Our resources and insight are limited.  Those with an interest in these efforts to create sweeping changes in our wholesale electricity markets – again – should keep an eye on the process here.]