Dive Brief:

• The Federal Energy Regulatory Commission on Thursday approved a proposal by the New England Independent System Operator (ISO-NE) to boost compensation for fuel resources during winter months, finding it a "reasonable short-term solution to compensating, in a technology-neutral manner, resources that provide fuel security."
• The Inventoried Energy Program would run during the winters of 2023/2024 and 2024/2025, and would be open to oil, coal, natural gas, nuclear, biomass, demand response and some hydro resources. ISO-NE estimated the program will cost between $102 million and $148 million per year.
• FERC Commissioner Richard Glick dissented from the commission's approval, citing concerns that tens of millions of dollars would go to nuclear, coal and hydropower generators "without any indication that those payments will cause the slightest change in those generators' behavior."

Dive Insight:

The four FERC commissioners agree that New England has a fuel security issue, particularly on cold winter days when residential heating demand peaks and there is little gas available for power generators. How to address that, however, is tricky.

The New England fuel security program will pay participating resources for having up to three days of "inventoried energy" onsite during certain conditions and includes a fixed forward rate of $82.49/MWh for inventoried energy sold during the delivery period. The price is an estimate of the minimum rate that a natural gas-only resource would require in order to sign a winter peaking supply contract for vaporized liquefied natural gas.

In its order, FERC said it agrees with the grid operator that the current market design contains a "misaligned
incentives" problem: fuel secure resources may not have sufficient incentives to make additional investments in energy supply arrangements, which in turn could impact reliability under the grid operator's existing market rules.

"Misaligned incentives result from the different values that generators and society place on investments in energy supply arrangements," FERC said. The grid operator's proposal warned that society places the value of such investments on the high energy price avoided, while generators value the investments based on the lower energy price they receive in the energy market as a result of the investment.

"By providing additional compensation to fuel secure resources, which may allow them to secure such energy supply arrangements, the Inventoried Energy Program is a short-term solution that helps address the misaligned incentives problem that currently exists," FERC said.

Glick, however, argued that the program would amount to a "windfall" for some generators rather than generating just and reasonable rates. 

"We must not waste consumers' money on poorly designed solutions that do little, if anything, to improve fuel security," Glick wrote in his dissent. "Unfortunately, wasting consumers' money is exactly what the Inventoried Energy program does."

According to Glick, at least a third of the capacity eligible to receive payments through the program comes from resources that will not change their behavior in response to the payments, because they already maintain more than three days of fuel onsite. Payments to those generators would amount to at least $40 million annually, he said.

"It would seem that burning that money might contribute as much to fuel security as wasting it on entities that we know will not do anything differently," Glick wrote. The ISO has said payments to all resources that provide
"inventoried energy" are necessary to make the program technology-neutral.

The grid operator declined to comment on FERC's approval of the program.

FERC Chairman Neil Chatterjee said at the commission's Thursday meeting that "the order speaks for itself and the order addresses many of the concerns, all of the concerns, that Commissioner Glick raised in his dissent."

Each regional transmission operator "faces unique circumstances," Chatterjee said. "This solution addresses ISO New England's specific challenges. The inventory energy program will allow the ISO to ensure reliability in the short term while it's developing and implementing a long-term market-based fuel security mechanism." 

ISO defends proposed new market products 

Separately, on Monday ISO-NE filed comments defending such a long term mechanism — its Energy Security Improvements (ESI) plan filed in April. The operator has proposed three new market products to help ensure reliability during fuel shortages and cold snaps when natural gas supply is prioritized for home heating.

The proposal has drawn a range of criticisms, including that the proposal exceeds the scope of a FERC compliance directive, which critics say directed a winter-only solution.

The commission previously concluded the grid operator's tariff does not sufficiently address the region's fuel security issues, which regulators said could result in a violation of mandatory reliability. FERC directed the ISO to develop and file a long-term market solution "reflecting improvements to its market design to better address regional fuel security concerns."

"Nothing in the Commission's directive imposes a seasonal or other temporal limitation on the required, market-based solution," the ISO responded this week.

The grid operator has proposed new operational capabilities that include a Day-Ahead Energy Imbalance Reserve, Day-Ahead Generation Contingency Reserve and Day-Ahead Replacement Energy Reserve, and says these will "create strong financial incentives for resources to maintain more secure energy supplies at a modest cost to consumers."

The ISO's proposal includes an alternative supported by the New England Power Pool that amends the ESI to limit the calculation of the Replacement Energy Reserve quantity and resulting costs to the months of December through February, among other things.