Dive Brief:

• Power generators last week asked the Federal Energy Regulatory Commission (FERC) to reject proposed changes to the ISO-New England (ISO-NE) capacity market submitted by the grid operator to better retain fuel secure resources.

• Last month, ISO-NE proposed to treat generators with onsite fuel supplies as price takers in its next three capacity market auctions as it designs new market rules to boost their compensation. Generators and environmental groups said the proposal would retain too many plants at ratepayer expense, while combined natural gas and electric utilities supported it.

• The filings came last Friday, the same day that Utility Dive reported Exelon's Mystic Generating Station — a fuel secure plant at the center of the debate — tripped offline on Labor Day due to a power line fault. Critics say the event and others like it show the limits of how onsite fuel supplies can contribute to grid reliability and resilience. 

Dive Insight:

The ISO-NE fuel security proceeding will reshape how the grid operator prices electricity and could provide a model for other regions as power systems move toward more natural gas and renewables.

The debate began this spring when ISO-NE asked FERC to approve cost recovery for the 1,700 MW Mystic plant in Boston, threatened by retirement in the early 2020s. The plant is necessary not just for the power it provides, ISO-NE argued, but the financial support it gives to New England's sole import facility for liquefied natural gas.

FERC rejected that proposal in July, directing ISO-NE to rewrite its capacity market rules to value fuel security. The goal, FERC said, is to retain plants with onsite fuel supplies through a market mechanism, rather than cost-of-service agreements like the Mystic filing.

ISO-NE responded last month, saying it did not have enough time to devise new market rules before its next capacity market auction in Feb. 2019. Instead, it proposed to treat generators that meet its fuel security criteria as price takers in upcoming auctions — not allowing them to set prices — giving it time to design market changes.

Exelon says market revenues are not sufficient to keep Mystic operating, and in July filed with FERC to have the plant receive cost recovery. If that is approved, any market revenues Mystic receives would be be subtracted from the costs ratepayers would contribute to keep the plant open.

ISO-NE argues that under this system, market clearing prices would be the same as today, but fuel secure plants would still receive the financial support they need to stay operational. It's a point contested sharply by independent generators.

"[T]he result will be massive suppression of prices and the displacement of economic resources in [the Feb. 2019 capacity auction] and subsequent auctions," Calpine Corp. wrote in comments.

Treating the two units at Mystic threatened by retirement as price takers would "suppress capacity prices by between $214 to $642 million" and displace "1,050 to 1,285 MW of otherwise economic capacity" in the next capacity market auction, Calpine wrote, quoting analysis from the New England Power Generators Association.

Generator Vistra also worried that the ISO-NE proposal could cause the region to build too many power plants to replace those no longer participating in capacity markets. It endorsed an alternative proposal the New England Power Pool, an association of market stakeholders, that would narrow the criteria by which a fuel secure generator could apply for cost recovery.

"[I]t is critical to modify the criteria ISO-NE will use to determine whether a resource is required for fuel security purposes to be more consistent with the criteria ISO-NE uses to determine resource adequacy requirements," Vistra wrote. "As proposed, ISO-NE's criteria are overly conservative, which will err on the side of retaining too many resources on an out-of-market basis."

Vistra's concerns about ISO-NE's retention criteria echo those of environmental groups, who argued at the start of the proceeding that the grid operator's fuel security analysis may be overly conservative. Massachusetts Attorney General reiterated those concerns as well, writing that the ISO's model is "a blunt instrument with very conservative scenario assumptions and triggering criteria that likely will result in over retention."

Plant owners and environmental groups, typically at loggerheads, also came together over concerns how long ISO-NE would apply price taker status. Because its capacity markets award contracts three years in the future, the ISO's proposal would affect the market until the middle of next decade.

"ISO-NE describes its proposal as 'interim in nature' — despite the fact that it proposes to extend the tariff effective date through 2025," the Environmental Defense Fund wrote. "This extended use of out-of-market remedies will disincentivize investment, constrain better commercial solutions, and limit supply in the capacity substitution action."

Not all stakeholders opposed the ISO-NE proposal, however. Connecticut state agencies lent tepid support to the plan, writing that it "gets more right than wrong."

Utilities Eversource and Avangrid, which both deliver power and gas to New England consumers, were more enthusiastic in their endorsement.

"ISO-NE proposes to treat capacity retained for fuel security initially as price takers in the [forward capacity auction], which is the same market participation treatment for resources retained for reliability under the current ISO Tariff," Eversource wrote. "Although ISO-NE intends to work with stakeholders to discuss alternative ways to include resources retained for fuel security in the primary auctions in [future years], the Eversource Companies believe price taker status is the just and reasonable and rational methodology to use."

The utilities made waves in the fuel security proceeding last month when they asked FERC to "clarify" that the "central issue" in the docket is to allow electric utility customers to finance pipeline investments. Generators lambasted the idea, which has been rejected by state regulators in Massachusetts and New Hampshire.

Debate over fuel security in ISO-NE could be complicated by the recent outage at Mystic, which came on a day of high load and forced the grid into emergency conditions. Exelon says the outage was caused by a power line fault affecting the LNG import facility that supplies the plant with fuel. Critics say the event highlights the fact that the vast majority of outages are caused by transmission and distribution problems, limiting the impact that onsite fuel supplies can have in ensuring a reliable grid.