Sunday, November 19, 2017

Lack of Carbon Pricing Distorting RTO Markets, CEOs, Ex-Regulator Say

By Rich Heidorn Jr.

NEW YORK — Organized markets are being distorted because of policymakers’ failure to price carbon, two grid operator CEOs and a former FERC and state commissioner told a New York Energy Week audience last week.

“I would say that in my … 16 years, this is the most vulnerable that I’ve seen the market construct yet,” ISO-NE CEO Gordon van Welie told more than 75 industry participants at Goldman Sachs’ office in lower Manhattan.

Van Welie appeared on a panel with NYISO CEO Brad Jones and former FERC and Pennsylvania Public Utility Commissioner Nora Brownell, who both joined van Welie in lamenting that CO2 emissions remain a market externality. The conference was created in 2013 by EnerKnol, an energy policy research and data company.

rto markets, carbon pricing

Left to right: Moderator Rich Heidorn Jr., RTO Insider; Gordon van Welie, ISO-NE; Brad Jones, NYISO; former FERC Commissioner Nora Mead Brownell Copyright: New York Energy Week

“We value what nuclear brings to the table” as a baseload, low-carbon resource, Jones said. “But our markets don’t.”

Asked about Gov. Andrew Cuomo’s proposed zero emission credits for upstate New York nuclear units, Jones said, “We’d like to see that be temporary in nature … a bridge into a future where the market can really resolve these issues.”

Obvious Solution

Brownell was blunt.

“We don’t have the leadership to deal with the obvious solution, which is a carbon tax. It’s straightforward, it’s transparent, it sends the right market signals,” said Brownell, who served on FERC from 2001 to 2006. “The market signals are there; we’re not allowing them to really work. And the more we create these constructs, the more we ultimately distort markets.”

Van Welie said the lack of carbon pricing is putting the public policy of achieving reliability through wholesale markets in conflict with that for reducing carbon emissions.

Allowing resources with “out-of-market” contracts under state clean energy procurements to offer into the capacity market will distort price formation, said van Welie. “And that really creates a problem in terms of ensuring reliability, but it also creates a problem with regard to the long-term incentive in the market as well.”

‘Fundamental Questions’

Brownell said the conflict raises “fundamental questions.”

“Do we really value markets, and have we done a sufficient job of illustrating the economic benefits of markets?

“Secondly, what is the role of the RTO? We have piled on … to what was originally a pretty straightforward economic dispatch reliability model. I’m not saying they are incapable of doing this; I just wonder if they are the best entity to do it. Or we are burdening them to the point where they really can’t do their fundamental job well, which is ultimately and critically important to both economic development and the environment in which we live.”

Building Infrastructure

rto markets, carbon pricing

Brad Jones, NYISO Copyright: New York Energy Week

Jones and van Welie also shared their challenges in building the electric and gas infrastructure needed to meet reliability and environmental goals.

Jones noted that it has historically taken 10 to 12 years to get new transmission approved, sited and constructed in New York.

Based on that, he said, the ISO “would have two years remaining in our 14 years to interconnect everything into the system to meet the [2030 state goal of 50% renewables]. That is not possible. We have to improve our ability to move these projects through the system.

“Given that we have a single siting authority, it does give us the advantage to begin to streamline that process,” he added.

For the six-state ISO-NE, siting issues are compounded by cost allocation disagreements.

Unlike the “singular objective” that made the region’s $12 billion transmission buildout for reliability possible, there is less consensus on transmission to deliver renewables, said van Welie.

Part of the problem is that some renewable developers are trying to connect in weak parts of the region’s grid. “Up in Maine, we have 3,000 MW of wind projects trying to interconnect to a transmission system designed to serve 300 MW of load,” van Welie said.

“We’ve spoken to the developers and said, ‘Why don’t we do a cluster study and why don’t you guys sort of get together and pool your money and all share in this investment that’s required and we can get you all connected?’ They don’t want to do that.

“And then we turn around to the states and say, ‘There’s a bunch of wind developers up here in Maine, some of which have actually signed contracts with you,’ he continued. “‘Can’t we get you guys to pay for some transmission to integrate them?’ And we can’t get that to happen either. And so we’re stuck, quite honestly.”

Van Welie said he has some hope that state clean energy solicitations will break the log jam.

“Maybe they’ll choose one that’s up in Maine and we’ll actually resolve this problem,” he said. “If they don’t, I think we’re going to remain stuck.”

Cost Allocation

Complicating New England’s transmission challenge is the Order 1000 cost allocation methodology approved by FERC. “The northern states don’t agree with the cost allocation and they’re the ones that would have to site these transmission projects,” van Welie said. “Ultimately I think we’re going to do something like what Texas did” with its Competitive Renewable Energy Zones (CREZ), he said.

Jones, who worked for ERCOT and Luminant before joining NYISO last year, said he sees lessons in how Texas and California — other single-state ISOs — were able to build renewables.

“In order to meet this aggressive goal, we have to begin identifying in advance where we think some of these renewables will locate. And then by that identification we can begin to build out a collector system, which allows those renewables to feed into the market,” he said. “We have to begin to remove some of that risk that is … on the developers by building out transmission to locations where we think there’s a high probability for those developers to come.”

Gas-Electric

For New England, the challenge of upgrading the transmission grid is compounded by its stressed natural gas infrastructure. This is a concern, van Welie said, because gas will be needed to balance renewables for the next “several decades,” until storage becomes more affordable.

“One of the most vexing problems we have is this disconnect between how the gas industry is regulated and the electric industry is regulated,” he said. “I think we all launched into wholesale markets 15 years ago thinking that the markets would do a great job of optimizing existing infrastructure, and of course they’ve done that. But we have now pushed the gas system to the limit.”

“So there’s nobody looking out to say, ‘How do we plan the gas system to be able to make efficient fuel delivery to the electric system?’ When we’ve approached the FERC on this issue, basically they’re boxed in because of the Federal Power Act.”

Brownell echoed van Welie’s concern, urging “integrated planning.”

“We need to look at the entire infrastructure needed. Texas [CREZ] worked. It just totally worked. … We just cannot continue to do things state by state, silo by silo, policy by policy,” she said.

Distributed Generation, New York REV

The panelists also gave their views on distributed generation, New York’s Reforming the Energy Vision initiative and its proposed rewrite of the utility revenue model.

“The debate about the big or the small grid [being] either/or is not really a debate that I buy into,” Jones said. “It really has to be both. We can’t … have a large renewable program and then trust that all that will be developed in rooftops. … To get the efficiencies out of building renewables in a way that just doesn’t cost too much for all of our customers, we need to do that in large scale. And so a lot of that large-scale [generation] will be a distance away from our [load] so it really has to be a combination of both the big grid and the small grid.”

rto markets, carbon pricing

Former FERC & PA PUC Commissioner Nora Brownell Copyright: New York Energy Week

Brownell, who served on the Pennsylvania commission (1997-2001) when it eliminated utilities’ monopolies and adopted customer choice, and now serves on the board of National Grid, was asked her reaction to the New York Public Service Commission’s May order seeking to change the utility revenue model.

Instead of earning returns on investments in large, centralized power systems, utilities would have “earnings opportunities” based on their performance as a “platform” enabling distributed resources and other new technologies. (See NY REV Order Revamps Utility Business Model.)

“Utilities cannot deny that the business model is changing with them or without them,” she said. “So I think there is real leadership among some — not all — to be part of that solution.

“The challenge is that if you’re going to have performance metrics — and we’ve seen them in the U.K.; they’ve worked for years — they need to be clear, they need to be measurable. You can’t have what you had in the telecom industry, which was: ‘We’ll give you extra money for doing the following 10 things, but we’re not going to really measure whether you’ve done them.’”

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