Getting the Most Out of the Region’s Offshore Wind Purchases

By Cynthia A. Arcate and Sean Burke 21 March, 2019

 

In a concerted effort to cost-effectively reduce greenhouse gas emissions and diversify the region’s resource mix with less reliance on natural gas, Massachusetts, Rhode Island, and Connecticut have procured a total of 1,500 megawatts of offshore wind projects. This is enough generation to replace about half of the Mystic gas plants in Everett, Massachusetts slated to be paid to stay open for reliability reasons from 2022-2024. Massachusetts already has the authority to procure another 2,400 megawatts of additional offshore wind in the coming years. The costs of the initial offshore wind contracts have been lower than many predicted, leading to significant excitement about the resource’s ability to help transition New England to a clean energy future. As currently designed, however, these contracts leave one of the most important attributes that could contribute to a clean future unaddressed: capacity.

Capacity is the ability of a resource to provide power at a particular point in time.  Capacity is what the grid operator relies on to meet the highest forecasted electricity demand.  Think of it as building a church with enough seats to fill the church on Easter Sunday rather than on a typical Sunday.  Because the region functions as a competitive energy market, the regional grid operator, ISO-NE, runs an annual auction to procure the capacity needed to meet regional demand three years in the future at the lowest cost. Recently, ISO-NE made significant changes to the capacity auction framework to make it easier for state-sponsored resources, such as offshore wind purchased by utilities under long-term contracts outside of the competitive market, to participate in the auction. If the resources do not clear in the initial auction, they can then participate in a second substitution auction where they can replace fossil plants willing to give up their slot in the capacity market for a payment. This construct enables a smooth transition to a cleaner energy future. The rules were changed specifically to accommodate the Massachusetts, Rhode Island, and Connecticut contracts into the market. The opportunity door was open, yet the contracts arising from these procurements in Massachusetts and Rhode Island did not take advantage of the opportunity.

None of the contracts require the offshore wind developers to bid into the capacity market. While the developers likely have a financial incentive to bid into the market (they get to keep the money), there is no requirement that they do so. Consequently, the region may buy more capacity than it needs and higher emitting resources will continue to operate. The vision behind the offshore wind purchases is not being fully realized.

As these contracts undergo regulatory review and approval, they should be required to bid into the forward capacity market. All future solicitations undertaken by New England states should be clear that the selected developer will be expected to bid their project’s capacity into the capacity market. This stipulation will ensure that customers realize the full benefits of the projects they are enabling. Offshore wind facilities, when bid into the capacity market, will be able to offset older, dirtier plants. Not only will this accelerate the regional transition to a clean grid, it will ensure that customers who are paying for the project will realize the economic benefits from not buying more capacity than is needed. The capacity value is there, and we are already paying for it. We should use it.

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