Winter Reliability Program Working, But What About Next Year?

By Cynthia A. Arcate 21 January, 2014

As previously discussed in this column, the New England electricity system operator, ISO-NE, encountered difficulties last winter in meeting electricity demand when natural gas supplies, the primary fuel source of electricity generation in the region, were constrained during high heating demand. After many months of wrangling, a plan – the Winter Reliability Program – was approved by federal regulators to provide financial incentives to dual fuel and oil fired plants should the gas supply become constrained again.

We all know it was cold during this past December. But, unlike other regions, New England made it through with little difficulty. The reason was some changes in the coordination of the natural gas and electricity markets and the Winter Reliability Program. During December, the power plants in the region were obligated to perform and did so. The price spike for gas drove up the price of electricity to the point where even the coal units could run. The good news is that we did not have a reliability problem. The bad news is that it was expensive and increased carbon emissions.

Even in the face of this success and with another arctic blast upon us, the ISO has stated that they do not see the need for this type of mechanism next winter. They reason that market forces, particularly with the rule refinements made this past year, will be sufficient to ensure that generation will be available. But, how do we know for sure? It’s impossible to know how much of the availability of the oil and coal units was from market forces and rule changes and how much from the reliability program.

The ISO seems to think generators now know that they can count on the constraints happening, the demand being there, and the price going up resulting in adequate generation next winter. But is that a safe assumption? Will generators take on the financial risk for next winter when they were unwilling to accept such risk in the past – and without any incentives? In fact, even with the rule changes this past year, the first round of the procurement for this winter’s operability program did not yield sufficient participation. The terms had to be sweetened to entice more participants. Why does the ISO think next year will be different, particularly without incentives?

It’s not clear that next year’s generation situation will be different from the last, and the ISO is risking the reliability of the region in the process. Perhaps there is more behind the ISO’s position. For the last couple of years, ISO has been advocating for greater penalties for plants that don’t perform when called. Over the last year they have been pushing a performance incentive program that has been uniformly rejected by all stakeholders for many good reasons. Are they forcing their performance incentive agenda on the region indirectly by removing the failsafe strategy that addresses performance during the winter gas constraints? Do they think no one will listen to their cries for gas pipeline expansion unless consumers feel the pain?

Surely, it is better to err on the side of doing the winter operability program again; at least until gas supply issues are resolved. Yes, it is a distortion of market forces–and no one abhors that more than those of us who fervently support a competitive market approach. But in the end, the cost is likely to be less than if we let the market forces work unfettered.  And most importantly it ensures reliability. This is an interim measure and the least offensive of options. (The ISO originally proposed actually buying the oil and selling it. That was an even greater distortion of the market and a role the ISO should not be playing).

Let’s get this resolved now and move on. We need this program next year. We have more important long term issues to resolve instead of spending more time debating incremental steps for interim solutions.

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