More than two years ago, we at NEPGA Powerlines discussed a wholesale markets project that was, and remains, of great importance to the reliable operation of New England’s electric grid and its transition to a greener, cleaner resource mix: Resource Capacity Accreditation (RCA). Since then, RCA has evolved significantly and we feel it is time to check in on its progress. RCA was never going to be an easy project, but in the last two and a half years, it has also become a such a larger topic that it has been christened with a new acronym: “CAR,” short for “Capacity Auction Reforms.”

In mid-2022, ISO New England launched the long-anticipated RCA project, whose goal is to enable the electricity market to better identify which power plants can run, at what time, and for how long — and then create market opportunities for each unit according to its contribution to reliability. The project is a natural evolution in sharpening the accounting of reliability contributions of all the different sources of electricity in the region. In doing so it better reflects operational needs of the changing electric grid to serve consumers in New England.

Right now, our region is home to about 400 generating facilities, but, according to ISO-NE, we expect to be home to more than 1 million generators by 2040 to meet state policies, almost all of which will be much more highly weather-dependent. Under these projections, New England would go from 6,000 MW of installed solar to 28,000 MW, and from about 1,400 MW of wind to an additional 17,000 MW of offshore wind.  At the same time, demand is becoming more flexible and changing its behavior. ISO New England rightly recognizes that it needs to update the way it does forecasting and designs and runs the markets in order to reflect this changing reality and likely future.

At first, in 2022, the ISO was focused exclusively on the task of identifying the exact contribution to reliability of each given resource, hence RCA. But since then, it has decided to also change the way one of its major markets, the Forward Capacity Market, is designed and operates, which leads to the broader CAR project.

This change in the nature, scope, and scale of the project can be likened to a home renovation project that started small and got big.  At first, you just need to replace the bathroom sink, but that morphs into ripping up the floor, ripping out the walls, and replacing pipes. To that end, the ISO is proposing to change this “forward” market to a “prompt” one and making its “annual” focus a “seasonal” one.

Moving from the Future to the Present

For 20 nearly years, New England has relied on the Forward Capacity Market to ensure enough resources are available to meet consumer demand for electricity.  Using an annual auction, selected resources agree to be on-call as needed three years in the future. Going forward, the ISO wants to do a “prompt” capacity auction, which means the time between the auction and the delivery date would be much shorter, though it’s not clear yet exactly what that timeframe would be.

Moving to a prompt auction could have multiple benefits. For example, it would allow for more accurate information about the expected demand for electricity and a plant’s ability to meet that demand during the most stressed system conditions. Also, recognizing just how difficult it is to permit and build a power plant in New England, a prompt auction would better reflect varying construction timelines and ensure that the region does not select a facility in the capacity auction that won’t actually be there. But there are also consequences to such a change, particularly for long-term grid planning and financing of new facilities.

For Every Change there is a Season

In addition to currently being a “forward” market, the Forward Capacity Market also ensures that New England will have adequate resources to meet demand through a single, annual auction. However, we know that different types of generators perform differently, based on the season and their specific technologies. For example, solar arrays, fossil fuel units, hydropower facilities, and nuclear generators all contribute to reliability, but in different ways. We also know that the demand for electricity varies at different times of year. Right now, New England’s peak energy demand occurs in the summer. But forecasts predict that the region will become a winter-peaking system in the next decade or so because of rapid adoption of heat pumps and electric vehicles.

And so, it may make sense to account for that seasonality of supply and demand to be better reflected in what is currently an annual auction. While many of the details are yet to be decided, it is clear that the ISO seeks to ensure the rules governing the electricity market are addressing the distinct reliability challenges from season to season and the variations in resource performance that follows. This change also comes with its challenges, particularly in making sure that a facility needed in one season but maybe not another, is able to earn enough money to keep employees and keep their machines operational.

Accreditation is Underway

The ISO has also made some headway on the initial task: More accurately assessing the reliability each type of resource can provide. There are multiple ways to handle accreditation, and the ISO is working with the idea of “perfect capacity.” If there could be an ideal generator, one with “perfect capacity,” that resource would be able to generate electricity, on demand, at its maximum output, without stopping, for an extensive period of time. There is no such generator, but the term is used to describe an ideal. You can think of it as a perfect ten, or a 100% grade on a test, but even harder to achieve.

Taking variables such as season, technology, and fuel type into account, each resource type is analyzed and judged against that “perfect capacity” and how well it would support reliability when the system is under stress during a particular time of year. That percentage that the generator can be available as needed is then used to calculate each facility’s potential revenue in the soon-to-be overhauled Forward Capacity Market.

Earlier this year, the ISO shared analyses about how each resource type would fare in this new evaluation system. More work still needs to be done, especially regarding how the design of prompt and seasonal markets will impact these valuations. Many are frustrated by how slow this process has been (us included), but NEPOOL market participants remain hard at work with ISO New England in striving to get this important work done right.

The Exception to the New Rule

There is one outlier in this entire analysis: Certain electricity imported into the region, which are referred to as “tie benefits.” Each year, New England imports roughly 15% to 20% of its overall energy needs from outside the region, largely from New York and Quebec. When conducting its annual analyses on the reliability needs purchased in the Forward Capacity Market, assumptions are made about how much it can depend on those imports. While some of those imports receive capacity supply obligations through the market, the vast majority of what is counted in the Forward Capacity Market has no such obligation and ISO New England makes assumptions of what will be available during emergency conditions. It’s those assumptions where risk comes in and a project like accreditation should be able to assess more precisely.

However, ISO New England does not intend to apply the same rigorous methodologies to these ”tie benefits.” This has caused concerns for reliability and market strains because our neighbors are experiencing many of the same changes in their resource mixes and increasing demand from the electrification of heating and transportation. Quebec has even seen a jump from increased manufacturing and AI data centers that is happening in many other parts of the U.S. The ISO does say it will “approximate” the flows from outside the region to account for seasonal variations, but go no further for quite some time.

Creating this blind spot for reliability undermines the basic economic fundamentals of the Forward Capacity Market. Raising the threshold question of why are generators in the region being held to different standards than the energy we expect from outside the region? It is even more bewildering when you consider that this imported energy that the ISO is counting as “perfect capacity” has no delivery or performance obligations in New England. It is just expected to be there in emergency conditions. That is not a smart way to plan for a reliable grid.

There is Much Left to Do

The complexity of the task ahead has prompted many questions and concerns. Some major issues that need to be resolved include:

Retirements
Right now, a generator that wants to leave the markets is required to follow a strict process that ties the decision to the annual Forward Capacity Auction. As a result, the region has almost four years to identify whether there will be any reliability challenges resulting from the retirement and to come up with a solution for that problem. What is the notification timeline and matching of plant exit and entry in a prompt market?

Reliability-Must-Run Contracts

If a generator chooses to retire and a reliability challenge arises as a result, ISO New England has the ability to offer the generator a contract to keep it around. These are often called “Reliability Must Run” contracts (“RMRs”) or Cost-of-Service agreements. They are famously controversial, and hugely difficult to negotiate, but serve as an important reliability back-stop in a “break glass” type of emergency.

With New England being a notoriously difficult place to build any kind of infrastructure, there are open questions about whether new resources will come on time to replace those that are leaving. Coupled with growing electricity demand, this creates real risks of retirements outpacing needed new entry. That makes RMRs an even bigger issue – particularly how these RMR facilities are treated in the electricity market with implications for every other facility competing to stay online.

Timing and Process

The ISO wants all of these new designs and market rules to be in effect by June 1, 2028, with the resources that will be expected to perform when called on to be selected in an auction – FCA 19 – probably sometime in 2027 or 2028.

What’s Next

The ISO will need the approval of the Federal Energy Regulatory Commission (FERC) to implement these changes, and the ISO has said it will file its proposals in two steps. Before that point, there will be significant time and energy spent at NEPOOL and with other stakeholders to discuss the design and implementation.

We expect lively, constructive debates on many of the issues that will be part of this filing.

Throughout, NEPGA – and many others – will be engaged in the CAR process as the region’s electricity market stakeholders work to build a design that drives New England forward.