Perspectives on Integrating Markets and Public Policy in New England April 3, 2018 | hartford, ct Perspectives on Integrating Markets and Public Policy in New England Northeast Energy Bar Association Matthew White, Ph.D. Chief economist

Overview and Key Points States’ growing renewables procurements pose a predicament for wholesale electricity market rules and objectives ISO New England and regional stakeholders developed an innovative near-term solution: Competitive Auctions with Sponsored Policy Resources (CASPR) FERC’s recent decision accepting CASPR expressed a range of views on balancing federal/state objectives in these markets

The Big Picture: Evolving Policy Objectives Electricity markets were developed with one objective: reliability at least cost Today, many states have additional, environmental goals for the power sector The wholesale markets were not designed to value these environmental attributes How should the region balance these objectives? Not every preferred policy resource will come at least cost, and vice versa (From Gordon’s Roundtable Presentation)

Recent State Resource Procurement Initiatives Target MW (nameplate*) States Are Supporting the Development of Clean Energy Resources to Meet Their Public Policy Goals Growing provision of out-of-market revenues through long-term contracts Legislative initiatives vary by state State(s) Recent State Resource Procurement Initiatives Expected Resources Target MW (nameplate*) MA, CT, RI 2016 Multi-State Clean Energy RFP Solar, wind 460 MA 2016 Energy Diversity Act Clean energy, incl. hydro import Approx. 1,200 (9.45 TWh) Off-Shore Wind Up to 1,600 Different graphic *Note: Nameplate megawatts (MW) may be higher than qualified Forward Capacity Market (FCM) capacity MW

Key Capacity Market Offer Rules Are At Issue Eastern ISO/RTO capacity markets have Minimum Offer Price Rules (MOPRs) Genesis: Counter buyer-side market power via subsidized new generation That is inefficient, resulting in excess investment (“overbuild”) and unnecessarily high total costs over time MOPR’s role affirmed in FERC’s recent CASPR decision: “[T]o address the impacts of state policies on the wholesale capacity markets… we will use the MOPR as our standard solution…” (ER18-619 at 22, issued 3/9/18) (From Gordon’s Roundtable Presentation)

The MOPR’s Reach is Broad, Spurring Recurring Debate MOPRs apply to (most) new resources, regardless of state-supported revenues’ intent State-directed procurements may reflect many possible public policy objectives Some suggest it be limited “to address monopsony power” (Bay, concurring, 158 FERC ¶ 61,137) In practice, that appears unworkably problematic: ISOs must apply objective market rules to verifiable data, on tight timeframes, to transparently administer the markets Concerns about ‘discerning intent’ as part of that process (From Gordon’s Roundtable Presentation)

The MOPR Predicament As New England states develop more clean-energy resources to achieve their public policy objectives: Most are unlikely to clear in the capacity market, given the MOPR Other, non-sponsored resources would clear instead Result: Excess investment (“overbuild”) and unnecessarily high total costs over time In this context, a MOPR contributes to some of the same inefficient outcomes it sought to prevent

The New England States’ Concern: “Paying Twice” The region could end up with more resources than needed to reliably serve load Consumers would effectively “double pay” for their future electricity supplies: Forward Capacity Market (FCM) payments + Retail fees/charges to fund higher-cost policy resources that remain outside the capacity market

Stakeholder Discussions on Markets and Public Policy In 2016, NEPOOL sought to address this predicament and better integrate the region’s wholesale electricity markets with the states’ public policy goals (IMAPP) In 2017, the ISO worked with NEPOOL and state representatives to design a market solution in the near term: Competitive Auctions with Sponsored Policy Resources (CASPR) Different graphic

Design Objectives and Principles Competitive capacity pricing. Maintain competitively based capacity auction prices by minimizing the price-suppressive effect of out-of-market revenues on competitive (non-sponsored) resources Accommodate entry of sponsored resources into the FCM over time. Minimize the potential for New England developing too many resources in the power system, an inefficiently costly outcome Avoid cost shifts. To the extent possible, minimize the potential for one state’s consumers to bear the costs of other states’ incentives A sustainable, market-based approach that extends, rather than upends, the existing capacity market framework

Solution: A Substitution Auction CASPR introduces a second auction phase, where new sponsored resources can acquire existing resources’ obligations Held after the primary Forward Capacity Auction (FCA) Resources that participate transact at a transparent, mutually agreeable secondary market price where no MOPR applies This helps the capacity market: Substitute new for old capacity resources, reducing the potential for inefficient overbuild and “paying twice” Simultaneously preserves competitively- based pricing in the primary FCA, where the MOPR continues to apply

The Substitution Auction is a Logical Market Solution Substitution auction matches buyers and sellers economically Sponsored policy resources that clear become existing capacity Existing resources that “buy out” must permanently retire Existing resources can bid to “buy out” (transfer) their capacity obligations New sponsored policy resources can offer to sell capacity (with no MOPR) S.A. clearing price Capacity (MW) 12

A Substitution Auction Has Many Notable Features Avoids cost shifts. The substitution auction generally does not affect payments to load, or to existing (non-retiring) resources Likely to help the New England states achieve their greenhouse gas (GHG) reduction policy goals as older, high-emitting units may retire sooner The Forward Capacity Auction’s competitive price signals continue to guide entry and exit if sponsored new policy resources are not developed

FERC Approved CASPR on March 9, 2018 CASPR will apply for the 2019 capacity auction (FCA 13) Also a multi-year phase-out of current renewables treatment rules Volumes of sponsored new supply are uncertain for FCA 13 Massachusetts’ procurement processes ongoing (83C, 83D) Participation apt to develop over a period of years, as sponsored new renewables come online (From Gordon’s Roundtable Presentation)

CASPR Elicited Broader Perspectives on the MOPR The Commissioners expressed a range of views on MOPRs in the CASPR order (ER18-619 , issued 3/9/18) Majority: MOPR will be the “standard solution” LaFleur: Not so fast – it’s a “blunt instrument” and certain exemptions could be warranted (concurring) Glick: Let’s “get out of the business of mitigating the effects of state public policies” generally (concur./diss. in part) Powelson: No, the opposite. “[S]tates had the opportunity to foresee this ‘double payment’ problem” (dissenting) Ergo: The balancing act continues… (From Gordon’s Roundtable Presentation)