Wholesale Electric Market Design Considerations for New England's Low Carbon Energy System

New Englands Future Wholesale Electric System Market Design Considerations in a Very-Low Carbon Energy System Sue Tierney Analysis Group New England Restructuring Roundtable, March 13, 2020 BOSTON CHICAGO DALLAS DENVER LOS ANGELES MENLO PARK NEW YORK SAN FRANCISCO WASHINGTON, DC BEIJING BRUSSELS LONDON MONTREAL PARIS

My biases The wholesale electric market should . . . support having public policy objectives relating to the electric system incorporated into the market rules and pricing approaches. promote (to the extent possible) efficient electric-resource investment and operations, through market-based mechanisms and fair and efficient assignment of risk. mitigate the exercise of market power. promote innovation and be robust to alternative futures. New England Restructuring Roundtable March 13, 2020 1

And other assumptions . . . About carbon-emissions reduction, wholesale market design, & the political economy of New England The New England states have or will eventually have a decarbonization / electrification agenda, although their policy approaches will likely differ across time and place. In designing their approaches, their first allegiance won t necessarily be to the efficiency of the regional wholesale market design. New England is not Texas . . . with some implications for thinking about energy-only and scarcity pricing. 2 New England Restructuring Roundtable March 13, 2020

And other assumptions . . . About conditions in New England s electric system of the future Introducing a much stronger price on CO2emissions inside the region s wholesale power market will help send signals that carbon matters (just as do reliability and efficiency). It needs to happen. The topology of tomorrow s grid will be a combination of central-station and highly decentralized resources, with much-more-varied and location-specific capabilities than exists today. Resource adequacy will need to be more about having the right types of resources in the right places, and not just about meeting the peak hour plus reserves. Locational market power issues could (will?) be become challenging in the future. Demand side bidders ability to offer into complex and sophisticated wholesale energy markets could be constrained (e.g., mainly only available to big electricity consumers, demand-side- resource aggregators). 3 New England Restructuring Roundtable March 13, 2020

A future market design for an organized wholesale power market Flipping the focus on capacity assurance and operational efficiency . . . Implications for the performance of a system with high capital costs, limited energy production from some technologies, low variable costs, reliance on central-station and location-specific resources? Two elements of a market design: Resource-Adequacy Construct assuring availability of valued resources installed on and accessible to the system. Energy-Production Construct assuring the operations of an efficient electricity service at all times. A market design needs to ensure adequate resources are available to provide needed electric-system attributes in an upcoming period e.g., coverage of peak loads and installed reserves. flexibility and other capabilities needed for operational security. local capacity in constrained areas which depend significantly on distributed energy resources. declining emissions profile of the resource portfolio over time. The market design needs to include a price on carbon. 4 New England Restructuring Roundtable March 13, 2020

A future market design for an organized wholesale power market Implications of a system with low emissions, high capital costs, energy constraints, low variable costs A hybrid model for resource adequacy: For local reliability, a central buying function for ISO-NE: to procure resources within or deliverable to local zones, with solicitation for sufficient forward periods to address capital-intensive nature of resources (e.g., 5 years). to assign to relevant load-serving entities (LSEs) the cost of providing service in those zones. For system reliability, a distributed responsibility for LSEs: to arrange for their share of any other resources needed for the region s resource adequacy (established by the ISO) in different forward periods. to demonstrate for a forward commitment period (e.g., 5 years) that each LSE holds resources (at higher levels for closer periods, such as 100% of required resources for the months in forward year 1, declining to 50% for year 5). For backstop resource procurement, the ISO would: conduct near-term central auctions for any gap in regional requirements. 5 New England Restructuring Roundtable March 13, 2020

A future market design for an organized wholesale power market Implications of such a system for the provision of MWh and A/S products (while trying to be provocative) . . . If most centrally and bilaterally procured resources are capital intensive and energy-limited, with very low variable costs and with the potential for market power in many places on the system, then is the appropriate energy-market design one that is: A bid-based security-constrained, co-optimized economic dispatch? In conjunction with forward resource-adequacy contracts that are contracts for differences (in the tariff) and with contractual performance incentives for availability? A security-constrained economic dispatch based on production costs? In conjunction with forward resource-adequacy contracts that are for fixed costs and that have contractual performance incentives for availability? 6 New England Restructuring Roundtable March 13, 2020

Contact Sue Tierney, Ph.D. Senior Advisor, Analysis Group 617-425-8114 Susan.Tierney@analysisgroup.com 7 New England Restructuring Roundtable March 13, 2020