Supporters of expanding renewable energy are headed for a showdown with New England’s energy market operator at the Federal Energy Regulatory Commission over an arcane rule that could have major implications in the near future for how much is invested in solar and offshore wind compared to natural gas.
Debate over the true cost of developing solar and offshore wind projects has led to two competing proposals – one from the regional energy market operator ISO-New England and the other from the New England Power Pool, a voluntary organization of stakeholders in the regional market including Eversource, energy producers, and interest groups like Acadia Center and RENEW Northeast.
NEPOOL has proposed a lower minimum price for solar and offshore wind projects to enter a regional power auction following an analysis presented by RENEW Northeast that claimed ISO was overestimating the capital costs of those projects.
The federal regulator will evaluate the proposals to decide the minimum price that solar and offshore wind projects can offer on the regional capacity market, where suppliers buy power three years in advance. The market gives energy producers a guarantee of future revenue to encourage short-term capital investments and ensure the region will have enough generating capacity in the coming years.
Critics say that the market has largely favored natural gas resources and has effectively blocked new renewable projects like solar and offshore wind from participating. It’s one key tension between ISO-New England and its constituent states, including Connecticut.
Gov. Ned Lamont and DEEP Commissioner Katie Dykes have criticized the market operator, ISO-New England, for not accounting for the capacity of renewable resources the state has invested its own money in – which they say forces customers to pay for unneeded extra capacity in the form of natural gas-fired plants.
The decision could play a major part in determining how two key sources of renewable energy enter a market that clears about 35,000 megawatts of electric generating capacity each year – the equivalent of almost 17 Millstone Nuclear Power Plants.
A level playing field?
The idea is to select projects that can be sustained on competitive revenue sources, like the regional energy markets. ISO-New England sets a minimum offer price to the estimated amount of revenue that a generator would need to stay financially viable without state subsidies.
It’s the position of ISO-New England that renewables with guaranteed revenues from state contracts incentivizing their development would undercut natural gas plants by offering lower prices in the competitive auction. The minimum price is simply an attempt to level the playing field.
“That’s important to ensure we get the right, economic prices to sustain the revenues of the existing fleet still needed for reliability,” said Dan Dolan, president of the Northeast Power Generator’s Association, which represents both natural gas and renewable energy plants in the region. “The resources that have contracts that trigger the [minimum price] rule are certainly still allowed to compete.”
But Francis Pullaro, executive director of RENEW Northeast, which represents renewable power generators in the region, said that by assuming high capital costs, the rule effectively blocks new solar and offshore wind projects from participating in the auction.
Dolan said that renewable energy generators can appeal the minimum price to the internal market monitor, which can review the generator’s books and decide if it is economical to offer a lower price.
But Pullaro said that appealing to the internal market monitor hasn’t worked for renewable developers. The fact that ISO-New England and NEPOOL are so far apart on a minimum price for solar and offshore wind, he said, shows that the deck is stacked against those renewables.
In a November filing, the market monitor opposed an appeal by NEPOOL for a lower minimum price.
“It just shows the challenge that solar and offshore wind in particular would have going into the internal market monitor – that the market monitor isn’t going to buy into the realistic data that offshore wind and solar are going to provide them,” Pullaro said.
Pricing a rapidly changing technology
While Dolan criticized the NEPOOL proposal as a workaround to the minimum offer price rule, Pullaro insists they are not arguing against the rule itself – just the cost assumptions that made the entry prices for solar and offshore wind so high that they are completely blocked out of the capacity market.
“We’re just trying to say, ‘Look, this has already been established, you just need to get the numbers right,” Pullaro said.
What it costs to develop solar and offshore wind projects is the key question in where to set the minimum prices.
Pullaro said their proposal simply takes the ISO-New England formula and uses lower capital costs for offshore wind and solar, which have become less expensive as the technologies have developed.
“We came up with our own cost curve, and it shows that ISO’s cost is head and shoulders above the rest of the world,” Pullaro said.
While Pullaro touted consultant reports on capital costs of solar and offshore wind projects, and literature reviews on their expected lifetimes, Dolan questioned how thorough and complete their analysis was. He said they took a series of consultant reports that did not look at the “actual economics” of projects being developed in Connecticut and the region.
Dolan questioned NEPOOL’s cost assumptions, which indicate that solar and offshore wind are competitive with natural gas even without preferential state subsidies. If that is the case, they should be able to easily demonstrate to the market monitor that they can come in at a lower price, he said. It also means they shouldn’t need those state contracts that force them to abide by the minimum offer price rule in the first place, he said.
“It feels to me like they’re trying to have it both ways,” Dolan said. “They’re trying on one hand to say, ‘State of Connecticut, you must guarantee a decades-long contract or we can’t finance these new projects,’ and on the other hand demonstrating to the market, ‘We actually don’t need those contracts, we can come in at rock-bottom prices.’ To me, that is a massive contradiction that has not been squared.”
Pullaro, in turn, questioned the ISO’s cost assumptions, which he said are based on no public source of information, rather on proprietary data from Mott MacDonald that it did not share with the NEPOOL markets committee.
Now FERC will be left to review the evidence and decide on a minimum – either accepting one of the two proposals, or rejecting both and telling everyone to start over, said Dolan.
Reading the tea leaves is difficult with the commission in flux – two new members, one Democrat and one Republican, were approved in December to bring the panel to a full five members for the first time in almost two years.
“This has been a contentious issue with the commission, and so it’s hard with two new commissioners who haven’t voted on the issue to kind of know where they would be,” Pullaro said.
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