Utility decoupling on steroids

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"Utility decoupling on steroids"

[A guest post for Climate Progress by a writer with more than 30 years in energy and the environment with government, private industry, and the nation's leading think tanks. He currently works for the federal government and will be blogging in anonymity until he leaves public service.]

New England ISO’s Forward Capacity Market

One of the more serious structural flaws in energy policy has been the fact that utilities can make money by selling electricity, but not by saving it.

As a result, a lot of power plants are built even though energy efficiency measures, on-site generation, and demand response could displace the need for the power they generate, at a far lower cost.

For years, the Holy Grail of utility policy has been to decouple utility profits from electricity sales, freeing them to make money off of efficiency and other low-cost means of providing capacity. Selling negawatts, as well as megawatts, in short.

As with most innovative energy policies, California led the way, decoupling utility profits from power sales in 1982 and ramping the policy up in 2007. Decoupling has been a big reason California has held its per capita electricity consumption flat for 3 decades while the rest of the country’s per capita use has increased by 50%.

In New England, they’re implementing what may be the next generation in decoupling.

Faced with capacity shortfalls, and a fraying consensus among the states in its service area, The New England Independent System Operator negotiated a new approach to meeting demand: the Forward Capacity Market.

FCMs just might become decoupling on steroids. Here’s how it works in New England.

ISO NE develops forecasts for needed demand 3 years in advance and then conducts auctions annually to purchase sufficient power to meet those needs. Nothing too spectacular so far.

But here’s where it gets interesting. The auctions are relatively wide open, and the entity that can provide the lowest cost capacity — whether through negawatts, megawatts, on-site generation, or demand response — is awarded the right to supply that capacity.

Whereas traditional decoupling strategies allow utilities to invest in and profit from efficiency-based capacity by assuring them a return that is equivalent to sales of MWs, FCMs require that power be allocated to the lowest cost bidder, and it opens the bidding to capacity providers other than utilities.

The centerpiece of the FCM is the descending clock auction. Essentially, a series of rounds are held where qualified applicants bid to provide the needed power. At the end of each round, the auctioneer announces the excess supply bid in the prior round, the start of round price; and the end of round price. As a result, bidders adjust their prices or drop out. The clearing price is determined when the excess supply being bid into the auction is zero.

Nothing is simple in transmission and distribution, but ISO New England has clear rules for qualifying both new and existing resources. New demand response applicants have to use a monitoring and verification (M&V) protocol to quantify reductions (based on the IPMVP), they must provide financial assurance, and they must be located within a specified capacity zone.

The first auction began on February 4th of this year and finished up on the 6th . The results were intriguing. Existing supply faired the best, but of the 1,813MW of new resources, 1,188MW were demand-side projects.

Although the FCM will increase prices in some capacity zones during the transition phase, it is expected to substantially lower consumer costs in the long term.

It’s not clear how much efficiency FCMs will tap into, but the approach will put demand-side strategies on an even footing with traditional supply and generation, and that could cut a lot of carbon at a low — or no — cost, particularly once carbon is priced under a cap and trade program. And if allowances were auctioned under the cap and trade program, as Obama has proposed, efficiency and on-site generation would garner an even bigger share of New England’s energy needs.

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11 Responses to Utility decoupling on steroids

  1. kenlevenson says:

    That’s very exciting (if a bit confusing to the uninitiated – me, for example). Can you describe what some of the demand side projects are that won the bidding?

  2. David B. Benson says:

    What kenlevenson wrote.

  3. john says:

    They run the gamut from demand response projects (shutting down big energy users like air conditioners etc. during periods of peak loads) to traditional efficiency projects such as replacing HVAC systems, lighting etc. the key often is aggregation.

    And don’t worry — the rules and terms for transmission and distribution are astoundingly complex … sort of like the third tranche in a hedge fund.

  4. kenlevenson says:

    Thanks.
    So are these demand side bidders big commercial landlords or retailers or industrial or institutional stand alone users?
    Or are they consortiums of users?
    Could they be a co-op of some sort?
    Or are they separate “energy companies” that makes efficiency plans/contracts for all or some of the above?
    Or both…
    What kind of savings scale does a bidder need to achieve?
    Just curious.

  5. john says:

    The article has a hyperlink to the “rules” ISO applies to new sources. Demand-side bidders have specific requirements unique to them. Under those rules, it appears as though co-ops and consortia could qualify, provided they could meet M&V requirements and they met financial responsibility obligations. ISO NE’s web site has a listing of the winning bidders.

    As for size, it varies according to the type of demand side measure being proposed. As noted, this is an extremely complex plan, and it would be difficult to summarize here. I’d suggest starting with this link: http://www.iso-ne.com/genrtion_resrcs/dr/broch_tools/intro_to_dr_in_fcm_training_21607.ppt.

  6. Earl Killian says:

    John, thank you for the article. In 2005, New England was 8,970 kWh per capita. Are there any estimates, goals, etc. for what this could become with decoupling? What policies other than decoupling allowed NE to be 27% below the national average of 12,347 kWh per capita?

  7. John Hollenberg says:

    I had a bit of trouble understanding the “descending clock auction”, and found this quote that describes it better for me:

    “The FCA is a “descending clock” auction, a common auction format. The ISO names a price, and suppliers indicate the quantity of capacity they are willing to offer at that price. If there is more supply than needed, price is decreased; some suppliers may choose, at this lower price, not to offer some of their capacity. This process continues until ISO has winnowed out the high-cost offers and is purchasing just enough capacity to meet the
    Installed Capacity Requirement from the most economical sources. The resulting price is then the auction clearing price, which all selected suppliers are paid.”

    See this link: http://www.nepga.org/contents/factsheet8030606.pdf

  8. john says:

    Earl:

    New England has had transmission constraints, relatively high prices, and in Maine and Vermont, relatively high use of biofuels for heating and even industrial energy, so these have likely contributed to the lower prices.

    John:

    Thanks – that is a clearer explanation. The link has some presentations which have graphics shwoing a hypothetical descending clock auction which are quite good, too.

  9. shop says:

    As with most innovative energy policies, California led the way, decoupling utility profits from power sales in 1982 and ramping the policy up in 2007. Decoupling has been a big reason California has held its per capita electricity consumption flat for 3 decades while the rest of the country’s per capita use has increased by 50%. ” waow 50% very big

  10. utanma says:

    As with most innovative energy policies, California led the way, decoupling utility profits from power sales in 1982 and ramping the policy up in 2007. Decoupling has been a big reason California has held its per capita electricity consumption flat for 3 decades while the rest of the country’s per capita use has increased by 50%. ” waow 50% very big

  11. utanma says:

    New England has had transmission constraints, relatively high prices, and in Maine and Vermont, relatively high use of biofuels for heating and even industrial energy, so these have likely contributed to the lower prices.

    John:

    Thanks – that is a clearer explanation. The link has some presentations which have graphics shwoing a hypothetical descending clock auction which are quite good, too.