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Gen Interconnection: Lessons From New England

How rules muted price signals and did not ensure efficient siting.
Fortnightly Magazine - September 15 2002

an unprecedented number of new gas-fired merchant generation facilities. Soon after initiation of restructured markets, more than 30,000 MW of new generation was proposed, and in a queue for a system that had peak loads of only 25,000 MW. Some officials from ISO New England attributed the result to "irrational exuberance." And much of that exuberance was focused on Maine, where relatively inexpensive, undeveloped land was plentiful, fuel was readily accessible from the newly installed M&N Pipeline, and the backbone transmission system could be reached with relatively little transmission investment. To further fuel this development boom, FERC took note of a complaint by a proposed generator and ordered changes to how interconnection requests were handled and analyzed in New England. A long-standing interconnection procedure had required expansion of the transmission system in a way that did not foster congestion. This procedure was replaced with an interconnection procedure that looked only at the minimum amount of transmission upgrades necessary to ensure that a new generator did not adversely impact the reliability and stability of the grid.

NEPOOL responded with a new interconnection procedure administered by ISO New England that is identical in most respects to the interconnection procedure now proposed by FERC in its interconnection NOPR. But because LMP was not in effect in New England, generation developers lacked good, location-specific price information that reflected fully the economics of locating their projects in Maine versus other locations within NEPOOL. To resolve issues with how to allocate the interconnection costs for new generation, NEPOOL negotiated a settlement. It required all generators who were ranked high in the queue to pay all of their direct interconnection costs, plus one-half of the remaining transmission upgrade costs required to satisfy the new FERC-imposed minimum interconnection standard.

This combination of factors led developers to propose more new gen capacity for Maine than either was needed or could be exported in certain conditions. Maine's load, which peaks at about 1,800 MW, represents only about six percent of New England's electric load. At one point, however, the amount of new generation proposed for Maine and in the interconnection queue was over 6,000 MW, which was approximately 20 percent of the new generation proposed for all of New England. Over time, some of these plants were delayed or canceled. Five new plants totaling approximately 1,650 MW eventually were constructed, coming on-line between February 2000 and March 2001. (Table 1 shows the system conditions prior to the new power plant development. Table 2 shows the system conditions after construction of the new generation.)

These figures demonstrate what happens when siting signals do not fully reflect the actual economics of the system. An overabundance of generation was constructed within an area that had insufficient load and export capability to support the full dispatchability of the generation within the area. As a result, the NEPOOL markets are not able fully to realize the benefits of this new competitive generation. Since the plants were constructed, New England consumers have paid tens of millions of dollars more for power, and Maine generators have lost revenues, because