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The Nation's Grid Chiefs: On The Future of Markets

Exclusive interviews with the CEOs of five regional transmission systems.

Fortnightly Magazine - October 2006

but it looks like there’s something in the future that will have to be married.

 

Gordon van Welie

President and CEO, ISO New England Inc.

 

Fortnightly: How are things going right now with markets in New England? How are you doing with energy prices and capacity incentives?

Van Welie: I think we’ve made some big breakthroughs. The markets have done well, now that we’re entering a maturing phase. Of course, we’ve been through a fairly controversial start-up phase.

We saw a huge investment—more than $6 billion, about 10,000 MW—in new generation in New England from the late 1990s, from when markets opened up until 2003. That was in very efficient gas-fired generation. This helped reduce pollution levels because it displaced older, dirtier units, and decreased the heat rate. This increased the efficiency of New England’s system dispatch because you had more efficient units coming into the system. Overall, our fuel-adjusted wholesale prices decreased over a period of three or four years.

The other thing, which is quite remarkable, actually, is to compare the availability of generation during the early 1990s versus the late ’90s, and into the early part of this decade. We’ve seen a net increase in power station availability. For example, a refueling outage at a nuclear unit in the 1980s and ’90s probably took four months on average—120 days. They now go to great lengths to get it down to less than 30 days. This leads to a higher availability for generation, which translates into less generation needed to achieve the same output, which is a big cost saving. Certainly, it would be very hard to argue that markets didn’t have a benefit.

Fortnightly: How about price volatility and congestion this past summer. Are they up? Down?

Van Welie: Price volatility was up this summer, and there’s a good reason for that. Price volatility is typically correlated to fuel price and high demand levels for electricity. Although fuel prices were at a relatively high level throughout the summer, what drove the price volatility this summer was demand. During the heat wave in early August, New England experienced record-breaking demand, causing us to run the most expensive units on the system. This drove wholesale prices to the cap of a $1,000/MWh.

Fortnightly: Why do you think there is so much opposition to LMP pricing across the country?

Van Welie: If you dig a little deeper, the argument is really whether you’re going to accept marginal pricing in the energy market. Typically, when you dig below the surface, there are other reasons why people don’t want locational marginal pricing—and it doesn’t really have anything to do with whether the markets are good or bad, but it has to do with the local financial interests of those who are resisting the introduction of markets. For example, a vertically integrated monopoly utility with a lot of rate-based generation might be resistant to the idea of competing on a level playing field because it doesn’t want competition for its generation.

Another New England example is when one tries to change something that

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