A common response to energy-market risk is a complex market infrastructure, with significant administrative effort and cost dedicated to managing the risks and ensuring that the market functions...
Finding the 'Sweet Spot'
As president and CEO of ISO New England, Gordon van Welie has his feet planted firmly on each of two sides of a cultural divide. First, as a transmission system operator, van Welie must keep the lights on and the wires humming—a conservative agenda dictated by long-established engineering concepts where even a moment’s failure can and does lead to political repercussions.
At the same time, however, he must run a regional market—an ongoing experiment in freewheeling capitalism in an industry fraught with more long-term uncertainty than perhaps any other.
Fortnightly: I’m hearing through the grapevine that your recent auction in the forward capacity market was “hijacked” by a huge wave of demand-side bidding. My sources tell me these bids pushed the price so low that some power producers—hard asset owners—are left asking, “What’s in it for me?”
van Welie: There was a very large show of interest. We whittled the amount down through our qualification process and then ran the auction. Ultimately, we ended up with approximately 1,200 MW of demand-side resource and about 600 MW of new supply-side resource. And yes, while it is correct that a large amount of demand-side resources was procured, we’re actually quite pleased about it. Our instinct has been that—at least in the early years of the auction—there ought to be some low-hanging fruit in the form of demand-side resources that could be picked in New England.
Fortnightly: Do you have any safeguards to make sure that these demand-side resources will show up when they’re needed, say, in summer, during a peak demand period?
van Welie: If a university, for example, said it was going to install a large-scale energy efficiency project by 2010, it would have to send us a report every quarter on its progress, including dates the new equipment was ordered, when it arrived, and when it was installed. Or, as another example, consider an aggregator promising to pull together retail customers to cut load. It would have to provide documentation on its progress, including lists of the retail customers under contract, how much each customer is expected to reduce load, and the results of any testing done with each customer.
Fortnightly: What about environmental mandates and renewable portfolio standards?
van Welie: New England has been at the leading edge in this area. Five out of the six states have formally adopted renewable portfolio standards (RPS) and I believe the sixth is now evaluating it. Also, all six have signed on to the Regional Greenhouse Gas Initiative (RGGI). RGGI requirements are the same for the entire region, but with RPS, the definition of the renewable requirement varies a little from state to state. However, both of these initiatives set a requirement at the state level. The cost of resources then will be priced into our markets, through the market bidding process.
Fortnightly: Do you anticipate any conflict between your FCM model and these state environmental mandates?
van Welie: No. Our wholesale markets are designed to be agnostic when it comes