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Retirement is Coming

Preparing for New England’s capacity transition.

Fortnightly Magazine - June 2011

are in development, as are various demand- and supply-side proposals to meet future capacity needs; and the region’s capacity market has cleared with an excess, at the market floor price, for the past three years.

Nevertheless, the potential for significant retirement of existing oil- and coal-fired capacity within a relatively short period of time—in a competitive market that’s becoming increasingly dependent on natural gas and has been aggressive in its pursuit of large-scale renewable resource development—is prompting a regional effort among states, stakeholders, and ISO New England to identify the challenges before the region, and discuss potential solutions. 6 If a significant quantity of capacity proposes to retire in the next several years, the region might be forced to at least temporarily rely on a number of expensive cost-of-service reliability contracts to maintain reliability—a prospect that would run counter to the states’ interests, the competitiveness of the wholesale market, and the wishes of the Federal Energy Regulatory Commission (FERC). 7

Many stakeholders in the region are also beginning to suggest that if there exists a generation or demand-response solution to a reliability need that’s cheaper than the backstop transmission solution, and if markets don’t induce the desired results, then such a non-transmission alternative should be analyzed and potentially be eligible for cost-of-service recovery through the region’s transmission tariff. In some ways, the discussion among stakeholders within New England has begun to blur the lines between competitive markets and integrated resource planning.

At a minimum, advance planning and a review of market constructs is warranted. The potential for significant capacity retirements to prompt a rapid turnover in the power fleet, plus the region’s need to avoid overdependence on natural gas and its aggressive pursuit of demand response and renewable resources, all mean that stakeholders and policymakers in New England need to understand the tradeoffs among options, and proactively address regional planning or market impediments to an efficient and policy-appropriate transition. The time for understanding the tradeoffs is upon us, since retirement and new capacity development bids in current forward capacity auctions (FCA)—which result in capacity supply obligations (CSO) or commitments in future years—will now reflect EPA compliance requirements that will likely be in place in the time frame of resulting obligations (see Figure 2) .

Regional Choices

Our modeling results represent a first-order estimate of energy price and emission outcomes. Specifically, we modeled the separate and combined effects of 1) retiring the coal-fired capacity at Salem Harbor Station, and 2) adding new capacity from either natural gas or renewable resources in increments of either 400 MW or 1,200 MW. The goal was to gauge the potential magnitude of impacts of competing resource outcomes on emissions and marginal energy prices within New England. As policymakers contemplate changes in state and regional policies affecting resource development, they will need to understand the differences in emissions profiles and how the integration of critical capacity replacement alternatives will affect regional market pricing. 8

We chose for our model two categories of potential new resources— natural gas and renewables—for several reasons. Practically speaking, the resources available to New