New England shows the benefits of demand resources in forward capacity markets.
Sandra Levine is a senior attorney with the Conservation Law Foundation. Doug Hurley is an associate with Synapse Energy Economics Inc., and Seth Kaplan is vice president for climate advocacy at the Conservation Law Foundation.
New England is leading the way toward a future that is both cleaner and provides greater electric reliability at reduced cost. New England Independent System Operator (ISO-NE) has created an innovative mechanism that addresses concerns about ensuring adequate energy capacity by allowing the cleanest and lowest-cost resources to be used to meet the nation’s power needs.
As the saying goes, the cheapest kilowatt is the one that isn’t used. The challenge always has been how to create the business and regulatory structures to allow reduced and managed energy use to be as financially rewarding as building another power plant. By including demand resources in the forward capacity market (FCM) in 2007, New England is making this happen in ways that are easily transferable to other regions of the country.
Green New England
Throughout the 1980s, New England states created programs allowing utilities to use demand-side management (DSM), demand response and energy efficiency to better manage electricity usage and costs. Rapidly rising fuel and electricity costs, coupled with rising electricity demand, placed consumers and the environment at risk. Programs used ratepayer dollars, usually collected through a systems benefit charge (SBC), to invest in energy-efficiency programs that improved lighting, cooling and industrial operations, while saving electricity. As a result, utilities and consumers saved money and reduced pollution by avoiding additional electricity generation to meet demand.
For example, Massachusetts ratepayers invested $371 million in energy efficiency from 2003 to 2005, which avoided nearly 3,000 GWh of energy, prevented emissions (9 million tons of carbon dioxide, 4,300 tons of nitrogen oxides, and 16,000 tons of sulfur dioxide) and ultimately saved consumers about $1.2 billion. 1 With these programs, new demand-side businesses created real efficiencies, and effective measurement and verification systems were developed to reliably account for the savings produced. Both of these are key building blocks to the future success and acceptance of demand resources.
From LICAP to FCM
As the New England economy grew throughout the 1990s, increased pressure was placed on the region’s power supply—a supply that by the early 2000s was dominated by merchant generation that either had been divested by utilities or had been newly built by independent power developers.
Conflicts erupted everywhere. First, there were pressures to close down old coal and oil plants that did not meet new pollution standards, or at least force installation of modern pollution-control equipment. Upward spikes in natural gas prices undermined the economics of gas-fired generation, in some cases causing owners to write off newly built power plants, by simply turning over the keys to a lender. All the while, peak electricity demand was rising. Concerns over lack of capacity needed to meet this demand collided with economic and business realities when a number of older and less efficient plants