Forward Capacity Market includes opportunities for energy efficiency
On March 6, 2006, the region’s energy stakeholders achieved a critical settlement concerning the design of the New England capacity market. An alternative to the widely contested Locational Installed Capacity (LICAP) proposal, the Forward Capacity Market (FCM) settlement was agreed to by most involved as a workable wholesale capacity market design. The Federal Energy Regulatory Commission (FERC) approved the settlement on June 16, 2006, recognizing the key objectives of the FCM design: to procure enough capacity to meet New England’s forecasted demand three years in advance (through a competitive auction process); and to provide a long-term (up to five-year) commitment to Supply and Demand Resources to encourage new investment.
A major provision of the FCM settlement is that Demand Resources – including energy efficiency, distributed generation, real-time demand response, and load management – can qualify as capacity along with supply-side resources both during the Transition Period to the FCM as well as in the Forward Capacity Auctions (FCA). Because Demand Resources have not historically competed in wholesale markets administered by the Independent System Operator for New England (ISO-New England), FERC required that a new stakeholder group – the Demand Resources Group (DRG) – convene to develop recommendations for: 1) the Transition Period rules for Demand Resources; 2) the treatment and integration of Demand Resources in the FCM; 3) the integration of the current ISO-New England Demand Response Programs into the FCM; and 4) input to the Installed Capacity Requirement (ICR) process, which sets the capacity resource needs for annual Forward Capacity Auctions starting in 2008.
Anticipating that FERC would approve the FCM settlement, and because the Transition Period is scheduled to begin in December 2006, the DRG began meeting in April 2006 to develop the Transition Period Rules for Demand Resources. By the end of June, the Transition Period Rules were proposed to the New England Power Pool (NEPOOL) Markets and Participant Committees, and with minor changes, were filed with FERC on September 1, 2006. They are currently awaiting approval.
Current ISO-New England Demand Resources Group Activities
Currently, the DRG is finalizing the market mules for Demand Resource participation in the Forward Capacity Market. The draft rules address a host of issues, including definitions for different types and categories of Demand Resources, determination of capacity value for Demand Resources, resource qualification criteria (for new vs. existing resources), financial assurance requirements, performance monitoring, measurement and verification provisions, determination of capacity payments and charges, and Demand Resource penalties and performance incentives. A draft of the FCM Rule for Demand Resources can be viewed on the ISO-New England Web site.
Role of Energy Efficiency Advocacy in the FCM Discussions
A key to effectively integrating energy efficiency into the capacity market is creating rules that provide a fair opportunity for energy efficiency to compete with supply side resources during the auction period. Demand Resources advocates have been instrumental in ensuring a level playing field for demand and supply resources. These parties include, among others, the state regulatory agencies in New England, Conservation Services Group (with the technical assistance of Synapse Energy Economics), Vermont Energy Investment Corporation, Environment Northeast, Regulatory Assistance Project, Conservation Law Foundation, the National Association of Energy Service Companies (NAESCO) and NEEP.
Of particular importance to successfully valuing efficiency resources in the capacity market is to ensure that appropriate measurement and verification standards are used and/or developed for the capacity market. Key efficiency stakeholders in the DRG have and continue to work on this issue with ISO-New England staff and other stakeholders during the process to develop the capacity market rules and ultimately the support Market Manuals.
Measurement and Verification Requirements for Energy Efficiency
Critical to the effective participation of energy efficiency resources in the capacity market is the development of credible and sufficiently rigorous measurement and verification (M&V) requirements. In the Transition Rule, the M&V provisions for Other Demand Resources (ODRs) (not including Real-Time Demand Response projects), in particular energy efficiency, require that
Measurement and Verification Plans must be consistent with the International Performance and Measurement Verification Protocol, or an alternative protocol that has been reviewed and approved by the appropriate state regulatory agency with jurisdiction over utility or state-sponsored ODR programs…ODR providers (utility or state-sponsored) that operate programs under the review of state public utility commissions will submit ODR Measurement and Verification Plans to the ISO for review and comment, as appropriate. State-approved ODR Measurement and Verification Plans shall be assumed to have an adequate independent review process. If ISO review identifies possible concerns, the ISO will consult with the New England states to resolve the concern. Notwithstanding this consultation process, ODR Measurement and Verification Plans submitted pursuant to this subsection are not subject to ISO approval, with the exception of projects for which the ISO must approve the Critical Peak Hours across which Average Hourly Load Reductions would be computed...ODR Measurement and Verification Plans include, but are not limited to, ODR Measurement and Verification Plans adopted or approved by state public utility commissions and utility ODR provider annual reports, technical manuals and ODR Measurement and Verification Plans reviewed by the state public utility commission with jurisdiction over the ODR utility provider.
As such, during the Transition Period, the M&V requirements for state-funded energy efficiency projects are based on state regulatory approval with ISO-New England review. However, in the cover letter of the Proposed Transition Rule to FERC, ISO-New England stated that the New England states would commit to developing common M&V protocols for the purpose of the FCM Rule. During the New England Conference of Public Utility Commissioners (NECPUC) conference this past summer, a resolution was passed that essentially committed the states to working together to develop common M&V standards. This effort, currently underway, involves a range of stakeholders including state regulatory staff, program administrators, and technical experts, and is being facilitated by NEEP. The work of this state program working group will inform the development of M&V standards to be included in the Forward Capacity Market Manual, which will be developed over the next several months and completed in February 2007.
For more information on the activities of the ISO-New England DRG, please visit the DRG Web site, review a presentation by a leading member of the DRG, Henry Yoshimura, or contact Julie Michals at NEEP.
