Transcript Slide 1

Projected Supply and Demand Balance and
Ensuring Long-Term Resource Adequacy in
New England
Department of Telecommunications and Energy
Chairman Paul G. Afonso
September 23, 2005
1
Electricity
Projected Growth in Electricity Demand in NE
1.5% p.a.
160
140
Billions of Kwhrs
120
100
80
60
40
20
0
2005
Residential
2010
Commercial/Other
2015
Industrial
Source: Dept. of Energy, EIA, Annual Forecast, February 2005.
Transportation
2
Electricity
Natural Gas Could Become Almost 50% of All
Fuels Used for Electric Generation
If ALL future capacity is gas-fired
15%
4% 0%
13%
(1)
39%
4% 0%
6%
48%
7%
8%
10%
21%
Natural Gas
25%
Current Summer
Capacity (1)
2012
Oil
Coal
Hydro
Nuclear
1A
little more than half of gas-fired capacity has
some limited ability to burn oil (limited by oil
storage and environmental regulations).
Renewables
Other
Source: 2004 from EIA (summer capacity); 2012 assumes Reference Load (50/50) from CELT 2004
Forecast, ISO-NE, October 2004 and assumes a 12% reserve margin, with ALL incremental capacity gas3
fired.
Electricity
New Transmission Lines
Source: Connecticut Light & Power Company 12C Application Presentation, ISO-NE Stakeholders Meeting, Marlborough, MA
February 7, 2005
4
Electricity
New Transmission Helps Boston
9000
Megawatts
8000
40%
35%
7000
30%
6000
25%
5000
20%
4000
15%
3000
2000
Typical Minimum
Reserve Level
Reserves BEFORE
NStar 345 kV line &
Dominion agreement
on Salem
10%
5%
1000
0%
0
-5%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Peak Capacity + Imports (MW)
ISO Reference Case Peak Load (MW)
Reserves as % of Load
No Action Case Reserves as % of Load
Source: RTEP 04 Report, October 2004, “50/50” Case”
Reserves as % of Load
Reserve Position
WITH NStar 345
kV line 7 Salem
thru 2011
5
Electricity
Major Massachusetts Transmission Projects
Project
Proponent
Cost
(MM$)
Projected
In-Service
Date
Status
NStar 345 kV Line
NStar
$233.4
2006
Northshore
Upgrades
National Grid
Total =
$114.9
Various
First $5 MM ISO-NE approved and under
construction with expected in-service dates in
2005 & 2006. Remaining $110 MM projects
proposed with completion expected in 20062008 timeframe
Nantucket
Interconnection
NStar
TBD
Dec. 06
Project has both MA Siting approval and
ISO-NE Reliability approval. No construction
yet.
Central MA
Reinforcements
National Grid
$57.8
2006
Fully approved and under construction
ISO-NE approved in May 04. Currently
under construction
6
New Generation
We Rely on the Private Sector to
Build New Power Plants
• Under the 1997 MA Electric Industry Restructuring Act, regulated
utilities no longer have an obligation to build power plants. With
wholesale prices set by market forces, unregulated developers
must deploy capital to build new plants. Thus, we rely on market
forces to ensure adequate supplies of electricity.
• In the initial 5 years following Restructuring over 8700 MW
of new capacity was added across New England with the
result that New England as a whole has surplus capacity
• In Massachusetts just under 4000 MG of new capacity was added, including 9 large new
plants—including in the Boston area the Sithe Mystic and Weymouth plants and the Mirant
Kendall Square plant
• In addition, the new capacity has allowed the closure of several older, less efficient and/or
more polluting plants
7
New Generation
We Rely on the Private Sector to Build
New Power Plants
• However, new power plants have often been located far from
population centers where electricity demand is highest. The
location of power plants influences both the reliability and price
of electricity.
• New transmission helps deliver power to where its most needed.
Location-dependent price signals encourages the siting of new
plants nearer to demand centers. Without new investment,
current capacity surplus will be eliminated by demand growth.
• To be most effective, new capacity needs to be added in the
right place, in the right amount, of the right type and built at
the right time. Not all of these criteria were met in the postrestructuring capacity boom.
8
New Generation
• Deficits in peaking resources are likely to occur first.
Need to develop demand reduction programs and
distributed generation in the face of large financial and
institutional barriers.
–
The challenge is to address the inherent risk of investment in peaking resources which have
low and uncertain utilization rates by either raising short-term price caps or some sort of
subsidy
• Deficits in overall resources may come if market forces
don’t adequately reward investment. The FERC has
required there be, as of next October, an incentive
mechanism (known as Locational Installed Capacity or
“LICAP”) to reward the provision of generating capacity.
• LICAP, however, may be costly and does not guarantee
new generation
9
New Generation
LICAP Alternative - NERAM
 A broad coalition of parties from New England have
developed a capacity market alternative to the LICAP
market proposed by ISO-NE.
 The alternative, the New England Resource Adequacy
Market (“NERAM”), is a region-wide capacity market
fully integrated with the locational “contingency”
reserves market being developed by ISO-NE.
 The proposed capacity market is based in large part on
a market design previously developed by ISO-NE, NYISO,
and PJM.
10
New Generation
Objectives of NERAM
 Capacity prices set by competition in market
 Capacity payments for performance; facilitate
development of sufficient resources
 Promote regional resource adequacy
 Integration of capacity and reserve markets
 Promote demand response and energy efficiency
 Support restructuring goals by not shifting ownership
risk to customers
11
New Generation
Capacity Market
Overview and Key Provisions

Use of an open auction format with a single clearing price to procure
capacity resources
• Multi-year planning horizon for the capacity auctions, allows new capacity
to participate
• Multi-year compensation/ performance commitment for capacity resources
• Auction process reflects the amount to be procured as established by
states/ISO-NE/stakeholders
• Financial and development qualifications apply to auction participants to
assure availability – substantial penalties for non-performance
12
New Generation
Locational Contingency Reserves Market
• Provides price signals for resources that can address locational
reliability needs (for contingency coverage) and provide operating
flexibility
• Minimizes the need for RMR agreements
• Addressing the locational reliability needs through locational
reserves facilitates implementation of the more efficient regionwide NERAM
13
New Generation
Advantages of NERAM vis-a-vis LICAP
• Market based prices, rather than administratively determined
• Requires advanced commitment from resources that they will be
developed and will participate in the market; LICAP is a monthly
market with no commitment from resources beyond the specific
month.
• Targets the exact amount of capacity needed to satisfy reliability
criteria region-wide; LICAP target is 5.4% above the needed
capacity level. Targeting the exact amount of capacity saves
ratepayers an estimated $150 million per year.
14
New Generation
Advantages of NERAM vis-a-vis LICAP (cont.)
• Obviates market power by having a region-wide market
that allows new capacity and demand response to
participate; LICAP short term planning horizon is not
likely to attract new investment.
• Targets locational payments only to resources that are
needed to maintain local reliability; LICAP makes
locational payments to all resources.
• For the above reasons, NERAM is a more cost-effective,
less expensive solution to ratepayers than LICAP.
15