Takeaways from ISO-NE's Clean Energy Transition Report

February 27, 2020

The explosion of distributed resources, renewable energy, and the electrification of everything are positive steps in our fight to curb carbon emissions. These new technologies present unique challenges to our grid and the regulatory structures surrounding it. This week, ISO-NE published a presentation on how they are thinking about potential pathways for the grid moving forward. In case you aren't interested in reading through the report in its entirety, I've highlighted a few of the key takeaways I'm thinking about.

The concerns shaping these decisions are fairly obvious to those who've been following the space but are still worth pointing out:

  • Consumers want freedom to choose between self-supply and market
  • High penetration of distributed resources means thousands, if not millions, of new resources need to be aligned with reliability
  • The importance of reliability grows as electrification grows
  • FERC and states are still working through the challenges of creating an efficient market (FERC) while transitioning to clean energy (states)

For those new to energy, I found the graph below to be a great explanation of how energy markets are generally structured. Deregulated markets in the northeast and Texas have different structures that want to achieve the same two goals: reliability and low-cost.

Of late, the competitiveness of clean energy and storage has become increasingly important. The structure of these markets combined with state incentives will play a large role in how DER's are deployed over the next decade, so it's important to understand them.

It's also a battle that could be waged in court. States are free to incentivize clean generation sources that compete in regional power markets - these markets are tasked by FERC to be resource neutral in design, so the conflict is an obvious and on-going one. The lack of certainty around how battle eventually plays out is one of the questions surrounding capacity style markets.

The different types of electricity markets

The future path decided by grid operators like ISO-NE could play a potentially large role in how we reduce carbon emissions in the power sector, but large uncertainties remain:

  • it's likely the steep part of the energy transition curve happens post 2030, but a lot can happen in 10 years and predicting that far out is extremely difficult
  • how quickly will the cost of storage decline
  • what transmission investments are needed for a DER + storage driven grid

The new structures created by grid operators need to be designed in a way that handles the large margin of uncertainty that comes with this transition. Two interesting solutions ISO-NE has proposed include:

  • Options on energy, an upfront market-determined option price that reduces revenue uncertainty for sellers
  • Energy imbalance reserves to supply the difference when forecast next-day demand exceeds the day-ahead markets

These types of major changes to power market structures take 2-3 years to take full effect, and the auctions that determine grid capacity are for 3 years into the future. It doesn't take an expert that 2030 feels a lot closer when you consider these types of time horizons.