Joel Gordon PSEG Energy Resources & Trade, LLC George McCluskey NH Public Utilities Commission Brian Forshaw Energy Market Advisors, LLC Maureen

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1 Joel Gordon PSEG Energy Resources & Trade, LLC George McCluskey NH Public Utilities Commission Brian Forshaw Energy Market Advisors, LLC Maureen Callahan (moderator) Usource

2 NE CASPR Update BIA 2017 NH Energy Symposium J O E L S G O R D O N P S E G E N E R G Y R E S O U R C E S & T R A D E L L C D E C E M B E R 7,

3 Competitive Markets Work Since competition was introduced in 1999: Over $12 billion in new investment in New England. 3,000MW of new generation under construction $3 billion of new investment. 5,000 jobs and $300 million in state taxes. Power plant operating efficiencies have increased 22%. Generator emissions have been significantly reduced. All without ratepayer guaranteed cost recovery for bad investments. 3

4 Competitive Markets Work for NH Almost $1 billion investment in NH between Newington Station and Granite Ridge alone. Supports over 800 skilled jobs and provides over $46 million in local taxes. CO2 emissions declined 33% from 1990, and 57% from the peak in Retail & 33 Commercial Supplier Options: Residential: PSNH KWh VS KWh Small Commercial: PSNH KWh VS KWh.and it is costing less than ever before 4

5 Competitive Markets Work 2016 had the lowest wholesale prices since Electricity prices are driven primarily by natural gas fuel costs, which have declined significantly. From 2001 to 2015 long term reduction in pollutants: NOx 68% SO2 95% CO2 24% The total cost declined from $7.3B in 2003 to $4.1B last year 44%. Energy prices declined to 2.9 KWh a 41% drop 5

6 Capacity Markets Take up the Slack $12.00 FCM Auction Clearing Prices $10.00 $8.00 $6.00 $4.00 $2.00 $ FCA1 FCA2 FCA3 FCA4 FCA5 FCA6 FCA7 FCA8 FCA9 FCA10 FCA11 The higher capacity clearing prices will increase the total cost of the market from the historic $1.2B to about $3.1B over the next few years. From about $0.9 KWh to $2.4 KWh in the wholesale cost. 6

7 Competitive Auctions with Sponsored Policy Resources - CASPR The current market was not designed to transition the fleet to clean energy resources over time. Markets designed to be fuel and technology neutral.. Growing concern that states actions to achieve clean energy objectives are becoming large enough to undermine competitive wholesale markets. CASPR designed to transition the NE fleet, over time, while maintaining the integrity of the markets and the reliability of the system. 7

8 Understanding Public Policy What you Need: Milk Eggs Bread States policy is no longer about delivering reliable electric service at a reasonable cost. What you Buy: Popsicles Candy Bars Carmel corn 8

9 CASPR at Fifty Thousand Feet CASPR sets up a new market (aka: retirement or substitution auction) to provide an opportunity for state subsidized resources to buy their way into the capacity market. Allows high priced renewables (otherwise uncompetitive compared to traditional generation) to obtain capacity market revenues. Provides existing generators potential incentive to retire earlier than they otherwise might. Goal is to preserve the functioning of the existing capacity auctions while using the market to help offset state subsidies to renewables. Mechanism generally designed to have sponsoring states incur the cost of their market participation. 9

10 Evolution of the New Design The electricity markets are a combination of administrative rules supported by economic theory to mimic true competition. They have undergone significant and continuous evolution since implemented 1999 as deficiencies are uncovered. CASPR is the first attempt to begin to integrate the markets with evolving public policy objectives. We don t always get it right the first time sometimes it takes numerous iterations. 10

11 New Hampshire BIA 2017 Energy Symposium December 7, 2017 New Hampshire s Perspective on CASPR George McCluskey New Hampshire Public Utilities Commission

12 State Environmental Policies and Competitive Markets New England s three southern states subsidize the development of clean energy resources by entering into out-of-market power contracts. The cost of these contracts could be significant if the quantities purchased are substantial and new clean energy resources are unable to enter ISO-NE s capacity market. Massachusetts expects to substantially increased its purchases of new wind, solar, and hydroelectric resources through the Mass RFP, with more to follow as its carbon reduction requirements increase over time.

13 State Environmental Policies and Competitive Markets (Cont.) Some states have lobbied for wholesale market changes that would make it easier for clean energy resources to enter the ISO s capacity market. New Hampshire has not played a leading role in the effort to develop market re-design proposals. Instead, the state has focused on ensuring proposed changes do not unreasonably harm its customers.

14 CASPR Proposal ISO NE has proposed a market solution that attempts to lower the cost of state subsidized clean resources while maintaining an efficient capacity market. The proposal dubbed CASPR - will allow state subsidized clean resources to enter the capacity market without depressing capacity prices below competitive levels. Preserving competitive pricing to incent new generation investment and continued operation of existing efficient resources is a crucial element of the CASPR proposal.

15 CASPR Mechanics The basic premise of CASPR is that existing high cost resources can be economically incented to retire early, and make room for new resources required by state laws to enter the capacity market. CASPR achieves this objective by adding a second auction the substitution auction (SA) that serves to coordinate the entry of new subsidized resources with the exit of existing resources that are willing to sell their rights to capacity payments.

16 CASPR Mechanics (Cont.) The price paid to acquire the capacity rights of existing resources will not affect the price set in the first auction the primary auction (PA)- which is paid by all regional electric customers. This means New Hampshire customers will pay none of the costs to encourage existing resources to exit the market and retire.

17 New Hampshire s Position On CASPR NEPOOL members will vote on CASPR tomorrow. Though New Hampshire does not have a vote, we are likely to offer our support for the following reasons: 1. CASPR s objective of preserving competitively-based capacity pricing in the PA aligns with our belief that New Hampshire customer interests are best served by competitive rather than subsidized pricing. 2. CASPR will provide state subsidized resources an important opportunity to enter the capacity market without increasing the capacity prices paid by New Hampshire customers.

18 New Hampshire s Position On CASPR (Cont.) 3. Failure to receive FERC approval for CASPR risks acceptance of an alternative solution that involves New Hampshire paying some portion of the costs of other states policies.

19 Potential Alternative Solutions In The Event CASPR Fails To Receive FERC Approval 1. Carbon Pricing This option could provide substantially increased energy market revenues to clean energy resources, possibly eliminating the need for them to participate in the capacity market. New Hampshire customers would likely pay higher prices. 2. FERC Order 1000 Transmission Upgrades Under this option, one or more southern states could elect to have a transmission project delivering wind or hydroelectric energy to the region designated as a public policy transmission upgrade under FERC Order 1000, which if approved could mean the project costs are shared among all New England states according to a pre-approved cost allocation formula.

20 New England Wholesale Electricity Markets: Will ISO-NE's CASPR Proposal Address State and Consumer Concerns? 2017 Energy Symposium New Hampshire Business and Industry Association December 7, 2017 Brian Forshaw Energy Market Advisors LLC 20

21 Energy Market Advisors LLC Energy Market Advisors was formed to help make wholesale electric markets work for electric consumers in the New England region and beyond. By understanding and influencing market rules, Energy Market Advisors clients are better able to reduce costs and take advantage of opportunities afforded by competitive electricity markets. Disclaimer: Any observations made in this presentation are strictly mine and do not reflect the views or positions of any Energy Market Advisors LLC clients. 21

22 Overview Development of Wholesale Electricity Markets in New England Public Power's Design and Evaluation Criteria for CASPR Why CASPR will Not Meet State Objectives and Consumer Needs What Comes Next? 22

23 New England Wholesale Electric Market Development New England's Wholesale Electric Markets were developed in the late 1990s and early 2000s to achieve 2 objectives: - Assuring the New England bulk power system meets applicable standards of reliability - Creating and sustaining economically efficient markets for energy, capacity, and ancillary services 23

24 New England Wholesale Electric Market Development (cont.) The associated market rules were based on a number of assumptions and expectations: - Future generation will be developed under a project financed, merchant generator model. - Load growth will require a new 600 MW resource to be built every year. - Competitive wholesale markets will drive down net consumer electric costs to the national average. - Exposure to fuel & resource diversity, local area resiliency, price volatility, and environmental stewardship will be taken care of through the markets. 24

25 New England Wholesale Electric Market Development (cont.) These assumptions and expectations are no longer valid: - Generation developers have admitted that the merchant generator model is obsolete and unable to create value over the long term. - Net peak load and energy requirements are flat/declining. - Low natural gas prices have reduced generator revenues and the region is increasingly dependent on natural gas as the primary fuel for electricity. - The gap between retail electric prices in New England and the rest of the country is greater than ever. 25

26 Consumer Expectations Today Today's Consumer Concerns Include: - The impacts of high natural gas price volatility, particularly during the winter months. - The impact of extreme weather events on local area resiliency (including recovery from widespread outages.) - The impact of high electricity prices on regional economic growth. - Recognition of the importance of environmental stewardship and the desire to reduce Greenhouse Gas (GHG) emissions. The Current Wholesale Market Design Does Not Adequately Address these Concerns. 26

27 Public Power Design Criteria for CASPR The Region's Public Power Utilities Identified the Following Minimum Requirements for CASPR: - ISO-NE should not dictate acceptable policy objectives or limit the resources or fuel types that can participate in the Substitution Auction. - CASPR must also accommodate resources procured to meet local community and utility objectives. - Substitution Auction demand (i.e. resources willing to retire) must be broad enough to accommodate entry of all resources developed by States and local communities. - State support is critical. We will look foolish if the States oppose CASPR at FERC. 27

28 Why CASPR will Not Meet State Objectives and Consumer Needs ISO recently revised its CASPR proposal in three ways that limit its effectiveness: - One change establishes a criteria that limits the quantity of resources that can retire through the Substitution Auction.. - Another change effectively requires exiting and entering resources in the Substitution Auction to be in the same capacity zone. - ISO is limiting Substitution Auction Supply to resources that meet environment laws in effect as of 1/1/2018. Policy concerns such a local area resiliency, fuel and technology diversity, and mitigation of price volatility are not considered. 28

29 What Comes Next? Public power systems will oppose the CASPR proposal at the Participants Committee and FERC. - CASPR was originally conceived as an interim step to accommodate State policy resources. - To address near-term environmental policies, expand the current Renewable Technology Resource (RTR) provisions to include large-scale hydro. Develop a new wholesale market design that starts with State and locally procured resources and construct a new competitive structure to operate around these resources. - This long-term review should start as soon as possible. 29

30 Questions? Brian Forshaw Principal, Energy Market Advisors LLC Web Site: 30

31 Joel Gordon PSEG Energy Resources & Trade, LLC Phone: (603) George McCluskey NH Public Utilities Commission Phone: (603) Brian Forshaw Energy Market Advisors LLC Phone: (860) Maureen Callahan (moderator) Usource Phone: (603)