New England Needs Flexible Storage and Demand Response—Will ISO-NE’s Markets Send the Right Investment Signals?
New England’s power grid is undergoing a significant transformation and is approaching a critical juncture. Electrification of heating and transportation sectors is driving up demand, while expensive fossil-fired power generators prone to price volatility deliver reliability at a high cost to consumers, both financially and environmentally. To meet the moment, an influx of new resources—battery storage, demand response, wind, and solar—are seeking to enter the market. Yet ISO-NE’s capacity market reforms threaten to undercount the value of these critical new resources, raising serious questions about the rate and scale of their deployment, or whether they’ll even get built at all.
To ensure reliability, the grid operator calculates the value of every resource through a process known as capacity accreditation. This determines how much capacity a resource can offer in each seasonal auction based on how it is expected to perform during grid-stressed conditions. Accreditation is a complex and highly technical modeling exercise that is a mix of art and science, and the resulting capacity values are a direct product of the methodologies, inputs, and assumptions that go into the process.
Concerning Results for Storage and Demand Response
ISO-NE’s methodology and assumptions are still the subject of debate, and according to an initial impact analysis of the proposed seasonal capacity accreditation reforms, advanced energy technologies like storage and demand response (DR) are set to receive very low accreditation values, which will mean little capacity market compensation. If changes aren’t made before ISO’s methodology is finalized and filed at FERC late this year, low accreditation values will undercut supply in the region’s auctions and drive up prices, while offering capacity revenues that will fail to send the market signal to project developers and financiers to invest in building new resources.
This is unfolding at a time when the grid is demanding more balancing resources like storage and DR to support system reliability. Between Massachusetts, Connecticut, and Maine, there are 6.5 GW of storage procurements planned by 2030—a significant amount in a region with a total installed capacity of roughly 30 GW.
Making sense of the impact analysis results is an esoteric and head-scratching exercise, even for experienced stakeholders and experts. But a quick comparison to the values in other regions indicates that ISO’s results may be significantly understating the value of resources like storage. With the caveat that different systems with different risks cannot be compared apples-to-apples, ISO’s neighbors have notably higher storage values: PJM values 4-hr storage accreditation at 55% and NYISO scores storage at 80%, while New England’s average 4-hr value is almost half that (35% annually). Farther away, SPP values storage annually at 99%. To determine accreditation, ISO-NE assess the region’s overall resource adequacy risk by accounting for extreme weather events, generator performance data, and other inputs to calculate the marginal reliability impact of each resource. Despite ISO’s improved efforts to share insight into the methodology and results, the modeling is a black box, and the impact analysis continues to leave a wide knowledge gap between ISO-NE and stakeholders, leaving participants wondering what inputs the results are most sensitive to and which variables are the primary drivers of accreditation values.
Issues with the Proposed Accreditation
Some obvious issues have emerged, however, that would seem to unfairly disadvantage accreditation values for resources like storage. For instance, ISO-NE’s model systematically overlooks real-world charging opportunities for storage during reliability events. The model then makes flawed assumptions that the storage fleet is depleted at a faster rate than is realistic and has no available source of energy to charge from, thereby understating storage’s true accreditation. This stems from failing to model significant energy imports from other regions like Hydro-Québec, neglecting to reflect how hybrid resources with storage onsite can recharge during charging constrained hours and in between reliability events, as well as a software limitation that prevents energy-limited resources like big oil-fired units (which can get fuel replenished on a daily basis) from charging storage. While it’s unclear how impactful these oversights are, what is clear is that even incremental improvements to resources’ relative accreditation values could make a meaningful difference in the strength of the market’s investment signal.
DR accreditation values are also poised to drop precipitously under ISO’s proposed methodology. One hindrance may be that DR assets lack sufficient flexibility under the current proposal to update the composition of their portfolio, drop bad performers, and reward good performers. Paradoxically, we are weakening the investment signal for a resource that states and even the ISO itself have recently affirmed will be a key solution to meeting our future system needs. According to the ISO’s 2050 Transmission Study, the region can save nearly $10 billion by reducing peak demand by 6 GW by 2050, which would be contingent on load flexibility and DR measures scaling. States’ attention on DR potential is growing and culminated in a final report from a recent regional working group affirming DR as a key technology for the future. States are rightfully latching onto DR as critical to achieving cost-savings amid an electricity affordability crisis, yet ISO’s market design is poised to incent very little additional DR. It may potentially even drive existing DR out of the market. This creates a growing disconnect between regional resource needs, state policy objectives, and wholesale market design, and places too much responsibility on states to solve an issue that also needs regional pathways.
More broadly, the preliminary results suggest that ISO’s modeling assumptions are very conservative. Planning for some extreme weather event outliers is important, for instance, but is it wise to weigh a single 1 in 1000 event more than ten events with 1 in 100 probability? Similarly conservative, instead of modeling the system conditions “as is,” ISO is artificially inflating the load to stress the system such that it matches the “1 day in 10 years” outage maximum consistent with NERC standards. Clearly, designing the system to ensure resource adequacy is crucial. But if assumptions are too conservative and don’t depict realistic system conditions, they can suppress accreditation values for the very resources the region is trying to attract. This is particularly true for duration-limited resources like storage and DR that offer immense value to the system during normal or even somewhat stressed conditions, but may not be able to fully cover a multi-day event.
So Where Do We Go From Here?
It’s not time to panic, yet.
While new design details continue to flow out of stakeholder presentations, the preliminary impact analysis finally gives an initial indication of the direction and magnitude of impact of the proposed seasonal accreditation changes. While there is work left to do and limited time, stakeholders at NEPOOL will not vote on ISO’s final proposal until the fall and will have a significantly clearer idea of where seasonal accreditation changes and values will land by late summer. This theoretically leaves ample opportunity for ISO to incorporate stakeholder feedback, consider amendments, and revise their proposal. For starters, ISO can better reflect charging opportunities for storage, help DR assets shape and update their profiles, and stress-test key assumptions through further sensitivities to consider whether less conservative parameters can strike the right balance.
Already, ISO has made important adjustments to both its methodology and its impact analysis and stakeholder process that have improved outcomes and provided stakeholders with critical insights. If this feedback loop continues, we may well be in a better place by the time ISO submits a filing to FERC toward the end of the year.
New England must invest in resources like storage and DR when winter reliability concerns, electrification, and affordability pressures are all increasing. Otherwise, the region could end up leaning longer on expensive thermal resources and missing lower-cost flexibility options. Advanced Energy United and our members stand ready to work with ISO-NE and other NEPOOL stakeholders to continue to improve the proposal before it heads to FERC for approval.