Citingthe importance of balancing the need to prevent the potential exercise ofmarket power against the risk of over-mitigation, FERC held fast to its earlierfinding that some state-backed renewable resources should be exempted from theISO New England Inc.'sminimum offer price rule even though that practice may have an impact on pricesin the region's forward capacity market.
FERCpreviously signed off on the exemption from the buyer-side capacity marketmitigation rules for up to 200 MW of renewable resources built to advance stateenvironmental policy objectives as part of its approval of the ISO-NE'sproposal to establish a system wide downward-sloping demand curve. Thecommission explained at the time that it believed implementation of the slopeddemand curve would limit any price suppressive impact of the exemption. Afterthe matter was appealed to court and considering the matter further, the agencyon April 8 said it still believes that to be true.
"Inthe specific circumstances of this case, where ISO-NE sought to balance boththe harms and the benefits to customers from an exemption that might result insome price suppression, and took steps to limit the amount of price suppressionso as to enable the FCM to continue procuring sufficient capacity to meetreliability targets, we find the renewables exemption to be just andreasonable," FERC said in its orderon voluntary remand from the U.S. Court of Appeals for the District of ColumbiaCircuit.
Untilrecently, the ISO-NE's capacity market construct employed a vertical demandcurve, which produced capacity prices that were very high when resources fellshort of what was needed to meet the regional planning reserve margin butcaused them to immediately plummeted to or near zero once that reserve marginwas met. But to avoid some of that price volatility, the ISO-NE in April 2014proposed to establisha system-wide downward-sloping demand curve that would result in capacityprices gradually decreasing as supply gets closer to meeting capacityrequirements.
Aspart of that proposal, the ISO-NE also sought to establish the exemption fromthe MOPR to accommodate legitimate state policies that favor renewableresources and that are not intended to suppress market-clearing prices. Whilesome generators took issuewith the exemption due to its potential to skew prices, FERC in May 2014approved the proposal.
Subsidiariesof NextEra Energy Inc.,NRG Energy Inc. andPublic Service Enterprise GroupInc. subsequently challenged the renewables exemption in the D.C.Circuit, arguing that FERC's orders failed to adequately address their concernsabout artificial price suppression. After reviewing opening briefs filed in theappeal, FERC in November 2015 toldthe court that the issues raised could be "most appropriately andefficiently addressed" through further commission proceedings following avoluntary remand of the case, and the court agreed.
Inits April 8 order on remand, FERC still recognized the potential for therenewables exemption to suppress capacity prices, but said it was satisfiedwith the steps the ISO-NE has taken to minimize such impacts. "Theimplementation of a sloped demand curve means that small changes in quantitywill have a smaller impact on price than would be the case under a verticaldemand curve construct," FERC said. "Additionally, capping therenewables exemption at 200 MWs per year will also temper the exemption's pricesuppressive effects."
Refusingto find that artificial price suppression is unjust and unreasonable per se,FERC noted that it "must balance competing goals to assure just andreasonable rates."
"Accordingly,in this proceeding, we find that even though some price impact could occur fromthe renewables exemption, the demand curve changes filing, including therenewables exemption, is consistent with the purpose of the FCM — namely,ensuring that price signals are sufficient to incent existing resources to stayin the capacity market, and new resources to enter, so that ISO-NE meets itsreliability requirements at least cost," FERC said.
Thecommission rejected assertions that it failed to consider certain specificarguments backing the position that the renewables exemption would severelysuppress prices even under a sloped demand curve. FERC said it considered thosearguments, as well as arguments presented by the ISO-NE that the exemption'simpact on price "would not be significant when paired with adownward-sloping demand curve."
Thosetwo opposing arguments relied on different sets of assumptions — thepetitioners assumed that the supply curve at the point of intersection with thedemand curve would be much more steep than the ISO-NE assumed — and FERC agreedwith the grid operator's position.
"Loadgrowth and retirements should ensure that, in years where new entry is needed,the supply curve is relatively flat at the point of intersection (i.e., thepoint of intersection will occur on the portion of the supply curve thatreflects new entrants)," FERC said. "And … while load growth may belimited, ISO-NE anticipates significant retirements in upcoming years."
FERCalso dismissed concerns that because the ISO-NE has not yet implemented zonalsloped demand curves, the entrance of a large amount of renewable resourceswithin a single zone "would have a more significant effect on the price inthat zone than would be the case in the entire New England market." Suchconcerns are speculative and will become moot going forward because the ISO-NEhas been directed to implement zonal sloped demand curves before the next FCAis held in February 2017, FERC said.
Finally,among other things, FERC defended its reliance on load growth to offset theimpact of the renewables exemption, explaining that it "ensures that onaverage over time, as … load growth exceeds the entry of renewable resources,other new entrants will be required to meet ISO-NE's installed capacityrequirement, mitigating the impact of any price suppression." (ER14-1639)