Footnotes

Understanding ISO New England and Wind

When I found out how electrical power is bought and sold on the wholesale market several years ago I was simply astounded. You may be too. Allow me to explain.

A not-for-profit private corporation called the Integrated System Operator of New England (ISO NE) was established in 1997 by the Federal Energy Regulatory Commission to manage the region's power generation and transmission system and to administer the wholesale electricity marketplace. This means ISO NE controls which generating plants put electrical power into the electric grid (i.e., who gets dispatched) to exactly balance the need of all users and they set a wholesale price by a confidential bidding system.

The price paid to bidding power plant owners (called merchant power plants) is based on an auction system called “pay on peak.” This scheme is more formally (legally) called a “uniform clearing price (UPC). This is how it works.

A UPC auction is one in which each winning bidder (generator) receives the same unit price (cents per kilowatt-hour) based on the price of the last unit needed to meet the demand, regardless of what the individual offer was [1]. This bidding stack, arranged from low-to-high bid, is established on a day-ahead basis with 5 minute increments of time. When the total amount of power bid reaches the anticipated need for the next day the “clearing price” is established. Those below the clearing price get dispatched the next day, and those above, don’t. And this is the astounding part... everyone that bid below the clearing price (and hence dispatched) gets paid at clearing price!

This means if you bid to sell power your power at 3 cents/kWh and the clearing price is set at 6 cents/kWh, you get paid at 6 cents/kWh. A good deal for a coal plant whose fuel cost is 2 cents/kWh. But if you use fuel oil to generate electricity with a fuel cost alone of 8 cents/kWh [2], you simply do not get to sell your power (unless you underbid at a loss). All bidding is strictly confidential for competitive reasons. Only the clearing price is public information.

Incidentally, if the day-ahead power need turns out to be more than anticipated, generators can bid a separate “product” called spinning reserve at a higher price since it is held back unless needed. Also ISO NE offers an additional premium if the generator’s power dispatch can be automatically controlled from ISO’s control center in central Massachusetts.

The policy makers have determined that a UPC auction is the best way to bring the lowest cost to consumers. I’m not sure at all that is the case. However, ISO NE claims that a “pay-as-bid (PAB)” system would inflate prices since bidders would price their offer above their operating costs [3].

On the other hand, ISO NE claims, and rightly so, that “a UCP ensures that clean energy sources with no fuel costs, such as wind, are dispatched and displace plants with higher operating costs and air emissions. [4].” And that’s why wind power from municipal power owners such as Hull Wind, and Princeton Municipal, and Cape Wind will always get dispatched and bump the highest bidders off the top of the stack. This saves everyone in New England some money by putting downward pressure on the price of electricity and indeed avoiding the importation and use of expensive fuel oil and or natural gas.                                                        

By the way, if you would like to see the clearing price ticker as it changes minute by minute, go the ISO NE web site at: http://www.iso-ne.com/. Put it on your “Favorites List.” Check it a few times during the day and night and over the seasons to get an idea of how the wholesale price of power fluctuates over the demands of users like you and I.

A note of explanation on this site. On the right you will see the “LMP Price Ticker” where the clearing price is displayed in dollars per megawatt-hour. To convert to the more familiar cents per kilowatt-hour, merely divide by 10. In other words if the LMP price is $60, this is the same as 6 cents per kWh. 

As a note, LMP stands for “Locational Marginal Price.” The New England region is divided into several zones or locations called LMP zones. Originally the zones were defined by state boundaries and most still are such as Maine, Vermont, New Hampshire, Connecticut and Rhode Island. But Massachusetts is now further subdivided into the North East sector including Boston (NEMABOST), South East Mass (SEMASS, our region), and West & Central Mass (WCMASS). And then there are the tie lines for power transmission to or from New England, like the Cross Sound Cable (Long Island Sound), New Brunswick, New York AC (New York ISO), Highgate (Hydro-Quebec), Phase I/II (Hydro-Quebec Phase I/II tie lines). In addition to the “Energy Component” which reflects the bid price, allowances are made for “Congestion” (too much load) on the transmission lines and for the power “loss” in the resistance of transmission lines.

The LMP concept is implemented to reflect the congestion realities and optimize the lowest cost in each zone. This “clearing price” is the wholesale price that is charged to the distribution companies like NStar or ConEdison Solutions who in turn will put a profit on it and sell it to you and me at a fixed price... at least for a few months.

The instantaneous load on the New England grid is also displayed at the bottom of the ticker. In these shoulder months of spring and fall, it ranges from about 10,000 megawatts (MW) at night to maybe 16,000 MW (peak of the day) out of a total capacity of some 32,000 MW.  For some more interesting information click on the “Morning Report.” It gives the detail status of the system for the day including power coming and going on the tie lines to New England. The explanation of which are for another discussion but are reasonably apparent to the viewer.

So what’s this all have to do with wind power or hydro or solar? It means that energy sources with zero fuel cost, that is renewables, will always get dispatched. If these renewable sources can’t make a profit at the clearing price set for the most expensive bidders over a reasonable period of time they will simply go bankrupt. On the other hand, it is expected that they can compete or they wouldn’t invest the capital necessary to begin operations in the first place.

Indeed, we hope all renewables will make a handsome profit and begin to wean our county from the perils of our addition to oil and natural gas.

Footnotes:

1. “Electricity Costs and Pricing in New England’s Power Market,” ISO New England Inc., February 2006, p. 1.

2. “Wind Footnotes on Emissions, Health and Oil,” C. Kleekamp, CapeCodToday Blog [Footnotes], April 23, 2006.

3. Ibid, ISO NE, p. 2.

4. Ibid, ISO NE, p. 2.

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