Efficient energy and ancillary services market pricing will be critical to maintaining reliability should environmental rules lead to the retirement of 3.3 GW of older peaking generators in southern New York, the power grid operator's market monitor said Monday.
"The New York Independent System Operator focused on potential risks if the [Department of Environmental Conservation] DEC's proposed Peaker Rule is adopted and this new regulation leads to the retirement of 3.3 GW of downstate peaking units," Potomac Economics said in a memo posted to the grid operator's website scheduled to be discussed at a Monday NYISO Management Committee meeting.
Under the potential peaker plant retirement scenario, the NYISO and local utilities Con Edison and PSEG Long Island identified "numerous violations of resource adequacy, transmission security, transient voltage recovery, loss-of-gas, and other criteria" in New York City and Long Island, according to the market monitor.
The NYISO's 2018 Comprehensive Reliability Plan found these violations could be avoided through a variety of solutions, including the retention of 1,280 MW of peaking capacity in specific areas called transmission-constrained load pockets.
Specifically, the nearly 1.3 GW may need to be retained or replaced with alternative resources across three load pockets in New York City and three load pockets on Long Island.
To ensure that these local reliability needs are met through market-based investments rather than out-of-market procurements like "Reliability Must Run" contracts, it is critical to set efficient prices for energy and ancillary services markets when peaking units are used to maintain reliability and manage congestion in these load pockets," Potomac said.
RMR contracts are used to pay the operating costs of power plants that want to retire because of weak profitability or other reasons, but are needed to maintain reliability. NYISO interim President and CEO Robert Fernandez said at a recent industry conference the grid operator will keep the lights on under all circumstances, but he "would hate" to have to enter into RMR contracts for that reason.
The rules would apply to simple-cycle and regenerative combustion turbines with a nameplate capacity of 15 MW or more that bid into NYISO's wholesale power market. Peaking units that do not meet the proposed standards account for approximately 9% of New York's generation capacity, according to the DEC.
MARKET-BASED SOLUTIONS
Potomac has recommended three market-based solutions to help ensure reliability as peaker plants comply with the DEC rules.
First, the market monitor recommends modeling Long Island transmission constraints in the day-ahead and real-time markets. These constraints are currently secured primarily through out-of-market actions, which have raised guarantee payments and are "sometimes economically inefficient," Potomac said.
Modeling the constraints in the NYISO's energy and ancillary services markets could incentivize investment in areas needed to ease congestion, the monitor said.
Second, Potomac recommends modeling local reserve requirements in New York City load pockets which could help satisfy the reliability requirements without out-of-market commitments that are currently used "in the majority of hours" to provide make-whole payments to generators.
Out-of-market commitment costs are "recouped through make-whole payments rather than through market clearing prices for energy and operating reserves," and the routine use of these payments "distorts short-term performance incentives, as well as incentives for new investment that can satisfy the local requirements," the monitor said.
Third, Potomac said NYISO should consider rules for efficient pricing and settlement when operating reserve providers provide congestion relief. In some cases, the NYISO is allowed to "use operating reserves and other post contingency operating actions" to increase utilization of the transmission system into load centers, which reduces production costs and air pollution, Potomac said.
However, these operating reserve providers are not compensated for helping manage congestion. Allowing the market to send efficient signals for investment in new and existing resources with flexible characteristics could help address the situation, Potomac said.
