Ways to Better Integrate Policy, Planning and Electricity Markets in New England

1. Ways to Better Integrate Policy, Planning and Electricity Markets in New England RESTRUCTURING ROUNDTABLE June 10, 2011 Mary J. Healey CT Consumer Counsel NASUCA, President

2. Views from a Consumer Advocate • What were the goals of electric deregulation? • 8 Years of market experience: lessons learned; • Good, bad, and areas of needed focus going forward; • Where do we go from here?

3. How will New Resource Decisions be Made? • The Short Answer: • For Generation and other supply resources, by state actors. • For Transmission, through FERC-approved regional tariffs and FERC-regulated rates. • In other words, not by markets. • This may have positive and negative aspects but the reality is leading us this way.

4. The Great Renewables Buildout • In New England and elsewhere, meeting the RPS requirements by the end of the decade will require significant development of new renewable resources (on- and off-shore wind, perhaps new hydro, biomass, solar, etc.). • It appears likely that much of the renewables buildout will need a long-term contractual backstop to support financing.

5. Why will New Renewables Require Contracts? • REC pricing has been volatile and is subject to regulatory risk. • Different renewable plants have very different needs for REC prices. A REC price that might achieve solar may vastly overpay biomass, for example. So, it is hard to define and design the compensation in the “renewables market.” • Energy Revenue Risks • Difficulties in dispatching intermittent resources in the energy market. • Lower expected energy revenue for renewables due to shale gas supply developments. • FCM penalties for intermittent resources.

6. What Will the Renewables Buildout do to Regional Market Prices? • Lower them, presumably. The costs of the plant would primarily be paid through “public benefits charges” on customer bills, not through market revenues. • “Contract for differences” approach. • The renewable capacity will therefore add capacity and energy without seeking to set higher clearing prices.

7. Can FERC Take Action to Elevate Market Prices in Response to State-Supported Capacity • It can try, and it already is trying. (e.g., April 13 Order re FCM). • However, in the long run, if renewables increase an existing surplus, how can prices stay high? Is that a market? • If FERC artificially elevates market prices during a surplus this would send a bizarre, contradictory signal—build more!

8. What about New Fossil Plants? • Several “restructured” states are building or considering building new fossil units under long-term contracts, including Connecticut, New Jersey, and Maryland. • Utilities in non-restructured states in RTOs (like PJM) are also building. • Little is being built without such support. • With low prices, or at best volatile price signals, and a possibly increasing surplus of capacity, the trend toward long-term contracts will likely continue if states desire, despite the surplus, to build new, cleaner fossil units to replace old, inefficient units.

9. CT’s “Extra- Market” Resource Developments • RFP for capacity- only contracts, leading to Kleen Energy (high intermediate, ~620 MW), Waterside Gen. (peaker, ~66 MW), Waterbury Gen. (peaker, ~96 MW), Ameresco (EE – 5 MW) • Peaking RFP (full C-O-S by CFD) GenConn Middletown and Devon, PSEG New Haven (totaling ~530 MW) • Project 150 renewables (didn’t work) • Significant EE support that participates in FCM

10. Is this the End of Competition? • No. States will presumably use competitive RFP processes to select resources. • Merchant generation facilities could still succeed or fail based on the efficiency of operations. Long-term contracts can provide incentives for such things as excellent reliability performance, or punish poor performance.

11. Are these Developments Disastrous or Surprising? • Not at all. Why should we ever have expected that markets would make our resource choices for us given: • The multiplicity of goals • Fuel Diversity; • Reliability • Affordability; • Reducing Emissions, • Replacement of old, inefficient plants on existing sites • Building cleaner-burning fossil plants on new sites • Promoting Renewables; • Economic Development.

12. Are these Developments Disastrous or Surprising? (continued) No, again, why should we have expected the “invisible hand” to make all the supply resource decisions given: • The difficulties of Nimbyism; • The fact that, given Nimbyism, there are natural advantages to a State seeking to have new generation built at or near sites where power plants (and the transmission infrastructure) already exist; • That the short-term nature of market signals does not fit well with plants that require compensation over decades • New Transmission lines built on a regulated paradigm can obviate the need for power plants, • Etc. and so on!!!

13. CT’s Large New Energy Bill Continues to Seek Resource Building (“the Visible Hand”) • Long-term contracts for solar (a/k/a “zero emissions generation”) • Long-term contracts for fuel cells (a/k/a “low emissions generation”) • Potentially significant new EE investment through IRP • Allows long-term contracting with existing plants if desired to hedge the market • Allows some utility-owned renewables • New CHP programs; and • Our massive RPS requirement (20% of our energy by 2020) has not been reduced • For more information go to SB 1243 in http://cga.ct.gov

14. Where do we go from here? • Serious collaborative on market design issues where the visible hand can work with the invisible hand. • Our Common Interests compel us to get it right: • Not about refilling the toothpaste tube, • Not about putting power suppliers out of business; • It is about recognizing states’ legitimate energy needs and goals.