ISO New England Inc.'s pay-for-performance capacity market program, long touted as a way to get merchant generators to sign up for firm natural gas supplies, will not result in new pipelines but instead will drive the region further down the rabbit hole of growing dependence on dual-fuel generation, ISO-NE President and CEO Gordon van Welie predicted. 

The New England region for some years has been plagued with winter gas-fired generation supply shortages. The problem has been exacerbated by the region's growing dependence on cheaper gas-fired generation and merchant gas generators' refusal to shore up supplies through expensive long-term pipeline contracts because, for all but a few cold days a year, they could get by on scraps.

 

The RTO has tweaked the penalty and incentive structure of the capacity market through which it signs up and pays generators and other resources to be on-call three years down the road. The pay-for-performance market regime, which takes effect in 2018, imposes harsher penalties on generators that fail to meet their capacity commitments when the region is experiencing a supply pinch and rewards resources that perform well. 

"By creating incentives for generators to firm up their fuel supply, pay-for-performance may indirectly incentivize the development of oil or LNG fuel storage or gas pipeline infrastructure," ISO-NE said in its 2015 regional electricity outlook. 

To ensure the region would not suffer from supply shortages and face possible blackouts in the intervening years, the RTO proposed a winter reliability program to shore up dual-fuel generation oil supplies starting with the 2013-2014 season. FERC is considering competing proposals to tweak that program once again. 

But now it appears that the winter program and the pay-for-performance incentives are prompting more of a shift to dual fuel — oil and gas — generation, which means the region is burning more oil for generation even as states are looking to curb emissions and use more renewables. 

"Our solution to reliability ... is not going to have generators invest in new pipelines," van Welie told an Aug. 25 North American Electric Reliability Corp. summit in Washington, D.C. ISO-NE is "seeing them instead invest in dual fuel," he said.  The "consequence is that you see really high price volatility and emissions, which run counter to policies of the New England states," he said. "That's causing a lot of tension." 

The region currently has 58 dual-fuel units with a combined summer generating capability of about 7,600 MW, ISO-NE spokeswoman Marcia Blomberg said in an Aug. 27 email. The ISO-NE's 2014-2015 winter reliability program offered an incentive for generators to convert to dual fuel. Six units, totaling 1,774 MW, said they would take the ISO up on the offer, and three resources representing 720 MW converted to dual fuel before that winter, Blomberg said. 

In February, the ISO-NE held its ninth forward capacity auction for the 2018-2019 delivery year, which is when the new pay-for-performance incentives begin. Whereas no new dual-fuel units were added in the prior auction held in 2014, two new dual-fuel units totaling 920 MW cleared the ninth auction in 2015. The most recent auction also saw an increase in new gas-fired generation compared to the prior auction, but at nowhere near the capacity increase that occurred for dual fuel. Four new gas-fired generation units in Connecticut and Rhode Island totaling about 123 MW cleared the most recent auction, while only one new unit with a 13.9 MW capacity cleared the auction in 2014.