Energy efficiency as a resource in the ISO New England Forward Capacity Market

ISO New England, which oversees New England’s bulk electric power system and wholesale electricity markets, recently established a Forward Capacity Market (FCM) that will pay suppliers to ensure sufficient capacity is available to meet future peak loads. Under the FCM, ISO New England projects the needs of the power system 3 years in advance and then holds an annual auction to purchase the resources necessary to satisfy the future regional requirements. This market is groundbreaking in that it was the first to allow energy efficiency and other demand resources to compete directly with generators. In the first auction, held in February 2008, demand resources contributed substantially to eliminating the need for new generating capacity in the near term and to providing low-cost resources to the region’s ratepayers. Two additional successful auctions have now been held. Participating in the FCM requires a considerable and complex bid, financial assurance, and claim activities. Meeting new intensive measurement, tracking, and verification requirements adds new costs. For efficiency portfolio administrators, participation raises policy questions regarding ownership of capacity credits, appropriate disposition of revenues, increasing emphasis on peak savings, and whether traditionally short-term budget cycles should change to enable the longer-term planning necessary to bid resources several years into the future. On the other hand, revenues from the FCM can provide needed funding for additional efficiency investments. This paper describes the FCM, examines the experience and trade-offs involved in participating for efficiency programs, and reviews the benefits of such participation for the program and the region, including the positive value from increased exposure of the part that efficiency can play in our energy mix.