Common Markets and Diverse States An EightFold Path

Common Markets and Diverse States An Eight-Fold Path to Liberation from Never-Ending Cycle NESCOE January 25, 2021 Rob Gramlich Clients: states; large energy buyers; developers and associations of renewable energy, storage, grid-enhancing technologies, and transmission infrastructure; national labs; consumer advocates; environmental NGOs; universities.

First, escort the elephant out of the room FERC Chairman Glick: End broad MOPR “will increase both the capacity price… as well as the already extensive quantity of redundant capacity. . . It is a bailout, plain and simple. ” “It is not hard to understand why states across the region are losing confidence in the Commission’s ability to ensure resource adequacy at just and reasonable rates. ” “any state regulation that increases or decreases the number of generation facilities will, through the law of supply and demand, inevitably affect wholesale rates. But the existence of such cross-jurisdictional effects is not necessarily a “problem” for the purposes of the FPA. ” Commissioner Clements: “I strongly disagree with the imposition of a strict minimum offer price rule. I believe the Commission must look forward, past the false dichotomy …that implies that we must choose to either “protect” the markets within the Commission’s jurisdiction or to accommodate state public policy goals. I hope to immediately engage with my colleagues to work with 2 states…”

Second, avoid contortions just to avoid MOPR • Unnecessary centralization to put products “in the market. ” • In most markets, most transactions are outside of central exchanges. • Might result in FERC jurisdiction over environmental attributes • They don’t undo MOPR anyway • Puts more than necessary through biased governance process • Hard to align all state policies with common product definitions (RECs, ZECs, etc) Better to simply solve the problem--end broad MOPR • ISO-NE should file with FERC to end MOPR and CASPR before FERC has to do it 3

Third, do not “replace MOPR” “[I]n a competitive market, where neither buyer nor seller has significant market power, it is rational to assume that the terms of their voluntary exchange are reasonable, and specifically to infer that the price is close to marginal cost, such that the seller makes only a normal return on its investment. ” Tejas Power Corp. v. FERC, 908 F. 2 d 998, 1004 (D. C. Cir. 1990) Limit FERC/RTO interventions to mitigating market power Give up on the “idealized vision of markets free from the influence of public policies…” which “does not exist. ” –Former FERC Chairman Norman Bay Recognize that compensation to surplus resources that have been displaced is unjust and unreasonable. Risks are on investors, remember? (its ok to feel bad for them though) Expect to have low capacity prices until supply and demand come back in balance 4

Fourth, respect state choices • Different resource preferences • Offshore wind, hydro, existing nuclear, distributed resources • These are all carbon-free, and bring a variety of economic and other developments that are not for ISOs or FERC to judge • Different market structures • • • Retail competition, full or partial Vertically integrated utilities Public power Competitive solicitations Long-term contracts • RTOs, market monitors, and FERC should advise state policy makers, but not over-rule or interfere. States should listen. 5

Fifth: adopt best practice spot markets to accommodate a variety of state structures and environmental preferences • Best practice spot markets • bid-based security constrained economic dispatch, locational prices, financial transmission rights, scarcity pricing • Scarcity pricing is true value-based pricing, attracts flexibility, discourages free riding by those who do not procure in advance • NO ONE PAYS THE SCARCITY PRICE IF THEY PROCURE IN ADVANCE • Centralization IS needed in real-time due to real-time power flows and need to honor security constraints • NOT “energy-only” (pejorative term) • Long-term contracts are key (see slide 8) • Environmental policies and retail competition policies set by state and/or federal policies, without RTO/FERC interference. 6

Sixth, take energy adequacy seriously northern climate: winter high load from electric heating “Dunkelflaute”: Multi-Day periods of low wind+solar and high load (high net load). Source: Clack, VCE, Minnesota/Eastern Interconnection study. See also E 3, EFI, VCE, Brattle, Jenkins/MIT et al. , Gridlab/UC 7 Berkeley, NREL, LBNL, IEA, ESIG, other studies

Seventh, implement forward contracting for energy adequacy and to support low-cost financing of supply • See Wolak paper in NEPOOL process, and works of Peter Cramton • Could be implemented by RTO, if that is what the states want Icarus: Not too high or low • Evolution of capacity markets • Could be implemented by states rather than RTO • Requires residual capacity market, or “Fixed Resource Requirement” opt out • States may wish to oversee the procurement by themselves or join with other states. • If states or load-serving entities fail, they pay scarcity-based prices. Like a speeding ticket. • Environmental attributes and energy, bundled or unbundled, at the discretion of states • Long-term contracting for flexibility products (reliability/ancillary services) as well. • Redefine physical metrics • All hours matter, not just peak. Move beyond peak reserve margin. • Determine which periods are of particular concern with RTO, DOE, national lab analysis • Could be physical or financial (e. g. , contract for differences) • Settled at physical spot market prices • Could be voluntary or mandatory • Voluntary works if competitive retail suppliers are regulated by the state to be sufficiently credit-worthy and have appropriate incentives. State PUCs have licensing authority. 8

Eighth, plan transmission • Incorporate future fuel mix • Including offshore wind, imports, remote renewables • Multi-benefit • De-silo reliability, economics, public policy • Regional State Committee decide on cost allocation 9