Playing with the Big Boys: Energy Efficiency as a Resource in the ISO New England Forward Capacity Market

Cheryl Jenkins, Blair Hamilton, and Chris Neme, Vermont Energy Investment Corporation

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Abstract

ISO New England recently established a Forward Capacity Market (FCM) that will pay suppliers to ensure sufficient capacity is available to meet future peak loads, with the value of such payments determined by auction. This market is unique in that it allows energy efficiency and other demand resources to compete directly with generators. More than 3,400 MW of demand resources qualified in the first auction in February 2008 (nearly 9% of the total qualified capacity), and 2,554 MW (with 655 MW from energy efficiency) cleared the auction, contributing substantially to eliminating the need for new generating capacity in the near term and providing low-cost resources to the regions ratepayers.

Participating in the FCM requires undertaking considerable and complex bid, financial assurance, and claim processes. Meeting new intensive measurement, tracking, and verification requirements will significantly increase 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 shortterm 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 could be substantial. Depending on market-clearing prices, installing a single CFL could bring as much as $1.50. Revenues from the FCM could provide 10% of the current budgets of many efficiency portfolios.

This paper introduces the FCM, examines the experience and trade-offs involved in participating for state-funded efficiency programs, and explores how one state has tackled the policy questions such participation raises.