Amid utility qualms, Massachusetts launches first “clean peak standard”

<span/>Amid utility contentions that the initiative is not a cost-effective greenhouse gas reduction strategy, Massachusetts officials released a final version of the nation's first "clean peak standard," which requires utilities to buy credits showing they are using increasing amounts of renewable energy at times of peak electricity demand.

The Massachusetts Department of Energy Resources (DOER) March 20 sent final rules for the new program to the legislature for final review, which will focus on substantial changes made by the agency since it first proposed key elements of the clean peak standard (CPS) last year.

DOER plans to implement the program in June, making Massachusetts the first state to carry out a concept initially floated in Arizona to boost the value of renewables by requiring utilities to use them to meet peak demand periods when power prices are highest.

The CPS also is designed to cut greenhouse gas emissions by reducing use of gas-fired "peaker" plants typically dispatched by utilities to meet demand spikes in the evening and morning. And it is aimed at spurring deployment of storage to ensure green power is available even when intermittent solar and wind plants cannot provide supply.

The Massachusetts' CPS rules require the state's investor-owned distribution utilities—National Grid, Unitil and Eversource Energy—to buy credits corresponding to 1.5 percent of their electricity sales in 2020, and rising by 1.5 percent annually, from eligible renewable energy, demand response and new storage resources that can deliver power in specified peak hours throughout the year.

The CPS is meant to supplement the state's renewable portfolio standard, which incentivizes renewable capacity but doesn't differentiate between power delivered at times of low- or high demand, which have widely different values in terms of price and value to reliability.

Highlighting the growing importance of using carbon-free renewables when the power is needed most—as opposed to simply whenever the sun happens to be shining and the wind blowing—DOER made major changes to the CPS since last year meant to increase the incentives to deploy storage and new demand-response resources that can "chase the peak."

Among other tweaks, DOE in its final CPS rules substantially increased multipliers for how many clean peak credits resources will earn if they can deliver power during high-demand hours in the heightened summer and winter peak seasons. The agency nearly doubled the multiplier to 25x for resources that deliver during each month's single highest peak hour, according to the proposal.

Also, the final version raises the "alternative compliance payment" (ACP) that utilities must pay if they don't buy enough CPS credits from eligible resources from $30 to $45. The ACP effectively sets a price ceiling for the credits, so raising it substantially is meant to bolster the value of CPS credits and thereby increase revenues for eligible resources.

In joint comments filed with DOER in October 2019, National Grid and Unitil generally applauded the effort to develop the nation's first CPS, but said the proposed design would raise ratepayer costs by $235 million a year starting in 2020 and reach nearly $5 billion in total costs through 2050.

They and others also questioned whether the program will be successful in attracting new resources or even whether it will significantly reduce GHG emissions given that emissions from the current generation mix on New England's grid usually does not change much throughout the day most of the time.

"The electric distribution companies (EDC) are concerned that with the current draft regulations, the CPES program, as currently designed, will not significantly drive new deployments of resources, nor sufficiently reduce GHG emission levels in a cost-effective manner," National Grid and Unitil wrote.

"The EDCs would recommend that the DOER consider a program cost structure that would both limit the total amount of ratepayer funding required, and focus these funds on the hours and resources that are most effective in reducing GHG emissions and energy costs at peak," they added.

The utilities offered several suggestions for capping costs and targeting incentives to specific resources that might not otherwise be deployed under the program, but National Grid officials said Friday those changes did not make it into the final version.

Massachusetts is the first state to launch a CPS although Arizona and other states interested in the concept—notably California—have largely seen it as a solution for growing oversupplies of solar in the middle of the day.

Massachusetts has substantially less solar than those sunnier states, but it is leading the nation in development of utility-scale offshore wind projects, a major part of its strategy for reaching net-zero carbon emissions by 2050.

DOER said its analyses indicate that the CPS will play a key role in helping the state reach that goal.

"The clean peak energy standard will send a market signal to clean energy generation to invest in storage technologies to deliver energy to users and to reduce demand during peak periods, thereby reducing the emissions and costs associated with these periods," DOER wrote in a summary of the CPS released Wednesday. "The market signal will reduce the commonwealth's reliance on high-emissions and high-cost power plants and enable the continued integration of renewable resources."

<span/>The CPS is projected to reduce carbon emissions by 560,000 metric tons in the first 10 years in addition to emissions reductions provided by new and existing renewable energy resources, according to DOER.

And contrary to contentions by utilities, the agency said the CPS is projected to provide overall net savings to ratepayers within 5 years and approximately $400 million of cost savings in the first 10 years, primarily by shaving off peak power prices and more efficiently using transmission infrastructure.

Under DOER's final rules, resources eligible to receive the clean peak energy certificates include new renewable resources, existing renewables that pair with new storage, new storage that charges primarily from renewables and demand-response resources.

Forecasts from DOER for a typical five-day period in winter 2030 indicate that without the CPS, there would be little or no clean energy delivered during peak evening demand on two days—even with 3,200 MW of offshore wind and 5,000 MW of solar capacity on the grid.

With the CPS, however, the DOER forecasts show that on each day over the same five-day period, at least 3,000 MW of eligible resources—and on other days more than 6,000 MW—could be delivered in peak periods, primarily from charging storage resources using offshore wind while demand is low overnight.

Among other concerns raised in the CPS proceeding, many commenters questioned whether the standard would actually cut GHG emissions—a problem highlighted by numerous analyses in California and other jurisdictions that have found that storage resources have not, in fact, been an effective GHG reduction mechanism so far.

In response to comments on the CPS, DOER said last week that it has taken specific steps to design the CPS to successfully lower GHG emissions.

"The proposed design aligns storage charge hours with periods of high renewables production consistent with the enabling statute and provides an additional mechanism to leverage storage asset performance in a manner that reduces overall emissions," DOER wrote.

Specifically, the department made adjustments to the CPS "that better align financial incentives for participating resources to dispatch in the highest total and marginal emission periods."

In response to many commenters who said the original proposal would not provide enough incentive to meaningfully increase deployment of storage or other eligible resources, DOER significantly increased the multipliers and raised the ACP rate that effectively serves as a price ceiling.

"The department determined there was a risk that, at the proposed ACP rate and without refinement to the program structure, projects may not move forward and participate in the program," DOER wrote in explaining its changes.

The agency also included provisions to require the EDCs to buy more certificates if the CPS market is undersupplied, increasing the incentive for storage deployment. Similarly, EDC procurement targets will be cut if the market becomes saturated.

Reprinted from The Energy Daily. For more comprehensive daily coverage of US energy policy, regulatory, and business trends from IHS Markit, visit The Energy Daily website.

Jim Day is a Senior Journalist for Energy at IHS Markit.

Posted 13 April 2020

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.