In Search of Equilibrium: Growth of Capacity and Transmission in the NYISO

The New York Independent System Operator (NYISO) was founded in December of 1999, taking over from the New York Power Pool and following the nationwide unbundling of electricity supply and delivery in the nineties.[i]  It is the responsibility of the NYISO to ensure reliability of power generation, and transmission across New York State.  Furthermore, the NYISO was founded in a period of high electricity prices and it was a hope that a more competitive marketplace would help to reduce the cost of electricity for end users.

Early in the life of the NYISO there were concerns regarding capacity of generation and transmission constraints around New York City (NYC) and Long Island (LI).[ii]  In 2001, William J. Museler, the President and CEO of the NYISO made a presentation called Power Alert: New York’s Energy Crossroads where he warned that load was increasing faster than new capacity was coming online and that already in 1999, the NYISO could not meet the reliability with only in-state resources.

Museler made a number of specific recommendations including that NYC alone must increase capacity by 2,000-3,000 MW and that those plans must begin immediately given the delays between approval and the first MW being generated. In a 2001 interview with the New York Times, Clarence D. Rappleyea, chairman and chief executive of the authority said about a plant being built near New York City,

“Because of transmission bottlenecks, it’s dubious it (Athens power plant) will help the city. You have to do it from inside almost. These places are ”load pockets.” Even if you have the generation outside, it’s hard to get it in.”[iii]

New York City and Long Island

Over the life of the NYISO, the NYC and LI zones (J and K) on average have accounted for 46.5% which follows since as of the 2010 census, NYC (including LI) makes up 42.2% of the state population.[iv] This region is particularly difficult to serve given its isolated geographic location and high population density.  Figure 1 shows the percentage of load required by the NYC and LI zones versus the remainder of the state.  Since mid-2005, these two population heavy zones have outpaced the rest of the state, requiring over 50% of the load for the whole state during peak summer months.

These two regions have affected the development of the power markets as the NYISO tries to ensure reliability in the region while keeping prices low.

From a regulatory perspective they have put in place particular provisions in the capacity and congestion markets to meet these goals.  For one, both the Long Island and New York City regions each have their own demand curves to be used to determine unforced capacity obligations in the region.[v] Further, these two regions constitute the two localities within the New York Capacity Auction where the Locational Minimum Installed Capacity Requirements are imposed. The Locational Minimum Installed Capacity Requirements are determined by resource adequacy studies and compel load serving entities (LSEs) to procure a percentage of their capacity in these regions.[vi]

 

The Impact on Prices

The constraints in this region have had an impact on pricing.  Figure 2 shows the percentage of electricity price represented by congestion on average for NYC and LI versus the rest of the NYISO zones.  On a monthly average the percentage of congestion for the NYC and LI zones rarely drops below 10% of the LMP. This is in contrast to the rest of the state, where generation is rich and there are few transmission constraints the congestion cost is rarely over 10% of the LMP.

Similar to congestion, largely due to the location and geographic restrictions in the region, the cost of losses in NYC and LI are on average double that of the rest of the state (see Figure 3).  When this is all taken into account to look at the overall price of electricity between NYC and the rest of the state it shows a consistent gap.

 

According to the draft of NYISO’s 2013 Congestion Assessment and Resource Integration Study, NYC and LI have consistently had the highest congestion prices of all the 11 zones; in 2012, New York City saw a total of $261 million in congestion costs and Long Island totaled $377 million. In contrast, Hudson Valley—which has the third highest congestion costs in New York State—only totaled $39 million. [vii]

 

The Need for Transmission Capacity

In the last decade, much of the focus of the NYISO has been toward increasing capacity to serve the load demands of NYC and LI and toward demand response programs to reduce load at peak serving times. The NYISO’s creation of capacity obligations as well as capacity markets in NYC, LI, and ROS (Rest of State) incentivized the building of over 10,000 MW in new generating capacity from 2000 to 2012,[viii] with 80% of new generation built right in New York City.[ix]

All the while, the economic recession as well as the growth of energy efficiency programs has reduced the load on New York’s electricity grid. In 2012, total power usage fell to 162,942 GWh from 163,330 GWh in 2011, and peak demand fell from 33,865 MW in 2011 to 32,439 MW in 2012.[x]

Even as the retirement of old power plants has reduced New York’s in-state generation resources from 39,570 MW in 2012 to 37,925 MW in 2013,[xi] they are still more than sufficient to meet projected demand, and the NYISO estimates that there will be no need to build new generating capacity until 2019.[xii]

Nevertheless, as is evident in Figure 4, the surplus supply of electricity in New York State has not reduced the load pockets in NYC and LI, and LBMP remains high in NYC and LI in comparison to the rest of New York State. This is mainly because these regions depend heavily on power from upstate and out-of-state generation, but transmission constraints limit transfer levels to about 3000 MW.[xiii] Transmission is also impacted by “widespread degradation in voltage performance […] caused by load growth and unit retirements.”[xiv]

For reference, around 1,990 MW is supplied upstate to meet downstate power needs, but during extreme weather conditions, such as heat waves, the downstate regions could require a supply of nearly 2,800 MW.[xv]

The NYISO has tried to address these transmission constraints by building more transmission lines; over 1600 MW of transmission capability has been added since 2000, most of which allow electricity to be imported from neighboring electricity markets into the downstate region.[xvi]  Even so, projected congestion costs for NYC is $353 million in 2022, up from $283 million in 2013, and congestion costs for LI will increase from $165 million to $269 million,[xvii] suggesting that more aggressive measures are needed to enhance transmission capacity in New York State before wholesale electricity prices in NYC and LI will decrease to levels comparable with the rest of the state.

Currently, there exists an NYISO Tariff to help provide cost recovery and cost allocation for transmission projects whose capital costs exceed $25 million, whose cost savings exceed the project cost measured over the first ten years from the proposed commercial operation date, and whose beneficiaries are over 80% in favor of the project.[xviii]

FERC has also ordered the NYISO to develop a process to create new capacity zones to address transmission constraints, and just this April, the NYISO submitted a proposal to create a capacity zone encompassing the Lower Hudson Valley and New York City. [xix]

Additionally, Governor Andrew Cuomo unveiled the New York Energy Highway initiative in January of 2012 to modernize New York’s energy infrastructure. The eventual blueprint included a proposal to build 1000 MW of transmission capacity that would move power from upstate to downstate; there were also recommendations to replace and upgrade some of New York’s aging transmission lines.[xx] NYISO’s State Transmission Assessment and Reliability Study (STARS) estimated that, in the next 30 years, the state will require $25 billion in investment to replace 4700 miles of transmission and another $2 billion to upgrade the transmission system to ease congestion and increase transfer capability.[xxi]

 

Looking Forward

New York’s transmission infrastructure is integral to the health of their power grid, and an efficient and resilient grid will become more important as more power plants are retired. Initiatives are already underway in the NYISO to develop smart grid infrastructure, “green” the grid, broaden the regional markets, and expand interregional planning.[xxii]

While the NYISO’s current projection of annual growth in electricity use from now until 2023 is very modest—only 0.47%,[xxiii] the possible retirement of the Indian Point Nuclear Plant—which supplies 30% of New York City’s electricity, as well as other power plants whose life cycles will be determined by upcoming, stricter EPA emission rules, means that generation resources will need to be either found or built to replace that lost generation capacity when those power plants are decommissioned.[xxiv]

The possibility of severe weather events becoming more common has also highlighted the need to “weatherize” New York’s electricity grid. Superstorm Sandy caused power outages all along the eastern coast of New York State, cutting off power to over 900,000 customers on Long Island and over 750,000 customers in the Con Edison service territory. Over 90 transmission facility encountered outages, and all ties to neighboring ISOs were out of service.[xxv] The disaster highlighted the necessity of strengthening the NYISO’s ties to other ISOs in the region to better coordinate efforts in, not only emergency response, but also grid efficiencies and resilience.

Hence, the NYISO’s coordination with neighboring control areas such as PJM, IESO, Hydro Quebec, and ISO-NE; this is part of their Broader Regional Markets initiative to address limitations that currently exist where the markets and systems connect, be they market inefficiencies or electrical grid inefficiencies.[xxvi] The ability to buy cheaper power from a neighboring grid rather than expensive local power, or shortening the time commitment of moving power in and out of New York State, are just some of the improvements that can help the NYISO ensure reliable transmission and generation resources and potentially reduce costs for consumers. By Potomac Economics’ estimations, these improvements alone could provide New York with regional savings of $193 million a year.[xxvii]

Particularly as electricity generation in the Northeast becomes more dependent on natural gas, and gas supplies in the region need to be more carefully scheduled during the heating months from November to March, more tightly intertwined regional coordination will likely become standard, and it will be interesting to see how NYISO transmission and capacity will evolve with its neighboring control areas.

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