Improvements to New England’s power grid and enhancements to the wholesale electricity markets have resulted in a reduction in fuel-adjusted wholesale electricity prices of 5.7% over the past five years, according to ISO New England’s 2004 Annual Markets Report.

“The introduction of competition into the wholesale electricity markets has resulted in a more reliable, economical, and environmentally friendly power system for New England,” said Gordon van Welie, president and chief executive officer of ISO New England Inc., the operator of the region’s bulk power system and wholesale electricity markets. “Major initiatives have been implemented to ensure the continued development and smooth operation of the markets. New power plants are producing cheaper, cleaner electricity, and four major transmission projects are underway that will enable power to flow more efficiently throughout the region. But, there is more work to be done.”

The report reviewed the operation of the markets from Jan. 1 to Dec. 31, 2004. The report concludes that New England’s electricity markets performed well in 2004, both during the high-use summer months and during a mid-January cold snap that tested much of the region’s energy system.

Highlights of the report are as follows:

  • New England’s wholesale electricity prices, after adjustment for fuel costs, have declined by 5.7% since the first full year of operation (2000) and 11% since 2001.
  • Natural gas and fuel oil prices were higher in 2004 than in previous years and were the driving force behind higher electricity prices.
  • Average yearly prices were highest in Connecticut and lowest in Maine.
  • New, cleaner, more efficient power plants have reduced annual carbon dioxide emissions by 6%, nitrogen oxide emissions by 32%, and sulfur oxide emissions by 48% between 2000 and 2004 relative to existing units.
  • Cooler summer weather in 2004 resulted in annual peak electricity use that was 2.3% below the 2003 peak.
  • The most severe test of the New England markets occurred during the cold snap of Jan. 14–16 when the region experienced extremely low temperatures and record winter electricity use. While the markets and the power system operated reliably during this period, ISO New England, New England gas pipeline operators, and stakeholders developed a number of short-term initiatives that should improve the availability of power supplies by up to 2000 MW if extreme cold weather conditions occur again.
  • A new Forward Reserve Market went into operation on Jan. 1, 2004, to improve incentives for installing and maintaining reserve power plants that could be called on in emergency situations to produce power quickly and help maintain reliability.
  • During 2004, ISO New England’s Demand Response Program, which provides incentives for customers to reduce their electricity use during periods of high demand or high prices, resulted in decreased electricity use of more than 13,000 MWh. Over the past two years, there has been a two-fold increase in demand-response participation. Today, nearly 500 MW are enrolled in the various programs across New England. Each megawatt of electricity can power 1000 homes.

“Since 1999, the wholesale electricity market has grown to more than 260 market participants conducting US$7.25 billion in wholesale electricity transactions annually,” said van Welie. “Although New England is building a strong foundation for achieving successful competitive markets, more work remains. As the markets mature, we will continue to respond to the challenges that develop. Additional enhancements have been planned that will ensure the long-term reliability of the region’s electricity system, so it can continue to meet the needs of New England consumers and support economic growth.”

One of these enhancements is the development of a “locational installed capacity market.” The absence of a functioning capacity market has made it necessary to enter into costly contracts with generators to make sure that power plants needed for reliability remain available. The cost of these reliability agreements is expected to reach more than $350 million on an annualized basis this year.

The bigger long-term issue, which locational installed capacity is designed to solve, is creating a market incentive to attract investment in new power plants or demand-side resources to meet the growth in New England’s electricity use.

Other market initiatives include increasing participation in the Demand Response Program and addressing payments primarily made to generators that are called on to operate “out of merit” to ensure a reliable system. As the amount of demand response increases, the cost of capacity should fall, and the need to run generators out of merit should be reduced.