The New York Independent System Operator: a Ten-Year Review
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The New York Independent System Operator: A Ten-Year Review Susan F. Tierney, Ph.D. Analysis Group Boston, Massachusetts April 12, 2010 This White Paper was prepared at the request of the New York Independent System Operator. The paper reflects the views of the author, and not necessarily the views of the NYISO, or its members. www.analysisgroup.com Table of Contents EXECUTIVE SUMMARY .............................................................................................................................................................. 2 PURPOSE OF THE STUDY .......................................................................................................................................................... 6 BACKGROUND: The Goals Underlying Changes in New York’s Electric Industry in the 1990s ...................................... 7 Overview ................................................................................................................................................................................... 7 New York’s Electric Industry Before the Establishment of NYISO .................................................................................... 9 Impetus for Change: The Pressure of High Electricity Prices ........................................................................................... 10 Planning for NYISO ............................................................................................................................................................... 12 Establishing NYISO ................................................................................................................................................................ 13 ASSESSING HOW NYISO AND NEW YORK’S MARKET MEASURE UP IN ITS FIRST DECADE: Results ................ 16 Overview ................................................................................................................................................................................ 16 Timeline of Events in NYISOʹs First Decade: 1999‐2009 .................................................................................................. 17 Part 1: Comparing Goals and Aspirations for NYISO with Outcomes ......................................................................... 20 Electricity Rates and Prices ............................................................................................................................................... 21 Retail Electricity Rates and Consumers’ Electricity Bills .............................................................................................. 21 Wholesale Electricity Prices and Rates ........................................................................................................................... 25 Economic Savings From Wholesale Power Markets ....................................................................................................... 27 Some Final ObservationsAbout Economic Savings and Electricity Prices ..................................................................... 28 Introducing Market Forces into the Provision of Electricity ........................................................................................ 33 Power plants – improved performance: less fuel for the amount of electricity produced ................................................. 35 Power plants – improved performance: reduced outages for maintenance .................................................................... 36 Nuclear power plants – improved performance ............................................................................................................. 37 Power plants – investment risk shifted from ratepayers ................................................................................................. 38 Demand response – getting customers voices into the market ........................................................................................ 44 Reliability of New York’s Electric System ...................................................................................................................... 46 Other Electric Supply Portfolio Objectives: Renewables, Fuel Diversity, Air Emissions, Energy Efficiency ........ 50 Other Outcomes (Non‐Utility Participation; Retail Choice; Stranded Cost Recovery). ........................................... 54 Open participation in NYISO processes ......................................................................................................................... 54 Retail choice and stranded costs ...................................................................................................................................... 57 Part 2: Comparing NYISO’s Features Against Structural Elements of Competitive Markets…………………………… .59 Part 3: Assessing NYISO as an Institution and in Executing its Responsibilities ......................................................... 65 LOOKING AHEAD ..................................................................................................................................................................... 73 ENDNOTES .................................................................................................................................................................................. 76 Tierney – NYISO 10‐Year Review – April 12, 2010 2 The New York Independent System Operator A 10‐Year Review by Susan Tierney, Ph.D. Managing Principal, Analysis Group April 12, 2010 EXECUTIVE SUMMARY Background: In conjunction with its tenth‐year anniversary, the New York Independent System Operator (“NYISO”) commissioned this retrospective review of the first decade of its operations. Many of the participants in New York’s electric industry also expressed interest in an assessment of NYISO’s performance relative to the original goals that led to the establishment of NYISO as part of the restructuring of the state’s electric industry. With that in mind, this report looks backwards in assessing NYISO’s performance in light of the initial goals for establishing the organization, and looks ahead to identify areas for further improvement in the future. Much has changed in New York State’s wholesale electric industry in the years since its fundamental design elements were adopted during the 1990s, and since NYISO began to administer the high‐voltage power grid and wholesale markets in 1999. Electricity is now delivered through competitive markets in New York. Hundreds of buyers and sellers of power have access to an open transmission system that underpins the market and provides reliable service. With one notable exception when a large blackout that started in the Midwest shut down the Northeast power grid in 2003, New York’s power grid has consistently provided reliable power supply to New York State consumers. Although wholesale power prices rose over the course of the decade in New York as they did around the country, they rose largely as a result of underlying increases in the prices of natural gas and other fuel inputs.1 Wholesale electricity prices have decreased noticeably in the last year, however, as natural gas prices dropped to their lowest levels in many years.2 Many thousands of megawatts (“MW”)3 of new generating capacity were added over the course of the decade, with most of the new capacity built in relatively close proximity to population centers in downstate New York and with most of the financial risk borne by investors rather than by electricity customers. Wind power developers have been particularly active in recent years, and as of the end of 2009, New York ranked 7th among U.S. states in terms of the amount of wind generating capacity built and in operation.4 Over 2,100 MW of demand‐response resources had been signed up in the NYISO‐ administered markets as of 2009.5 New York added three interconnections with neighboring regions.6 This report tracks these and other trends. After summarizing the forces that led to the establishment of NYISO in 1999, the report reviews an array of information that sheds light on the performance of NYISO as the administrator of the state’s bulk power electric grid and wholesale power markets. From the vantage point of the end of 2009/beginning of 2010, the paper assesses New York State’s first decade through two lenses: a quantitative one, which Tierney – NYISO 10‐Year Review – April 12, 2010 3 tracks performance using a range of metrics; and a qualitative lens, which examines structural features and takes into consideration evaluative comments by observers of and participants in New York’s electric industry. The paper relies on two principal types of information to analyze NYISO’s actual performance: the report draws on the author’s review and analysis of historical documents and quantitative data in the public domain; and the assessment reflects perspectives obtained through dozens of interviews with stakeholders at the end of 2009. The report uses as its starting point the original goals and objectives for the new electric industry structure as established at the end of the 1990s. The hope of many in the state was to find a way to lower electricity prices and narrow the gap between electric prices to consumers in New York compared to those in other parts of the U.S.7 The expectation was that by introducing competitive pressures into parts of the industry – power production and retail supply – customers would benefit from more efficient supply of electricity than was occurring under traditional regulation of vertically