A guest post by a writer with more than 30 years in energy and the environment with government, private industry, and the nation’s leading think tanks. He currently works for the federal government and will be blogging in anonymity until he leaves public service.

ISO-NE

One of the more serious structural flaws in energy policy has been the fact that utilities can make money by selling electricity, but not by saving it.

As a result, a lot of power plants are built even though energy efficiency measures, on-site generation, and demand response could displace the need for the power they generate, at a far lower cost.

For years, the Holy Grail of utility policy has been to decouple utility profits from electricity sales, freeing them to make money off of efficiency and other low-cost means of providing capacity. Selling negawatts, as well as megawatts, in short.

As with most innovative energy policies, California led the way, decoupling utility profits from power sales in 1982 and ramping the policy up in 2007. Decoupling has been a big reason California has held its per capita electricity consumption flat for 3 decades while the rest of the country’s per capita use has increased by 50 percent.

In New England, they’re implementing what may be the next generation in decoupling.

Faced with capacity shortfalls, and a fraying consensus among the states in its service area, the New England Independent System Operator negotiated a new approach to meeting demand: the Forward Capacity Market.

FCMs just might become decoupling on steroids. Here’s how it works in New England.

ISO NE develops forecasts for needed demand three years in advance and then conducts auctions annually to purchase sufficient power to meet those needs. Nothing too spectacular so far.

But here’s where it gets interesting. The auctions are relatively wide open, and the entity that can provide the lowest cost capacity — whether through negawatts, megawatts, on-site generation, or demand response — is awarded the right to supply that capacity.

Whereas traditional decoupling strategies allow utilities to invest in and profit from efficiency-based capacity by assuring them a return that is equivalent to sales of MWs, FCMs require that power be allocated to the lowest cost bidder, and it opens the bidding to capacity providers other than utilities.

The centerpiece of the FCM is the descending clock auction. Essentially, a series of rounds are held where qualified applicants bid to provide the needed power. At the end of each round, the auctioneer announces the excess supply bid in the prior round, the start of round price; and the end of round price. As a result, bidders adjust their prices or drop out. The clearing price is determined when the excess supply being bid into the auction is zero.

Nothing is simple in transmission and distribution, but ISO New England has clear rules for qualifying both new and existing resources. New demand response applicants have to use a monitoring and verification (M&V) protocol to quantify reductions (based on the IPMVP), they must provide financial assurance, and they must be located within a specified capacity zone.

The first auction began on Feb. 4 of this year and finished up on Feb. 6. The results were intriguing. Existing supply faired the best, but of the 1,813MW of new resources, 1,188MW were demand-side projects.

Although the FCM will increase prices in some capacity zones during the transition phase, it is expected to substantially lower consumer costs in the long term.

It’s not clear how much efficiency FCMs will tap into, but the approach will put demand-side strategies on an even footing with traditional supply and generation, and that could cut a lot of carbon at a low — or no — cost, particularly once carbon is priced under a cap-and-trade program. And if allowances were auctioned under the cap-and-trade program, as Obama has proposed, efficiency and on-site generation would garner an even bigger share of New England’s energy needs.

This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.