ISO New England says price signals worked to encourage needed new capacity

New England’s annual auction to acquire the power system resources needed to meet future demand concluded Feb. 2 with sufficient resources for 2018-2019 in most of the region, but with a shortfall in Southeastern Massachusetts and Rhode Island, said ISO New England in a Feb. 4 statement.

The auction, run by ISO New England., concluded with more than 1,400 MW of new capacity that will help fill the gap resulting from recent and pending generator retirements. The Forward Capacity Market (FCM) auction attracted significant competition, and three new power plants—two in Connecticut and one in Southeastern Massachusetts—won the obligation to build 1,060 MW of generation to serve the region’s load.

The auction also drew 367 MW of new demand-side resources. Clearing prices were higher than in previous auctions, reflecting the need for new resources to ensure a reliable supply of power in New England during the capacity commitment period running from June 1, 2018, through May 31, 2019. Most resources will receive a price of $9.55 per kilowatt-month (kW-month). The region’s need for new resources emerged in last year’s auction when retirements totaling more than 3,000 MW led to a shortfall in the resources needed to meet demand in 2017-2018.

“The capacity market is working as designed. The price signals from last year’s auction helped spur investment in new resources, including more than 1,000 megawatts of new generating capacity, which will help address the region’s resource shortage and meet peak demand in 2018-2019,” said Gordon van Welie, president and CEO of ISO New England. “Several significant FCM enhancements went into effect with this auction, including Pay-for-Performance incentives, a sloped demand curve, a seven-year price lock-in for new resources, and the ability to defer a capacity obligation for one year under extraordinary circumstances. These reforms are removing risks from the market and providing investors with the financial stability needed to build new resources in New England, and providing consumers with greater assurance that the region’s power system will have sufficient capacity to keep the lights on, and that those resources will perform when called on.”

For this, the ninth FCM auction, the region was divided into four zones: Connecticut (CT); Northeast Massachusetts/Greater Boston (NEMA/Boston); Rest of Pool (ROP); and a new zone, Southeast Massachusetts/Rhode Island (SEMA/RI). The ROP zone includes western and central Massachusetts, Vermont, New Hampshire, and Maine. The CT, NEMA/Boston and SEMA/RI zones were created based on transmission limitations that restrict the power that can be imported into each area, as well as local resource levels and needs.

Amount of capacity acquired region-wide for 2018-2019 Preliminary results indicate that the FCM auction concluded with about 34,695 MW of capacity acquired region-wide. The installed capacity requirement (ICR) for 2018-2019 is 34,189 MW; however, with the sloped demand curve now in place, the region can acquire more or less than the ICR, depending on reliability requirements and price. The auction began with 32,101 MW of existing resources, so new resources were needed to meet the 34,189 MW ICR. The auction started with 5,432 MW of new resources qualified to compete. In addition to the regional ICR, a local capacity requirement is set for each of the three import-constrained zones.

For several years, the region’s capacity auctions all started—and concluded—with surplus capacity, resulting in relatively low capacity prices, ISO-NE noted. However, before last year’s auction, a large number of resources announced their intention to retire by June 1, 2017, including the 1,500-MW, mostly coal-fired Brayton Point station in SEMA/RI. In total, nearly 3,400 MW of generation and demand-side resources will be retired by 2017. Altogether, that’s more than 10% of the region’s capacity.

The retirements created a resource shortfall that drove up capacity prices in the February 2014 auction, sending the market signal that new resources were needed. The resource shortage continued into this auction, with fewer existing resources available to meet the regional ICR. The price signal from the previous auction attracted a significant quantity of new resources to compete in this auction.

The total level of resources clearing the auction included 30,442 MW of generation, 1,449 MW of imports, and 2,803 MW of demand-side resources, which includes companies that have agreed to reduce their power consumption if needed during times of system stress, and energy-efficiency measures. The total 34,695 MW clearing the auction included 1,427 MW of new resources in New England, including a new 725-MW dual-fuel unit and two 45-MW units in CT, a new 190-MW peaking power plant in SEMA/RI, and 367 MW of new demand-side resources. The higher auction clearing price reflects the cost to build new generation in the region.

Even before the auction started, there were not enough new and existing resources, combined, to provide the capacity needed in the SEMA/RI zone in 2018-2019. In all, there were 7,241 MW (6,888 MW of existing and 353 MW of new resources) that qualified to provide the 7,479 MW needed to meet SEMA/RI local sourcing requirement in 2018-2019. Since all the resources that qualified, including the new resources, will be needed to help meet the local resource requirement in SEMA/RI, auction bidding never opened in that zone.

New resources clearing in this auction can choose to lock in their capacity price for seven years, up from the previous five. The extension is intended to increase financial stability for new resources to better attract investment when needed.

Also, a new resource can obtain a one-year deferral of capacity supply obligations and payments if the resource is needed for reliability, but cannot meet its initial operational date due to circumstances beyond the developer’s control.

The annual FCM auction is held three years before each capacity commitment period to provide time for new resources to be developed. Capacity resources can include traditional power generation or demand-side resources such as load management and energy-efficiency measures. Resources that clear in the auction receive a monthly capacity payment in exchange for their commitment to provide power or curtail demand when called upon by the ISO. The capacity market is separate from the energy market, where resources compete on a daily basis to provide power, and are paid for the electricity they produce.

Finalized auction results will be included in a filing with the Federal Energy Regulatory Commission within the month. This filing will include resource-specific information.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.