ICF sees the MISO capacity markets getting tighter

ICF International expects supply and demand balance to tighten in the Midcontinent Independent System Operator (MISO) market and reflected on other aspects of the recent capacity auction results in MISO, during an analysis released May 5.

MISO’s recent capacity auction results reveal the impact of independent power producers (IPPs) on the market. Zone 4 (Illinois) cleared at $150/MW-day, almost ten times higher than the 2014/2015 auction price, ICF said. “This supports the view that MISO Capacity markets might work and deliver resource adequacy,” according to ICF.

Zone 4’s price spike was due to the large concentration of IPPs and more retail load relying on the auction instead of bilateral contracts. “In contrast, Zone 7 (Michigan) prices failed to spike in this auction because of a lack of un-contracted or not self-supplied load and supply,” ICF said.

“Going forward, we expect supply and demand balance to tighten in MISO; however, given the current capacity market structure and the fact that the majority of the capacity in MISO is already contracted, this may not translate to a sustained recovery in capacity prices, without MISO reforms,” ICF said in its analysis.

In the interim, it is possible that more players could exit from MISO and look at neighboring markets. “The lack of federal reform could also precipitate state intervention, which could exacerbate concerns about reliability,” ICF said.

The ICF analysis was led by ICF Principal George Katsigiannakis with contributions from Senior Associate Himanshu Pande and Research Assistant Rachel Green.

“Going into the next auction, there are a number of factors that will tighten the supply/demand balance,” according to the ICF analysis.

“Over 2 GW of retirements are already anticipated, while there remains a potential for 15% of the region’s overall coal capacity to retire due to MATS [Mercury and Air Toxics Standard] compliance by 2016,” ICF said. “Power plant operators in MISO are increasingly looking to interconnect to PJM instead to benefit from higher capacity prices there. In Zone 7 particularly, capacity losses are expected to increase prices, albeit moderately.”

But ICF finds that several “inefficiencies” remain in the current MISO capacity market setup. The issues include the vertical demand curve, a lack of penalties for poor performance, a substantial number of low bids from regulated units, and volatility in the threshold for economic withholding — and the fact that the majority of the capacity in MISO is already contracted, ICF said.

For these reasons, “we do not expect a major recovery in capacity prices,” ICF said. “This combination of factors may require eventual reform in the capacity market. In the interim, state intervention could translate into more opportunity for new assets to enter into PPAs with utilities,” ICF said.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.