The capacity market in New England has been following a declining trend in clearing prices. While FCA 15 saw some uplift in prices from FCA 14, overall the prices have ranged within $2-$4/kW-mo over the last couple of auctions. This declining trend is driven by oversupply and resource bidding behavior. The capacity prices have cleared marginally lower than those in FCA 15 for ROP. However, the SENE separation came down by $1.3/kW-mo.
The auction results are reasonable, indicating an oversupply in the system. Going forward, ICF expects the prices to recover with the increased generators exiting the market.
- Key price drivers for the low clearing capacity prices in this auction compared to the previous auction include lower Cost of New Entry (CONE), lower Installed Capacity Requirement (ICR), and minimal static delist resources.
- While more permanent and static delists bids were expected during this auction due to the lower Dynamic Delist Bid Threshold (DDBT), only 258 MW capacity filed retirement delists. This could be attributed to cautious bidding behavior given the uncertainty surrounding the Offer Review Trigger Price (ORTP) and the Competitive Auction with Sponsored Policy Resources (CASPR) construct.
- Despite very high penalty rates for scarcity events and ISO-NE’s constrained gas network, the thermal bids currently don’t seem to reflect any risk premium/component. With expected future retirements and increasing reliability needs in this market, this may not be the case going forward.
Lower Net CONE and ICR requirement
ISO-NE’s Net ICR of 31,645 MW for FCA 16 reflects a 1,625 MW (4.9%) decrease relative to the prior auction value. The majority of this decline in Net ICR can be attributed to the new reconstitution methodology for forecasting passive demand resources. This new methodology resulted in a much lower gross load forecast compared to that in FCA 15.
The decrease in Net ICR as well as a decrease in Net CONE from $8.707/kW-mo in FCA 15 to $7.468/kW- mo in FCA 16 results in an inward shift (shift to the left) in the demand curve, as shown in Figure 1, putting downward pressure on capacity clearing prices, all else equal.
Figure 1: Demand curve for FCA 16
Lower dynamic delist bid threshold (DDBT)
Dynamic delist bids are capacity price bids submitted by market participants that specify the floor below which the generators do not want to assume a capacity supply obligation in the FCA for that auction period. The bids are typically reflective of the avoided cost of the resource and submitting them during the auction is the only way for generators to delist themselves. The bid is subjected to a threshold limit—called the dynamic delist bid threshold or DDBT—above which the ISO’s market monitor reviews them to mitigate any supply-side market power in the auction.
The DDBT was set to $2.61/kW-mo for FCA 16, which has significantly decreased from the previous auction’s threshold of $4.3/kW-mo. Until FCA 15, Internal Market Monitor (IMM) had a manual process to calculate the DDBT value, which involved estimating the marginal resource’s bid in future FCAs using a sample of generally non-public bid data from the most recent FCA. This update was done once in three years. Starting with FCA 16, IMM has employed a new “recalibration method” and will update the DDBT value for each FCA based on the most recently available supply conditions, as evidenced in the last FCA, and the most up-to-date projected demand conditions, using the estimated system-wide demand curve for the next FCA. The recalibration method estimates a “preliminary” DDBT value that is then adjusted by the application of maximum and minimum limits, as well as the addition of a “margin” (margin adder). This change in methodology in calculating the DDBT has resulting in the significantly lower DDBT for FCA 16.
Minimal retirement, static, and permanent delist bids
Only 256 MW of capacity submitted retirement or permanent delist bids. This could be due to cautious bidding behavior given the uncertainty around ORTP and the CASPR construct. Additionally, only 1.4 GW of capacity dynamically delisted from this auction, while only 64 MW submitted static delist bids. With such little capacity trying to exit the capacity market, there remained excess capacity in the system putting downward pressure on capacity prices.
Lower ORTP for storage and solar
For FCA 16, ISO-NE significantly reduced the ORTP for solar and storage resources compared to FCA 15. The ORTP for solar and storage resources was $1.381/kW-mo and $2.601/kW-mo respectively. Given the clearing prices, solar resources were not mitigated from the capacity market. However, storage resources could have been mitigated from entering in ROP/NNE as the auction cleared below the ORTP for storage. The incremental capacity that cleared in the market put downward pressure on capacity specially in SENE, since a majority of the new resources cleared in Massachusetts fall in the SENE load zone. This change did not have significant on the ROP prices.
Flat supply curve mitigating the impact of removal of the Killingly Energy Center
In ICF’s analysis, the removal of Killingly Energy Center did not have a significant impact in the capacity prices due to the flatness of the supply curve. Approximately 6 GW of oil/gas units were bidding around the same price. With 672 MW removed from the stack, the units were merely offset. Scarcity Hour penalty rate None of the generators seem to be pricing in any impact of penalty risk adders in their bids. The lack of any ISO-NE scarcity events over the last couple of years may be prompting this bidding behavior resulting in sustained low clearing prices.
Actual clears in the results
Note: Natural gas additions include existing generator uprates
In FCA 15, approximately 950 MW of new capacity cleared, which included 595 MW of storage resources. In FCA 16, only 311 MW new capacity cleared and it all consisted of solar, storage, and paired resources. Out of the 311 MW that cleared, only 98 MW of storage cleared, which was less than expected given the much lower ORTP compared to the previous auctions. Out of this 214 MW cleared in Massachusetts, potentially due to the more stringent clean energy targets/policies in the state thus putting downward pressure on SENE capacity prices.
Given that the SENE capacity prices cleared higher than the ORTP for storage, it is surprising that more storage did not clear in this auction. One of the reasons for this could be that the 7-year lock-in period is no longer valid, implying there is no need for storage resources to urgently enter the market at this point. It is possible that the majority of last year’s storage cleared to try to get a locked-in capacity payment for seven years for financing purposes.
Recently, ISO-NE published the ORTP for resources participating in FCA 17 (2026-2027). The ORTP for storage has further declined to $0.789/kW-mo compared to FCA 16, where it was $2.601/kW-mo as mentioned previously. Given this development, ICF expects more storage resources to clear in the next auction.
Moreover, as more oil/gas plants in ISO-NE retire, there will be a need for reliability. ICF expects more storage resources will be built to meet this need.
Developments and future expectations in the ISO-NE Forward Capacity Market
To address concerns for market power from states (buyer-side mitigation), ISO-NE introduced the CASPR construct along with the ORTP (MOPR). However, due to its failure to incentivize the entry of sponsored resources, states in ISO-NE called for market construct changes as the ORTP construct hinders the states' efforts to achieve their decarbonization/RPS target and mandates. On March 31, 2022, the ISO filed a transition proposal with FERC to eliminate MOPR from the forward capacity market. The proposal allows for a gradual removal of the construct while providing a Renewable Technology Resource (RTR) exemption of 700 MW capacity over a two-auction window. The MOPR is expected to be eliminated completely starting FCA 19, scheduled for 2025.
In addition to the first tariff to eliminate the MOPR, the ISO proposed a second tariff as part of a single filing under Section 205 of the Federal Power Act to reform buyer-side market power mitigation. This includes higher participation of renewables in the market starting with the RTR exemption in FCA 17, broad stakeholder support, avoiding reliability risks by judiciously retiring inefficient resources, and adopting a reasonable capacity credit contribution for different resources.
Currently, the market does not seem to reflect the impact of any scarcity risk premiums given the low marginal clearing bid/price of thermal units. Although ISO-NE has not had any scarcity events in the last couple of years, the system is still constrained through the gas pipeline network, especially during the winters when thermal generators could have fuel supply issues. Cognizant about this issue, the ISO is working with North American Electric Reliability Corporation (NERC) to assess and revise its reliability standards through a Standard Authorization Request submitted for resource fuel assurance and flexibility and gas delivery security.
With more clarity regarding the status of MOPR/CASPR and the methodology for capacity credit contributions of renewable and storage resources, ICF expects more inefficient thermal plants to exit the market. With the tightening supply-demand balance and the turmoil in the LNG market due to the Russia-Ukraine war, there may be potential delays in the retirements of old oil/gas steam units. Additionally, there may also be delayed retirements from dual-fired resources due to their ability to arbitrage between the high gas and oil prices, which may benefit their overall energy margins.
In the long term, ICF expects the capacity prices to be set by longer duration storage units due to their favorable economics in ISO-NE compared to new thermal units. With the penetration of more solar and storage resources into the market the peak demand profile will flatten, requiring longer duration storage resources for reliability purposes. ICF expects 4-hour storage resources to be the most economic capacity expansion in terms of cost, reliability, and expected revenues.
The future and outcomes of ISO-NE's capacity market will also depend on the solutions to the Energy Security issues, which the ISO needs to address. For example, a solution that provides incremental revenues of oil storage without accounting for lack of flexibility could delay further the retirements of oil/gas steam units.