Exhibit 1: Differences between 2022/2023 PRA and 2021/2022 PRA results
Exhibit 2: Offered capacity in the 2022/23 PRA vs. ICF expectations and 2021/22 PRA results
Non-merchant offers decreased while merchant offers increased
We also observed changes in bidding behavior. Compared to the 2021/22 auction, there was a roughly 6 GW decrease in self-scheduled and Fixed Resource Adequacy Plan (FRAP) capacity, which is usually offered at near-zero prices. This decrease caused the share of self-scheduled and FRAP capacity to decline by four percentage points (Exhibit 3a). Furthermore, there was a 6 GW increase in high-price merchant offers; merchant capacity as a percentage of total cleared capacity increased to 8.1%, compared to 4% to 5% in the previous auctions (Exhibit 3b). The most significant increases in merchant capacity were observed in Zones 1, 4, 5, and 6. This impact can also be seen in the offer curve, which shifted leftward as zero price bids decreased (Exhibit 4). MISO’s Minimum Capacity Obligation (MCO) proposal, submitted to FERC, could limit further shifts. The MCO would require LSEs to procure at least 50% of their PRMR ahead of each PRA. MISO justified this proposal by noting that a small number of LSEs increasingly rely on the PRA for capacity procurement and that the MCO would prevent overreliance on PRA.
Exhibit 3a: Self-scheduled and FRAP capacity
Exhibit 3b: Merchant capacity as % of cleared capacity
Exhibit 4: Unconstrained offer curves for 2020/21, 2021/22, and 2022/23 PRAs
Only the LSEs with net short positions prior to the PRA are exposed to high prices
Load serving entities (LSEs) in MISO have traditionally procured most of their capacity needs outside of auction through self-supply or contracts, with the PRA acting as a balancing market for additional capacity. The high clearing price in MISO North will only apply to the amount of capacity that LSEs procured from the PRA to meet their load obligations. In MISO North, there is nearly 8 GW of such capacity, which constitutes around 8% of total cleared capacity. As shown in Exhibit 3a, nearly 92% of total cleared capacity was either self-supplied or contracted.
All zones in MISO North cleared at a single price
While Zones 4 to 7 could not meet their PRMRs, all zones were able to meet their LCRs. This was due to high-capacity import limits and lower LCR-to-PRMR ratios for Zones 4 to 6 such that none of these zones were constrained due to their LCRs. However, MISO North as a whole was short of capacity. In contrast, in the 2020/21 PRA, only Zone 7 cleared separately at the CONE ($257/MW-day) as it was short of local capacity to meet its high LCR (99.6% of PRMR); other zones in MISO North cleared at a lower price ($5/MW-day).
Increasing reliance on natural gas and renewables
The share of coal capacity cleared in the PRA continues to decrease with corresponding increases in the shares of natural gas and renewables (Exhibit 5). Over the last five years, the coal capacity share has decreased from 36% to 30%, whereas the total share of natural gas and renewables has increased from 39% to 46%. These trends are expected to continue in future PRAs due to planned coal retirements and the predominance of renewables among new builds. However, renewables (especially wind and solar) have limited capacity accreditation. For example, for 1 GW of firm unforced capacity, the system would require nearly 7 GW of wind or 2 GW solar based on their current capacity credits.
Exhibit 5: Historical cleared capacity mix in MISO PRAs
Implications of the auction results for the future of MISO resource adequacy
Are the high prices in MISO North in this auction an anomaly or a representation of deeper forces at play in MISO? We conclude the latter, particularly due to changes in the capacity mix in MISO North. In 2023, we expect over 8 GW of retirements and only 3 GW of new capacity (derated for renewables) across MISO. Unless there is a reassessment of unforced capacity and planned retirements, transmission expansion, or a sufficiently large increase in long-duration storage builds, shortages could persist in future auctions.
Due to these potential shortfalls, there is an increasing need to reform the MISO resource adequacy construct to provide proper economic signals. Price stability in the MISO capacity market should be a key aim of this reform to induce the necessary investment. One potential reform that would reduce volatility is the use of a sloped rather than vertical demand curve. The MISO Independent Market Monitor has estimated that if a sloped demand curve had been used in the 2021/22 PRA, the price would have been $150/MW-day as opposed to $5/MW-day. Nevertheless, we expect that utilities will try to limit their exposure to the volatility of the auction by increasing self-supply and bilateral contracts. This will put upward pressure on bilateral contract prices.
Finally, due to capacity shortages, emergency events, and the predominance of renewables among new builds, proper capacity accreditation is necessary to maintain system reliability. One potential reform in this area that has been proposed by MISO is the use of availability-based resource accreditation based on the top 5% tight margin hours in each season. MISO's proposal is currently under evaluation by FERC. Other potential reforms in this area that are being considered by MISO include hybrid capacity accreditation, seasonal and monthly outage modeling, and forward capacity accreditation for renewables.