The NYISO capacity market auction results for the 2021 summer capability period sprang a surprise with New York City (NYC, or Zone J) locality clearing at the same level as New York Control Area (NYCA) Rest-of-State locality. The last time NYC cleared at the same level as NYCA was in January 2010 (see Figure 1). The May-August 2021 average clearing price for NYC was $5.4/kW-month, a sharp 70% decline relative to the summer 2020 average clearing price. ICF projects NYC capacity prices to clear at the NYCA level of $2.9/kW-month in the upcoming Winter 2021-22 capability period.
Capacity located in NYC is typically priced at a premium to that in NYCA because transmission constraints into NYC necessitate the availability of local capacity to serve the local load. However, Spot auction prices for the Summer 2021 capability period veered from this trend implying that capacity located in NYC has no better reliability value than capacity located in upstate New York.
While that outcome is surprising—prompting the NYISO’s Market Monitoring Unit (MMU) to call it inefficient—ICF projects NYC capacity prices to remain volatile through 2030 with prices initially rebounding and subsequently falling in the second half of the decade.
The primary driver for the depressed capacity prices is the reduction in the Local Capacity Requirement (LCR) for NYC, which dictates how much local capacity is required to meet the local reliability requirements. An increase in LCR implies that more local capacity must be procured to meet load, thus putting upward pressure on capacity prices; and, likewise, a decrease in the LCR, all else equal, drives down capacity prices.
Figure 2 illustrates how both increases and decreases in the NYC LCR have been directly associated with increases and decreases in the auction clearing prices. For example, the reduction in the NYC LCR from 86.6% in capability year 2020-21 to 80.3% in capability year 2021-22 represents a reduction of ~600 MW in the capacity requirements and is the primary driver for the sharp drop in the NYC capacity price to the NYCA level. Similarly, a decline in the NYC LCR from 85% in 2014 to 80.5% in 2018 resulted in a decline in capacity prices over this same period.
Preliminary results by the NYSRC and NYISO for the 2022-23 capability year indicate a decline of 1-2% in NYCA IRM, and a 1% increase in NYC LCR, and a 3% increase in LHV LCR. In such a scenario, NYC would again clear at or near NYCA level, with summer capacity price declines of $0.5-1/kW-month relative to 2021. Note: Historically, the preliminary LCR results have varied until a final value is accepted in January, and these LCR figures should not be treated as final.
Encouraging prospects in the short-term
In 2019, the NY State Department of Environmental Conservation (NYSDEC) issued regulations establishing maximum emissions rates of nitrous oxides (NOx) during ozone season—May through October—for simple cycle combustion turbine plants. The first tranche of these regulations come into effect in 2023 and will force affected peaking units to comply by installing emissions controls, ceasing operations during the ozone season, or retiring altogether.
According to compliance plans, 1 GW of peaking capacity in NYC will be out-of-service in summer 2023 capability period. By summer 2025 capability period, another 700 MW of capacity will be inoperative, even as outgoing capacity is likely to be only partially replaced by repowering and or new energy storage resources. ICF projects a net reduction in capacity of approximately 500-600 MW, which may boost summer capacity prices in NYC by $10-11/kW-month.
However, the year-on-year volatility of the LCR will continue to be a significant source of uncertainty in the capacity market. In its 2020 State of the Market report, the NYISO’s external market monitor noted that the objective function used in the LCR optimization process is flawed and leads to inefficient allocation of capacity across zones. Further, it contends that a misalignment between the IRM and LCR setting methodologies leads to the high year-on-year variability seen in the LCRs. While the NYISO has started a review of its LCR process and will consider enhancements to improve stability and transparency, fluctuating LCRs could yet lead to large swings in ICF’s projected capacity prices (Figure 3). Note: New renewables and storage resources are assumed to be exempt from buyer-side mitigation rules for these projections.
Riskier prospects in the mid-term
New York State recently selected two HVDC lines to begin contract negotiation under NYSERDA’s Tier 4 REC solicitation. The two HVDC transmission lines, Champlain Hudson Power Express (CHPE) and Clean Path NY (CPNY), will bring up to 2.5 GW of firm new capacity to NYC and will materially impact the NYC capacity market prices. CHPE is scheduled to complete construction in 2025 and ICF assumes it will be online starting summer 2026 capability period. With the line in service, ICF estimates that NYC prices will drop to NYCA levels and summer prices will decline by approximately $10/kW-month relative to 2025 projected prices. The completion of CPNY in 2027, on the other hand, will not further impact NYC capacity prices. Since the CPNY line will not add any new capacity in NYCA, it will not affect NYCA, or NYC prices.
However, Equinor and BP’s Empire Wind I offshore wind plant is expected to commence operations at the end of 2026 and deliver capacity to NYC starting 2027. Figure 4 presents the estimated impact of these developments on NYC capacity prices. Note: These projections do not account for any reduction in incumbent supply, which may or may not choose to retire due to insufficient economics.
Potential stability in the long-term
Setting aside the impact of the Tier 4 projects, ICF projects a significant turnover in generating capacity in NYC. Nearly 1 GW of battery storage capacity and 3.5 GW of offshore wind capacity could be in service by the end of the decade.
On the other hand, 3.5 GW of NYC’s fossil steam turbine capacity would be approaching or exceeding 70 years of age. ICF projects 40%-50% of that ageing capacity in NYC to retire due to escalating maintenance costs and insufficient economics, hence offsetting the entry of the two HVDC lines and new renewable and storage capacity. Between 2030 and 2035, ICF estimates NYC capacity prices to recover to $150-170/kW-year annually following economic retirement of generating units.
Although substantial state-supported offshore wind and battery storage capacity is expected to be added in NYC in the long term, the impact on the capacity markets will be muted. Due to the lower reliability contribution of intermittent and duration-limited resources, the market impact of renewables and storage per MW of installed capacity is smaller than that of thermal power plants. Further, as penetration of these resources increases, their reliability contribution declines due to correlation of resource unavailability.
Capacity requirements should also be higher under large-scale penetration of intermittent resources. The system will require significantly higher installed capacity to serve load to compensate for the unavailability of renewable generation for extended periods of time. A draft white paper authored by the NYSRC with assistance from the NYISO suggested that NYC LCR could be as high as 97.9% in a high renewable scenario. Thus, increasing penetration of offshore wind resources in NYC is likely to drive up its LCR and put upward pressure on capacity prices.
It is worth noting that some uncertainty surrounds the structure of the NYISO capacity market itself. An ongoing resource adequacy proceeding by the NYPSC is examining how to reconcile the current market structure with the state’s climate and GHG emission goals. The proceeding may result in more substantial market design changes, or even an overhaul of the capacity market. However, any major change to the capacity market structure will require an extensive design, review, and approval process—likely including a FERC challenge—and ICF does not expect such changes to materialize in the immediate future.