By Jesse Newton, Associate Manager of Analytics
ISO New England (“ISO-NE”), the independent system operator responsible for the electricity grid in New England, held Forward Capacity Auction (“FCA”) 16 on February 7, 2022. Clearing prices for most of New England were flat from FCA 15, except for Southeast New England, which fell 34% to $2.639/kW-month. The auction clearing price for Northern New England and Maine was $2.531/kW-mo and the clearing price for the rest of the region, dubbed Rest-of-Pool, was $2.591/kW-mo.
Figure 1: ISO-NE's FCM clearing price has declined since FCA 8 held in 2014. In FCA 15 and 16 prices have differed across the region with higher clearing prices in Southern New England.
The Forward Capacity Market (“FCM”) is one of several markets that ISO-NE manages, and it is designed to guarantee that New England has sufficient electricity resources to meet consumer demand during all hours of the year, including during the hottest hours of the summer when electricity demand peaks. Each auction is held three years in advance of the Capacity Commitment Period (“CCP”) which it will apply to; the recent auction held this February is associated with the 12-month period starting June 1, 2025 and ending May 31, 2026.
In advance of the FCA, ISO-NE establishes certain market parameters that are used to structure how much capacity will clear the auction and at what price. The two key parameters are the net installed capacity requirement (“net ICR”) and the net cost of new entry (“net CONE”). The net ICR is based on future load forecasts and is essentially the amount of power resources New England is expected to need to maintain grid reliability in three years. This year the net ICR went down about 4% reflecting a lower peak load forecast. Net CONE on the other hand is assessed by analyzing the cost to develop new power generators in New England. For FCA 16 net CONE was $7.468/kW-month, a decrease from $8.707/kW-month in FCA 15 likely driven by economies of scale from larger gas turbines and lower capital costs. Decrease in both net ICR and net CONE set the stage for prices to decline in this year’s auction.
Figure 2: The net-ICR in New England has declined in recent auctions. Since FCA 8 the auction has cleared an amount of capacity above the net-ICR ensuring that there will be sufficient resources to meet electricity demand. In FCA 16, 32,810 MW cleared, 1,165 MW above the net ICR.
Nearly 38,000 MW of qualified capacity resources entered FCA 16. These included new and existing power resources, comprised of generating, demand response, and energy efficiency resources. After four rounds of bidding, ISO-NE acquired sufficient capacity commitments to meet the net ICR. Approximately 15%, or 5,000 MW, of the cleared resources were solar, wind, energy storage, or demand resources. Notably, after first clearing the auction last year, more than 700 MW of new and existing energy storage resources cleared this year. Solar, or solar paired with storage, accounted for all 311 MW of new generating resources that cleared. Of the 1,976 MW of resources seeking to exit the market who filed delist bids, 1,540 MW delisted.
Figure 3: In FCA 16 27,984 MW of generating resources cleared the auction, the lowest amount in an ISO-NE capacity auction. This reduction is driven by a reduction in the total cleared capacity, with the number of regional imports increasing and demand resources decreasing slightly.
FCA 16 clearing prices are slightly higher than the record low prices seen in FCA 14, yet prices remain very low due to an excess of capacity resources in New England. Low prices mean customers will pay low-capacity costs as part of their electricity supply in 2025-26. Prices have fallen in recent years as increased demand has been offset by increases in energy efficiency. In the near term, capacity prices could remain low as more competitively priced energy storage and renewable energy resources enter the auction. Also in the short term, the recent rise in global energy prices may have a negative impact on capacity prices as the wholesale energy market in New England has risen, providing increased revenues for generators, and reducing their reliance on capacity market revenues. Longer term, when New England’s fossil fuel generators begin to exit the market, we could see capacity prices begin to rise.
Other Key Developments:
The public release of FCA 16 results were delayed several weeks because of uncertainty around the qualification of NTE’s 650 MW Killingly Energy Center, a natural gas plant located in Killingly, Connecticut. The Killingly plant originally secured a capacity supply obligation (“CSO”) in ISO-NE’s FCA 13 in 2019 requiring it to supply power starting June 1, 2022. It has subsequently participated in the two most recent auctions before FCA 16. In November 2021, ISO-NE requested permission from the Federal Energy Regulatory Commission (“FERC") to terminate Killingly’s CSO because permitting delays had stalled construction, delaying its online date to 2024 and preventing it from meeting its capacity obligation starting in June. In early January, FERC approved the request. NTE requested a rehearing, took the issue to court, and was granted a stay in FERC’s decision to remove them from the auction. ISO-NE proceeded on schedule with FCA 16, yet to accommodate the stay calculated auction results with and without Killingly, keeping results confidential until FERC resolved the request for a rehearing. In late February 2022, FERC denied NTE’s request for a rehearing and soon after the court removed the stay; ISO-NE then released FCA 16 results with prices and quantities cleared excluding Killingly.
Another key capacity market development came in February as ISO-NE reversed course on its commitment to remove its minimum offer price rule (“MOPR”) before FCA 17 in 2023. The MOPR sets offer price-floors for state-sponsored renewable resources, limiting their ability to clear the auction and blocking their access to capacity market revenues. In an early February stakeholder meeting of the New England Power Pool's (“NEPOOL”) Participants Committee, 70% of members supported a transitional plan to retain MOPR through FCA 18 in 2024 while creating an exemption for 700 MW of state-sponsored renewables in FCA 17 and FCA 18. Proponents of the plan justify the extension arguing that it will minimize short term reliability risks that are expected if a large wave of renewables were to clear the auction, drive down capacity prices, and force conventional power generators to retire while also allowing planned renewables intending to enter the market to do so through the exemption. The proposal requires FERC approval to be implemented and there is reason to believe that FERC may not approve the proposal. The commission has recently criticized ISO-NE’s MOPR as unjust, unreasonable, and overly broad and has strongly recommended that ISO-NE propose a near term solution.
If you’re interested in learning more about the implications of FCA 16 results on your business, please reach out to a member of our Energy Services Advisory team.
Photo by Roman Zaiets