ISO-NE's Upcoming Forward Capacity Auction Reforms

in March 4th, 2024

By Conor Larkin, Energy Analyst

ISO New England's Forward Capacity Market (FCM) determines the electric generation capacity needed to ensure grid reliability under peak summer and winter demand conditions in the region. The Forward Capacity Auction (FCA) sets the price at which existing and new power resources are compensated for the reliable capacity they provide. Since the FCM’s inception in 2006, each FCA has established capacity commitments three years into the future to ensure that the grid supply mix has adequate generating and demand resources for peak demand events. ISO New England (ISO-NE) held FCA 18, the most recent auction, on February 5, 2024, for the capacity commitment period from June 2027 to May 2028.

ISO-NE's FCM is a classic capacity market model where generators are paid in advance to ensure grid reliability. In addition to administering day-ahead and real-time electric energy markets, four of the United States’ Regional Transmission Organizations and Independent Service Operators (RTO/ISOs) — ISO-New England, ISO-New York, MISO, and the PJM Interconnection — also have a centralized capacity market. The Electricity Reliability Council of Texas (ERCOT) and the Southwest Power Pool (SPP) do not have capacity markets and use an Energy-only model. Energy-only markets pay generators only when resources are economically dispatched and deliver electricity to the grid. The lack of capacity payments means that legacy baseload units need some type of other reliability-based compensation if they are needed for contingency purposes. Energy-only markets, especially ERCOT’s market, are structured to allow more energy price volatility than markets with an FCM construct. 

While ISO-NE has avoided a major supply-driven grid outage to date, the FCM has come under intense scrutiny in recent years. Policymaker and stakeholder concerns on the FCM have been driven by two key factors – concerns with New England’s increasing fuel security risks during the winter months and concerns that FCM is not appropriately adapting to an evolving regional supply mix that is increasingly relying on intermittent solar and wind generation resources. These concerns have sparked substantial reform efforts that will delay FCA 19.   

FCA 19 Delay

In January 2024, ISO-NE received approval from the Federal Energy Regulatory Commission (FERC) to delay FCA 19 by one year to February 2026 to complete a Resource Capacity Accreditation (RCA) study. ISO-NE's RCA project will examine the unique characteristics of the resources that are expected to make up New England’s increasingly renewable power mix in the future. The aims to improve the Resource Adequacy Assessment model used to predict demand and supply conditions in the FCM. Resource adequacy studies have been conducted by other RTOs. MISO’s 2021 Renewable Integration Impact Assessment concluded that increased levels of renewables can create system instability and requires thoughtful planning to adapt. MISO’s report points to the importance of deploying geographic diversity between renewable projects to ensure capacity reliability.

ISO-NE's RCA Study Effort has Four Key Focus Areas

Correlated performance: Examines the performance and intermittent nature of renewables in the same geographic region and that impact on system reliability.

Maximum storage: Establishes the basis for paying resources more or less money due to their ability to store energy. This incentivizes resources to prioritize energy storage in their design.

Winter risks and fuel availability: For the first time, ISO-NE is incorporating winter seasonal risks into the resource adequacy assessment. A nuance of the New England grid is that natural gas pipelines become constrained in winter when priority is given to residential heating customers. Power plants that rely solely on pipeline gas purchased on the spot market will be compensated less than otherwise identical resources that have stored fuel onsite, or that have firm contracts to access pipeline gas.

Outage rates: Generators that are more reliable will be compensated for their dependability. Those that are likely to have an unexpected outage when the system needs them will be paid less than otherwise identical resources that are less likely to be out of service under the same conditions.

FCM Reform Proposal

On February 8, 2024, shortly after getting FERC approval to delay FCA 19 to complete the RCA study, ISO-NE recommended that New England’s FCM undergo reforms to “better ensure power system reliability and cost-efficiency." ISO-NE's recommendation is that the FCM shift towards a prompt model. The prompt model means that instead of ISO-NE's Forward Capacity Auction (FCA) taking place three years prior to the specific capacity period, the auction would take place closer to the point in time where capacity is needed. This would allow for more accurate forecasting of electricity demand and generating resources capacity. MISO and NYISO’s capacity markets include some form of prompt auctions with a seasonal component.

In practice, ISO-NE's proposed reform will not immediately uproot the core elements of the FCM that impact customers’ electricity supply costs. First, the proposed reform does not change how capacity tags are assigned to end users. Installed capacity payments made by end users, commonly called ICAP costs or capacity tag obligations, are the mechanism by which the FCM is funded. ICAP costs are based on a customer’s average 60-minute usage during ISO-NE's annual peak demand hour. ICAP costs account for a sizable portion of a client's electricity supply costs, though the share of these costs has fallen in recent years with lower capacity prices. Clients with the ability to curtail their demand or dispatch load shedding technologies like batteries during targeted high-demand periods will still be able to significantly decrease their capacity tag and see reduced electricity costs as a result. Second, there is nothing in this proposal that impacts the ability to sign a long-term fixed electricity supply contract in New England. Many of CES’ clients benefit from the certainty around long-term fixed contracts and this is not going to change based on ISO-NE's proposed reform. Third, the shift won’t take place until 2028, so customers can pursue near-term electricity supply renewals without this issue before a key consideration.

Looking into the future, ISO-NE's proposed reforms would have lasting impact on which generation technologies are deployed to meet load growth from beneficial electrification. It will be more difficult to develop new gas power plants to meet marginal winter-driven capacity needs without those resources contracting for firm gas supply. We expect battery storage to become a primary component for meeting ISO-NE's new capacity needs, especially as capacity contributions from wind and solar decrease under RCA at increased penetration levels.

In addition to the RCA implementation, FCA 19 is noteworthy because the auction is an important inflection point in the history of the FCM. FCA 19 will be the first auction where the minimum offer price rule (MOPR) is no longer in place. The MOPR previously required new capacity resources to bid into the FCM at their unsubsidized cost. Critics of the MOPR saw the mechanism as restricting the development of renewables and believe that its removal should encourage increased integration of wind and solar into the FCM. The timing of RCA implementation is no mistake, ISO-NE wants RCA in place as increased levels of solar and wind seek capacity obligations in a post MOPR world.

The New England Power Pool (NEPOOL) Participants Committee, ISO-NE's primary stakeholder forum, is expected to vote in April 2024 on whether to begin designing the prompt market model. If approved, the first prompt capacity auction would be held in early 2028 for the 2028-2029 capacity commitment period, the same period that the delayed FCA 19 under the original structure would have been scheduled for.

If you’re interested in learning more about the implications of the FCA 19 delay and proposed FCM restructuring on your business, please reach out to a member of CES’ Energy Services Advisory team.



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