ISO’s Ninth Forward Capacity Auction Good News For New England

Jerry Elmer

On Monday, February 2, the ISO-New England conducted its ninth annual Forward Capacity Auction.  The purpose of the auction was to secure enough electricity supply to keep the lights on in New England in the future.  The outcome of the auction was very good news for New England because, unlike last year, the ISO’s auction this year ended with a (slight) overall surplus.  This occurred because new power plants and energy efficiency programs are replacing old, uneconomic power plants that are “retiring” (that is, leaving the market).

The ISO is the operator of the New England electricity grid.  As with all things related to the ISO, the results of the February 2 Forward Capacity Auction require a bit of explanation.

If you want some background about the ISO (and CLF’s work on several ISO committees) you can see that here and here.

Capacity and Electricity Markets:  How They Fit Together

Once a year, ISO holds what it calls a “Forward Capacity Auction” (FCA) for a one-year period of time three years in the future. The purpose of these FCAs is to ensure that there will be an adequate supply of electricity in the region to meet the expected load.  (“Load” is electricity demand.)  ISO’s ninth FCA (called, appropriately enough, FCA-9) was held February 2.

The ISO runs both New England’s electricity market and New England’s capacity market.  Although those two markets are related in the sense that electricity generators can participate in both, the two markets are not identical.  And by “electricity generators,” I mean both conventional generators (like gas, coal, and nuclear) and renewable generators (like wind, solar, and small hydro).

The capacity market is designed to ensure that there will be sufficient electricity supply available in New England in the future.  In a Forward Capacity Auction, electricity generators compete for what is called a “Capacity Supply Obligation” (CSO).  Generators that “clear” (bid successfully) in one of these auctions acquire a CSO for a future period; in the just-completed FCA-9, the relevant period was June 1, 2018 to May 31, 2019.

Generators that clear in the auction, and get a CSO, will receive a stream of income (called “capacity payments”) in the future; and they can use that guarantee of future revenue to collateralize a loan now — that is, use those loan proceeds (now) to build a power plant that can produce electricity three years from now when their obligation starts.  The specific obligation that generators acquire when they get a “Capacity Supply Obligation” is to produce electricity if and when they are called on to do so by the ISO during the relevant period.  (And, as I said, the “relevant period” for the just-completed FCA-9 is three years from now, June 2018 through May 2019.)

The electricity market is the real-time market of actually producing electricity for real-time use throughout New England.

Thus, in broad terms, the money that goes to generators from the capacity market can be, and often is, used to generate funds to construct electricity generating power plants.  The money that goes to generators from the electricity market is used to run those power plants, which is mostly fuel costs.

The Results of This Auction

In the just-completed FCA-9, the ISO was trying to purchase 34,189 megawatts (MW) of capacity.  As I explained in a prior blog post, this figure is referred to as “Installed Capacity Requirement” (ICR).  Don’t be put off by the fancy acronym; ICR is just the amount of electricity that ISO believes New England will need during the relevant period.

And, in the auction just concluded, 34,695 MW of generation actually cleared the auction and got a CSO – that is, 506 MW more than the ICR.

Why This Matters

A year ago, in FCA-8, the ISO failed to acquire all the capacity it said it needed for the period June 1, 2017 to May 31, 2018.  The shortfall, such as it was, was very, very small.  In the last auction (FCA-8), the ISO’s ICR (the amount it wanted to procure) was 33,855 MW; the amount of capacity it actually procured was 33,712 MW, a shortfall of a mere 143 MW.

The reasons for the (very, very small) shortfall were mostly things that made environmentalists cheer.  In the period leading up to the auction (FCA-8) a year ago, several dirty, old fossil-fuel and nuclear plants decided to close down, partly in response to years of activism by environmentalists:

  • New England “lost” 1,535 MW of capacity when the dirty, old Brayton Point coal-fired plant decided to shut down by 2017. You can read about CLF’s long, and ultimately successful, efforts to close Brayton Point here, here, and here.
  • New England lost 604 MW when the Vermont Yankee nuclear plant decided to close. You can read about CLF’s long efforts on Vermont Yankee here, here, and here.
  • New England also “lost” another 342 MW when the very dirty old oil-fired Norwalk Harbor Station decided to close.

Each one of these retirements was a good thing.

Even though the auction shortfall a year ago (in FCA-8) was insignificant, it created a lot of very scary press coverage.  One ISO press release on the auction results was headed, in part:  “Shortfall in Power System Resources Needed for 2017-2018 in New England.”  The sub-title was:  “Resource shortage pushes up capacity market costs.”  Another ISO press release a year ago said:  “The auction concluded short of the capacity required, resulting in higher prices for capacity for 2017-2018 . . . . Before the auction was conducted, resources totaling about 3,135 MW announced plans to retire, resulting in an insufficient level of resources in the auction . . . .”

Scary headlines and scary broadcast news stories followed.  A year ago, everyone was talking about a supposed “crisis” that was looming.  The six New England Governors worked feverishly on a plan to build new gas pipeline into New England to address the purported “crisis.”  (CLF worked actively against the proposed build-out of long-lived fossil-fuel infrastructure, and the Governors’ proposal, at least in its original form, has been abandoned.)

What A Difference A Year Makes!

Where last year, the post-auction press narrative was all about shortages and the need for more fossil fuels, this year the narrative is all about how well the market is working.  The headline on the ISO’s press release this year is:  “Annual Forward Capacity Market Auction Acquires Major New Generation Resources for 2018-2019.”  The take-home message in this year’s ISO press release is this:

“The capacity market is working as designed.  The price signals from last year’s auction helped spur investment in new resources, including more than 1,000 megawatts of new generating capacity, which will help . . . meet peak demand in 2018-1019,” according to Gordon van Welie, president and CEO of ISO New England . . .

Gordon is correct.  The capacity market is working the way it was meant to work.  It is creating the right incentives to ensure that there is sufficient generation capacity in New England.  In fact, as the ISO press release correctly states, ISO has recently re-designed the actual mechanics of how the capacity market operates in two significant ways in order to enhance its operations.  CLF is an active member of NEPOOL, the ISO’s stakeholder entity, and supported and voted in favor of both of those market re-designs.

The results on February 2 of FCA-9 do not, alone, prove that CLF was correct in 2014 to oppose the Governors’ proposal for new multi-billion-dollar gas (that is, fossil fuel) pipeline infrastructure – but the the result does provide useful evidence of that fact.  For additional useful evidence of the same fact, see my colleague Christophe Courchesne’s excellent January 14 blog post, entitled “As Cold Sets In, New England Winter Energy “Crisis” Fizzles.”

Focus Areas

Climate Change

Places

Campaigns

Vermont Yankee

6 Responses to “ISO’s Ninth Forward Capacity Auction Good News For New England”

  1. Rich Cowan

    Hi Jerry –
    Has CLF (or anyone else) analyzed the percentage of the auction made up by NH wind, ME wind, offshore wind, solar, other renewables or peaking storage, and new natural gas generation?

    We know that even if only a few gigawatts of new electricity from natural gas was bid into the auction, certain gas distribution companies may use that as justification for overbuilding regional pipeline capacity.

  2. Meg Sheehan

    Thanks for a great explanation.

    Can you explain how the retirement of Entergy’s Pilgrim nuclear station in Plymouth would affect the supply/demand/market? Pilgrim generates about 650 MWe, however it is off line much of the time due to mechanical failures. It was out 10 days from Jan. 27 to Feb. 7 due to Juno. It has another outage planned in the Spring of 2015 for refueling.

  3. Eric Broadbent

    Thank-you Jerry, excellent analysis and commentary. I would like to extend Rich C’s question (thank-you as well Rich) to thinking about how wind and solar can be brought online to replace future planned capacity losses, and how the loss of Cape Wind would affect that. Many of us are trying to figure out how to breathe new life into Cape Wind – and it seems clear that more renewables coupled with STORAGE are the only sustainable means to reliably reduce our reliance on fossil fuel generating capacity. These issues are likely beyond the scope of what you wanted to address in this post, but any contributions that you might have to further discuss them would be welcome.
    Thank-you again.

  4. Santiago

    Full disclosure here: Nuclear engineer working at the Pilgrim Nuclear Power Station scheduled for shutdown either in 2017 or 2019 (TBD). I’m a strong environmentalist and supporter of reductions in global greenhouse gas emissions. My family lives on Cape Cod and I’ve worked at Pilgrim for almost 15 years, responsible for the management of the reactor core / fuel and the Special Nuclear Material. I do not authorize the Conservation Law Foundation to take my comments out of context for any reason and reproduction must be done in total to provide full context. The opinions presented herein are my own and do not represent my employer or anyone else for that matter, I make up my own mind.

    I’m engineer and a physicist by training so I offer the following input for your consideration. I hope and expect the moderator to allow a fair and free discourse on these topics so that the readers may engage in a civic debate.

    The argument presented in the article above claims the Forward Capacity Markets are effective and efficient in their manner of execution in terms of sending the appropriate price signals to investors. I would hedge this claim with the fact that they are mostly successful in meeting the objective of shutting down inefficient assets with respect to the price of natural gas. Conservation and environmental activism has almost no bearing on the decisions made to retire assets, despite what is claimed herein.

    Here is the truth about the New England market: it is heavily skewed. This bias presents itself in various manners and in my opinion does not enjoy the benefits of either a planned resource or a free market (both ends of the ideological spectrum are denied). Here are data points proving my point on the bias:

    1. The externalities of all the power generating assets are not priced accordingly. This means that dirty coal plants that are required to meet new EPA standards on emissions as well as environmental heat sinks cannot justify the capital improvements to the plant asset at the power prices reflected by low natural gas. I actually support this because the externalities are properly priced, but unfortunately the natural gas externalities are not.

    2. Natural gas gluts from hydraulic fracturing are pushing the price ($/MMBtu) of natural gas to historical lows driving all market prices accordingly. This might seem good for consumers but it places pressure on renewables and competing power generation, like nuclear, on an uneven playing field. True conservation sees the bigger picture and makes a holistic assessment, cheap electricity does not mean a clean environment. The externalities of natural gas are not priced in the power (from fracturing environmental cleanup and mitigation, insurance, disclosure, reparations for damages, and emissions from the transmission and burning of gas for electricity generation). The true cost of natural gas is hidden from society and public and skews the market.

    3. The ISO-NE market is flooded by power from Canada, including Hydro (which is not without environmental consequences to local eco-systems) and guess what, surprise, nuclear (CANDU reactors)! WE don’t get to choose which electrons come from the Canadian grid to power our homes, and some invariably come from nuclear plants over the border. Let’s keep in mind that Canadian power is heavily subsidized, from fuel costs, R&D, construction, etc. and that power is price dumped onto the US domestic market. Once again, not an even playing field for competitive power production.

    4. Renewables are heavily subsidized by state and federal tax policy and grants. I personally have solar panels on my home because I believe in the technology and I recognize that all generation sources were at one time heavily subsidized (nuclear and coal during their R&D and oil/gas with todays exploration and refinement tax policies). I support renewable subsidies because I want to see the technology prosper, but not at the expense of a diverse supply. The challenge with renewables is that they have not been fully deployed in conjunction with smart grid technologies and energy storage systems (batteries, capacitors, etc.). This again skews the market because they are not mandated to support any type of grid stability and act really as a demand hedge during periods of peak luminance or wind. Their maturity as a stable power generation is not there yet and they must be treated like a newly planted garden that must be cultivated.

    So what do we project the ultimate conclusion of the existing deregulated energy market in the New England will be if extrapolated 15 to 20 years? I see a 70/30 mix of natural gas and renewables and a lot of new pipeline. I see significant imports from Canada that are outside the jurisdiction of domestic energy policy. I see periods of potential peak demand not being met and the ISO having to throttle demand (i.e. brown outs). I see periods of significant price volatility when policies combatting global warming are fully implemented causing the price of speculative natural gas to oscillate wildly. I see a consolidation of domestic hydraulic fractures being run and managed by large conglomerate energy companies like Exxon-Mobil, BP, etc. with the economies of scale to handle fracking regulations (which are inevitable, sorry Cheney). I see a future in which we used the power of the skewed market to navigate our grid, the backdrop of our information economy, into a situation of little to no flexibility to changes in policy and large price increases to rate payers. I don’t see a market designed to preserve or conserve the environment, nor help prices stay low, nor provide stability to our growing economy.

    I don’t mean to sound pessimistic, I’m just following the adage that placing all your eggs in one basket is never a prudent thing, especially when the ability to find new baskets will become increasingly difficult. I’m glad I have my solar panels.

Leave a Reply

About the CLF Blog

The views and opinions expressed on this blog do not necessarily represent the opinions or positions of Conservation Law Foundation, our boards, or our supporters.