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.”

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