Watt’s Next for Capacity Auctions? FCA 18 Takeaways

Written by: John Keene, Senior Director and Maeve Hulsman-Wells, Analyst (with contribution from former Director Raghu Palavadi Naga)

Publish Date: May 10, 2024

Estimated Reading Time: 13 minutes

In February, ISO New England, Inc. (ISO-NE) held Forward Capacity Auction (FCA) 18 for the June 1, 2027 through May 31, 2028 Capacity Commitment Period (CCP). ISO-NE’s Forward Capacity Market (FCM) is designed to procure sufficient capacity needed to maintain system reliability. ISO‑NE conducts the FCA approximately three years ahead of each CCP, i.e., the delivery period. The clearing price from the auction constitutes a key source of revenue for many supply resources operating in New England. Capacity prices in most of New England have been generally declining since FCA 9 (see chart), largely due to a combination of stable or negative load growth and entry of new renewables and storage resources (without commensurate retirements). However, in FCA 18, clearing prices jumped, rising by over 40% on a year-over-year basis from $2.590/kW month in FCA 17 to $3.580/kW-month.

Using clearing prices for New Participants for FCA 8 & 9

In this blog post we will explore reasons for this outcome, including: rising Installed Capacity Requirement (ICR), i.e., the demand for capacity, retirements and delists, new entry, and the net Cost of New Entry (CONE). A number of these factors, in conjunction with the forthcoming changes in capacity accreditation, suggest that the market may have turned a corner with an elevated likelihood of stronger prices in the future.

All parameters discussed are sourced from ISO-NE, unless otherwise stated.

Net ICR, the amount of capacity ISO-NE has determined is needed to maintain resource adequacy into the future, increased marginally by 245 MW from 30,305 MW to 30,550 MW, less than a 1% increase,  relative to FCA 17, on account of higher peak demand and a change in outage rates. The net ICR had been on a downward trend since FCA 11 (for CCP 2020-21) and dropped to its lowest point ever in FCA 17 (for CCP 2026-27).

Resource retirements and delists (delists are requests to exit the FCM) played a key role in the rising clearing prices. FCA 18 saw substantial quantities of retirements and/or resources that acted in a price sensitive manner, delisting dynamically once prices fell below the de-list bid threshold of $3.840/kW-month. Resources delist for several reasons, but primarily because they lack the ability to make enough money to cover fixed costs, such as maintenance, for incurring and meeting a Capacity Supply Obligation (CSO). In FCA 18, 13 Retirement De-List bids were accepted, totaling approximately 797 MW, including three jet fuel or residual fuel oil generators which collectively totaled approximately 750 MW in nameplate capacity. Two Static De-Lists bids were accepted, but both were withdrawn and instead dynamically de-listed in the auction; both were coal generators. Older fossil fuel units are heavily dependent on capacity revenues because they are not often dispatched in the energy market due to their higher marginal costs (primarily for fuel). Additionally, fossil fuel generator Dynamic De-Lists accounted for approximately 1,321 MWs of capacity.

With all the retiring and delisting MWs, if it weren’t for new entry, price increases would likely have been substantially higher. FCA 18 saw new entry totaling approximately 4,108 MWs, with only approximately 29 MWs of nameplate capacity from natural gas, and the remaining MWs from solar, wind, storage, and hydropower.  Approximately 1,167 MWs of storage, 67 MWs of solar, 184 MWs of wind, and 218 MWs of Demand Resources acquired a CSO for the first time in FCA 18.  This auction, with old fossil fuel units being replaced by new renewable or non-emitting units, is a clear representation of the type of transition that the region’s policymakers have been hoping for.

Net CONE increased in FCA 18 considerably to $9.078/kW-month, relative to FCA 17 at $7.359/kW-month, which resulted in a higher demand curve which further supported prices in FCA 18. Net CONE is calculated by subtracting a reasonable expectation of energy and ancillary services (E&AS) revenue from CONE of a peaking unit. When E&AS revenues fall, Net CONE increases, and when CONE increases, Net CONE will also increase. In FCA 18, both E&AS revenues dropped, and CONE rose.

Going Forward

Generally, the above trends suggest prices will increase in the future. Peak load is set to increase due to electrification, with the adoption of electric vehicles and electrified heating, which will increase the demand for capacity and result in higher prices. The 2024 Capacity, Energy, Loads, and Transmission (CELT) report, released last week, projects that Summer peak load will rise by 1.1% from 2024 to 2033, an increase of 2,499 MW. Winter peak load is projected to increase by 3.1%, an additional 6,129 MW.

Many older units have been deemed as at-risk by ISO-NE and new entry required by decarbonization policies will put more economic pressure on these resources to retire because new entrants will be cheaper. In addition, the FCM is undergoing substantial changes, including updating its capacity accreditation mechanism and potentially switching to a prompt-seasonal market (as opposed to the current forward-annual construct) . These changes would likely reduce the capacity surplus and support prices into the future. Impact analysis, discussed in Eyes & Ears Flash Update 24-7, of the accreditation-related changes suggests that under the marginal accreditation framework, the capacity value of renewable and storage resources is likely to decrease as renewable resource penetration increases. The following figures, produced by the Brattle Group as part of an analysis assessing capacity accreditation in New York, illustrate the proposed capacity accreditation values for wind and solar resources as a function of their respective installed capacities, by season.

Furthermore, the recognition of fuel supply risks in conjunction with the shift to a winter peaking system, projected in the 2050 Transmission Study to occur in the mid-2030’s, is likely to result in lower supply from fossil resources. While ISO-NE’s market design changes may result in lower capacity requirements as well, the net impact of these changes to the FCM is likely to be a reduction in the capacity surplus, which will put upward pressure on the prices.

Taken together, these considerations indicate that the capacity prices are more likely to remain elevated into the future, particularly relative to the recent historically low levels.