Overview and Update on the
Ever-Evolving New England
Wholesale Capacity Market
presentation to
Boston Bar Association
May 23, 2013
Presented by:
Paul N. Belval (pnbelval@daypitney.com)
Sebastian M. Lombardi (slombardi@daypitney.com)
© 2013 Day Pitney LLP
New England Wholesale Capacity Market
• Introduction of Wholesale Electricity Components Sold
• Overview of New England’s Forward Capacity Market
• Update on Key Challenges and Evolving Solutions
Page 2 | 5/23/2013 Presentation to Boston Bar Association
© 2013
Introduction - Wholesale Power Markets
• The Markets
 Energy
 Capacity
 Other Ancillary Services
Page 3 | 5/23/2013 Presentation to Boston Bar Association
© 2013
Wholesale Electricity Cost Components
Capacity
6%
NCPC
7%
Slice
Ancillary
6
Service
0% 1%
ISO Admin
1%
Energy/Fuel
85%
Total Wholesale Load Cost in 2012: $7,332,216,296
Source: Wholesale Load Cost Report, ISO New England Inc. (March 2013)
Monthly Regional Network Load Cost Report (Jan. 2013
Page 4 | 5/23/2013 Presentation to Boston Bar Association
4
© 2013
New England Wholesale Capacity Market
KEY TERMS
Installed Capacity Requirement (ICR) - Amount of
capacity needed to reliably serve New England.
Forward Capacity Auction (FCA) – A periodic auction
held by ISO New England to procure generating capacity or
demand reduction capacity to satisfy ICR.
Capacity Commitment Period (CCP) – The period from
June 1 to May 31 that defines the duration of a capacity
obligation procured in the FCA.
Page 5 | 5/23/2013 Presentation to Boston Bar Association
© 2013
New England Wholesale Capacity Market
KEY TERMS (cont.)
Offer - Amount of capacity for a New Resource that is bid
into an FCA.
De-list Bid - Amount of capacity from an Existing Resource
that is proposed to be withdrawn from an FCA.
Capacity Supply Obligation (CSO): MW of capacity
obligation assigned to a Resource during all of or a portion
of a specific Capacity Commitment Period.
Page 6 | 5/23/2013 Presentation to Boston Bar Association
© 2013
Why have Capacity Markets?
•
Ensure adequate resources are available where and when they are
needed to “keep the lights on”
•
Units that operate only during peak demand times would require huge
payments in energy market to recover their full costs during few hours
of operation
•
Society has been unwilling to allow prices to rise to such levels, even in
the small number of hours when high prices would be required
•
Separate and assured revenue stream necessary to keep generators
that are required for reliability and available to operate when needed
•
Help to stimulate new generation and demand resources that are
desired to meet future needs
Page 7 | 5/23/2013 Presentation to Boston Bar Association
© 2013
New England Wholesale Capacity Market
New England’s Forward Capacity Market (FCM):
• “Forward market” where ISO New England procures
enough capacity to meet reliability needs 3 years in the
future
• ISO New England procures needed capacity through an
annual auction
Page 8 | 5/23/2013 Presentation to Boston Bar Association
© 2013
New England Wholesale Capacity Market
Installed Capacity Requirement (ICR)
• ICR is the amount of installed resources (both generating and
demand) needed to meet ISO-NE’s Resource Adequacy
Criterion
• Calculated outage probability – “one day in ten years” criterion.
• To meet this requirement, ISO-NE calculates how much
capacity should be needed to meet the expected demand (i.e..
“How much electricity is going to be used 3 years from now?”)
and handle foreseeable uncertainties associated with load or
performance of the capacity resources
Page 9 | 5/23/2013 Presentation to Boston Bar Association
© 2013
New England Wholesale Capacity Market
What Resources Can Meet the “Need”?
• Supply Resources
 Oil, coal, nuclear, natural gas, intermittent renewable
generation
• Demand Resources
 Distributed generation, energy efficiency, load
management
• Imports
Page 10 | 5/23/2013 Presentation to Boston Bar Association
© 2013
Forward Capacity Market:
Qualification Process to Participate in Auction
Qualification process begins over a year before the auction
New Resources (i.e., Resources that have not cleared in
any previous Forward Capacity Auction)
 Rigorous process to assure that new resources are “real”
 To qualify, New Resources must submit sufficient
documentation indicating their ability to operate at a
specific MW value for the relevant Capacity Commitment
Period
 Must clear as “new” for one auction
Page 11 | 5/23/2013 Presentation to Boston Bar Association
© 2013
Forward Capacity Market:
Qualification Process (cont.)
Existing Resources (i.e., Resources that have cleared in
any previous Forward Capacity Auction)
 If existing, resource automatically treated as price-takers in
the auction based on historical capabilities, unless they
exit by delisting.
 If resource does not want to take on a capacity obligation,
must submit permanent or static de-list, or export, bids at
qualification time (during auction Existing Resource can
submit dynamic de-list bid) - - all such de-list bids are
subject to reliability reviews
*Minimum project size for all eligible Resources = 100kW
Page 12 | 5/23/2013 Presentation to Boston Bar Association
© 2013
Forward Capacity Auction Mechanics
•
•
•
•
•
Descending clock auction conducted in discrete rounds (held in February)
During process, the price in the auction will be lowered and some resources
will remove themselves from the auction
Existing Resource
 Will clear if no action taken in auction (Existing Resources are price
takers) and will receive a CSO for a one-year commitment period
 Will not clear if Existing Resource submits de-list bid (varied forms)
New Resource
 Can offer into the auction to receive a CSO for a Capacity Commitment
Period of 1-5 years, in one-year increments
 Will clear if New Resource offers at a price at or below the FCA clearing
price
 Will not clear if New Resource offers at price above FCA clearing price
Outcome of Forward Capacity Auction sets the initial Capacity Supply
Obligation (CSO) for resources
Page 13 | 5/23/2013 Presentation to Boston Bar Association
© 2013
What Does it Mean to be Selected?
Every Resource that clears in an FCA receives a
Capacity Supply Obligation and a price (or “capacity
payment”) for that obligation.
Capacity Payment: Monthly payments to Resources with a
Capacity Supply Obligation
However, with payment comes all sorts of obligations. . .
Page 14 | 5/23/2013 Presentation to Boston Bar Association
© 2013
Obligations and Penalties in FCM
Example of a Resource’s Obligation:
Generating Capacity Resource that has a CSO must offer its obligated capacity into the DayAhead Energy Market and Real-Time Energy Market whenever and to the extent the resource
is available
Penalties
Capacity payments reduced by:
•
Penalties assessed when resources are not available in real-time during the most needed
hours (Shortage Hours/Events)
•
Peak Energy Rents (PER)

PER $ = revenues obtained from reduction in capacity
payments when energy prices are extremely high
Page 15 | 5/23/2013 Presentation to Boston Bar Association
© 2013
New Rule for Next Forward Capacity Auction
Minimum Offer Price Rule (MOPR)
• Intended to address price suppressing effect of Out-ofMarket (OOM) resources
• Beginning with the next Forward Capacity Auction (FCA
#8), New Resources will be assigned an Offer Review
Trigger Price
• Offer Review Trigger Price (ORTP): Default floor on
lowest price that a particular resource can offer into the
auction
Page 16 | 5/23/2013 Presentation to Boston Bar Association
© 2013
FCM Redesign Efforts Under Consideration
Key Challenges:
• What are you paying for versus what you are getting? Scope
and definition of obligations?
• New England’s increased reliance on natural gas
Potential Solution: “FCM Performance Incentives”
• Pay-for-performance mechanism
• Over-performing resources would be paid a premium through
revenue transfers from under-performing resources
Page 17 | 5/23/2013 Presentation to Boston Bar Association
© 2013
New England Wholesale Capacity Market
Is It Worth It and To Whom?
• Forward Capacity Market provides added revenue for
generation and demand side resources
 But efforts, and therefore costs, of qualifying and
clearing are not insignificant (i.e., MOPR makes
clearing an FCA more difficult for new renewables,
absent state request accepted by FERC)
 Penalties now add a downside risk
 Not required to participate in FCM to be in other
markets, but once resource clears in one FCA, it is
committed for the rest, absent a de-list
Page 18 | 5/23/2013 Presentation to Boston Bar Association
© 2013
New England Wholesale Capacity Market
Can You Finance It?
• Challenge of addressing Capacity Resources in a
Financial Model
 Long-lived assets, but annual market redesign
 More frequent “tweaking” of Market Rules
• Revenues are provided on a year-to-year basis – no
assurance of revenue long-term
• Consider as an additional payout for equity, not as cash
flow for the bank
Page 19 | 5/23/2013 Presentation to Boston Bar Association
© 2013
Questions?
43091880
Page 20 | 5/23/2013 Presentation to Boston Bar Association
© 2013