NYISO kicked off the demand curve reset reform process with a discussion of how to improve the overall process and what could be done to strengthen the definition of the proxy unit. The ISO seeks to stabilize the installed capacity market by reducing volatility and making the DCR less complex and burdensome.

“I think, uncontroversially, we can consider this process quite burdensome for both NYISO and stakeholders, and we want to address those issues now as part of a project,” said Michael Ferrari, a market design specialist for NYISO.

No specifics, tariff changes, definitions or formulas were discussed. The discussion at the Jan. 12 Installed Capacity Working Group Meeting was centered on possible avenues to improve the DCR and what the ISO might explore with stakeholders.

The DCR anchors capacity prices on a curve by picking a “proxy unit” to represent the cost of a hypothetical new generator entering the market every four years. The most recent DCR set a two-hour battery energy storage system as the proxy unit for the 2025/29 period. (See FERC Accepts NYISO Demand Curve Reset.)

The current process involves considerable debate, outside consultation and stakeholder meeting time to pick a type of generator to serve as the proxy unit and determine a reasonable hypothetical capital cost estimate for it. Debating the engineering cost assessments to estimate capital costs for potential technology takes much of the 18-month DCR process. These findings are subject to an annual adjustment to try to keep the curve in line with market conditions.

“We want to address the issues now as part of a project before the status quo process of the demand curve reset begins in earnest,” said Ferrari.

Ferrari outlined some of ISO’s preliminary ideas for smoothing the DCR. The ISO is considering a periodic review that would use the existing annual update framework to apply systemic, formulaic adjustments to reduce the need for a total reset every four years. This would involve using cost-trend publications, inflation-based indexes and various annual financial parameters such as interest rates to adjust prices periodically. This would, in theory, reduce the administrative burden by getting away from detailed engineering studies.

NYISO also is considering redefining the proxy unit. It would no longer be a unit based on specific technology; instead, the proxy unit would merely be a hypothetical unit that meets a minimum operating criterium.

Stakeholders seemed skeptical of NYISO’s proposal. Some pointed out that national price indexes were extremely bad at predicting costs in New York City. Others pointed out that the annual adjustment mechanism already doesn’t work very well.

“I think it’s fair to say, not pejoratively, that the analysis group kind of threw up their hands and said ‘Well, there really aren’t good indices for certain things so this is as good as it can get,’” said Doreen Saia, a lawyer for Greenberg Traurig, referring to the NYISO consultant’s comments during the last DCR. (See NYISO Offers Final Staff Recommendations for Demand Curve Reset and NYISO Stakeholders Continue Debate over Battery as Proxy Unit.)

Adam Evans, a representative of the New York Department of Public Service, pointed out that the status quo was not tenable.

“In the last reset we saw a potential $2.5 billion increase in demand curve cost based on what some folks were arguing for the proxy unit, which is frankly untenable,” said Evans. “I think this type of proposed solution to limit volatility … I think it makes sense.”

Other stakeholders pointed out that the current DCR process was not responsive or flexible in the face of state policy shifts. One stakeholder pointed out that state incentives for procuring carbon-free energy were not incorporated into the cost of new entry models. Another said the state climate law could be altered or removed by the legislature if the political winds shifted and any new process would have to account for that.

“I would be very concerned about trying to have a demand curve process that is super responsive to every policy shift that comes at us. That undermines the idea of certainty,” said Mike DeSocio, a consultant with Luminary Energy. He disagreed with the idea of a flexible process and asked NYISO to instead focus on market certainty.

Stu Caplan, representing New York Transmission Owners, said the market should not be designed for high price increases without reliability gains.