ISO-NE: No Difference Between FCEM and ICCM — Yet
ISO-NE told stakeholders that Analysis Group’s modeling approach for a future capacity market construct is consistent with both an FCEM and ICCM.

In March, ISO-NE presented a memo to a NEPOOL Participants Committee working group session on “Pathways to the Future Grid,” outlining some of the outstanding market design questions that needed answers before Analysis Group could begin its modeling efforts for the RTO.

One design question was whether Analysis Group would model a forward clean energy market (FCEM) or integrated clean capacity market (ICCM).

However, ISO-NE does not believe stakeholders need to choose between the two designs at this time. Analysis Group’s modeling approach is consistent with both of them, according to a presentation and memo discussed with the PC during a “Pathways” meeting last week.

ISO-NE headquarters in Holyoke, Mass. | ISO-NE

The memo details a pair of examples that include the same set of resources and parameters. The first is awards, prices and compensation when clean energy and capacity are procured simultaneously in an ICCM. The second is procuring clean energy first with an FCEM and subsequent capacity in the regular Forward Capacity Market.

Making Assumptions

There are five assumptions consistent with Analysis Group’s modeling approach in which the FCEM and ICCM would yield identical awards and compensation to all resources:

  • Resources submit offers for capacity and clean energy based on their missing money, defined as the revenue they would need to receive, in addition to that from the energy and ancillary service (EAS) markets, to recover their costs.
  • The markets for renewable energy certificates (RECs) and clean energy certificates (CECs) are competitive so that the marginal resource recovers its missing money. If REC or CEC markets were not competitive, and the marginal resource recovered more than their missing money, additional resources would enter the markets to profit themselves. As more resources enter the markets, competition would increase until the marginal resources did not earn a profit.
  • Resources offer to sell the entirety of their clean energy and capacity capability forward. For example, if a clean energy resource expects to produce 3,000 MWh of clean energy for each megawatt of capacity during the delivery year, they would offer to sell their entire production in the forward markets.
  • Resources submit “non-lumpy” offers for capacity.
  • Resources have “perfect foresight” to “exactly predict” the capacity clearing price, award, real-time profits and clean energy production.

The last assumption “may not hold in practice,” as actual capacity prices will differ from those expected by resources when formulating the clean energy offer prices. Without this assumption, the RTO said there could be “divergent outcomes” between the FCEM and ICCM, especially when the resources have different beliefs about the expected capacity prices.

Modeling Efforts, Next Steps

Analysis Group’s modeling approach does not distinguish between a sequential FCEM and a simultaneous ICCM. More specifically, its capacity expansion model will conduct a single, global optimization to determine the resource mix for each framework. The model will include constraints corresponding to capacity demand, renewable energy demand and clean energy or carbon emissions reduction. This modeling approach is consistent with either an FCEM where resources correctly internalize the actual capacity price when formulating their clean energy offer price, or an ICCM where there is jointly procured clean energy and capacity.

ISO-NE said consideration of how these beliefs may vary across resources and how these might inform market design decisions is outside the scope of the modeling exercise.

Under an FCEM, resources incorporate future capacity revenue when determining how much missing money they must recover by selling clean energy forward. When these capacity revenue predictions are accurate, there are matching results under FCEM or ICCM designs.

ISO-NE said it seeks written feedback by this Friday so it can post comments ahead of the working group’s scheduled June 11 meeting. The final report on modeled market outcomes will be shared with stakeholders in the first quarter of 2022.

Capacity MarketISO-NE

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