Analysis Group Presents Final Report on Capacity Market

WESTBOROUGH, Mass. — Adopting prompt and seasonal capacity auctions would provide a range of benefits that would help enable New England’s clean energy transition, Todd Schatzki of Analysis Group told the NEPOOL Markets Committee on Jan. 11.

Schatzki presented the consulting firm’s final report on significant potential changes to ISO-NE’s Forward Capacity Market. While the Forward Capacity Auction is currently held more than three years prior to the annual capacity commitment period (CCP), ISO-NE is considering a transition to holding the auction as close as a few months prior to the CCP, as well as dividing the CCP into distinct seasons.

Responding to stakeholder questions based on a draft report the firm presented in December, Schatzki reiterated Analysis Group’s recommendation to adopt a prompt and seasonal market for the 2028/29 CCP. (See Analysis Group Recommends Prompt, Seasonal Capacity Market for ISO-NE.)

A prompt format would provide a “technology-neutral platform for competition among resource types,” Schatzki told the MC. This would benefit new clean energy resources with shorter development timelines compared to new gas plants, which the existing forward market was originally designed to accommodate, he said.

Schatzki added that a prompt, seasonal market would also more accurately forecast load growth from electrification and the effects of counterbalancing state policies intended to reduce demand. He also noted that a seasonal format would also increase incentives for resources that provide winter reliability benefits.

A seasonal market “creates price signals for the development of capacity resources to complement the variable output of resources important to states’ decarbonization efforts, such as solar PV and offshore wind,” Schatzki said.

Responding to stakeholder questions about the merit of holding seasonal auctions simultaneously or sequentially each year, Schatzki said sequential auctions could result in a small percentage of resources obtaining only a capacity supply obligation in one season, creating a risk that these resources would struggle to recover their annual costs.

In contrast, holding the auctions simultaneously could enable generators to dictate annual revenue requirements that need to be recovered through one or multiple seasons.

Analysis Group declined to recommend either design. It noted that holding the auctions simultaneously “offers many conceptual advantages, but the auction structure decision requires a thorough and careful assessment.”

The firm made some changes to the methodology of the quantitative analysis for the final report, finding that alternatives to the FCM resulted in lower prices in eight out of nine scenarios, by 8% on average. A prompt and seasonal market showed the most significant price reductions, with payments projected to be 12% lower — equal to more than $200 million annually — relative to the FCM.

ISO-NE is planning to make a recommendation on whether to move to a prompt and seasonal market at the MC’s meeting next month, with a vote by the committee on whether to further delay FCA 19 projected to occur in March.

Resource Capacity Accreditation Impact Analysis

Throughout the three-day MC meeting, NEPOOL discussed several aspects of ISO-NE’s ongoing Resource Capacity Accreditation (RCA) project, which would bring major changes in how the RTO calculates the capacity value of several resource classes.

Dane Schiro of ISO-NE presented the RTO’s updated impact analysis framework, which is intended to “provide quantitative insights into the RCA design.”

The analysis will provide information on how the RCA changes would affect accreditation values and capacity supply obligations for different resource types, as well as metrics related to capacity market prices and loss-of-load expectations. ISO-NE performed an initial version of the impact analysis in April 2023 before a software issue derailed the project for several months.

In a change from the initial impact analysis methodology, gas resources will now be studied at the fleet level instead of at the individual level, while the risk assessment for oil resources will include a two-week inventory limit.

The analysis will use a base case that employs the resource mix associated with the upcoming FCA 18 and the load forecast for FCA 19. Imports will be based on the level cleared in FCA 13, which represents the median amount from the past five auctions.

The first phase of the analysis will focus on resource accreditation in the base case, while the second phase will look at different sensitivity scenarios, including changes to the amount of fossil fuel resources replaced by renewables and an increased winter peak load. The third phase is intended to give quantitative insight on auction results, including demand curves, clearing prices and LOLE.

Marginal Reliability Impact Calculations

As a part of the ongoing RCA project, Steven Otto of ISO-NE detailed the RTO’s proposed approach to calculating the marginal reliability impact (MRI) and qualified MRI capacity (QMRIC) values for different resource classes.

MRI aims to quantify how small changes to a given resource’s output would affect grid reliability. MRI is an input to QMRIC, which represents a resource’s overall accredited capacity.

MRIs will be calculated for two seasonal periods: a June-September summer period and an October-May winter period. Seasonal MRI values for existing thermal resources “will be driven by their equivalent forced outage rate on demand excluding events out of management control,” ISO-NE said.

For new thermal resources, MRI values will be calculated based on the averages associated with their resource class. MRI values for new storage and large wind and solar resources will be created by modeling the marginal addition of a proxy resource. Small existing intermittent resources with a nameplate capacity of less than 10 MW will be combined into aggregations for their MRI assessments.

Gas Accreditation

Prior to the MC meeting, ISO-NE issued a memo detailing several potential methodologies for accounting for gas system constraints in the RCA updates. The current accreditation approach does not account for gas system constraints when determining a resource’s capacity value.

The RTO is recommending a derating approach for gas resources, which “decreases the accredited capacity of all gas resources so that their total accredited capacity equals the gas constraint,” ISO-NE wrote.

ISO-NE also discussed the possibility of a “market constraint approach,” which would not decrease the accreditation of gas resources based on a lack of firm fuel commitments, but instead would “decrease the amount of gas capacity procured in the winter … and would pay that capacity a lower price.”

“The market constraint approach achieves the same level of reliability as current rules, but at least cost,” ISO-NE said. “The awards determined by the market constraint are cost minimizing: No other set of awards could achieve the same level of reliability at lower social costs.”

ISO-NE proposed to conduct additional analysis into implementing a market constraint approach, while adding that the derating approach would be easier to quickly implement and makes sense as a “as a reasonable transition mechanism.”

“Overall, the market constraint approach is preferred but is not implementable for FCA 19 or a one-year delayed auction timeline and likely requires a seasonal market construct,” the RTO wrote.

ISO-NE also included the possibility of an “MRI=0 approach,” which would not award any accredited capacity to gas resources that lack firm fuel arrangements. The RTO wrote that this approach “would not procure a socially optimal quantity of gas capacity, nor would it pay the gas capacity an appropriate price.”

Tom Kaslow, vice president at FirstLight Power Resources, presented to the MC on the company’s concern that ISO-NE’s proposed approach would not provide adequate incentives for firm gas contracts.

Kaslow told RTO Insider that ISO-NE’s proposal to determine the maximum reliability contribution from gas resources based on the expected available gas supply could “undermine the forward contracting for firm gas supply access that would assure that the future year assumed gas supply is realized.”

“While there is a history of a certain level of available gas supply to gas-fired generators, without advance contracting, circumstances can change, as evidenced by the possible retirement of the Everett Marine Terminal,” Kaslow added.

The company is asking ISO-NE and NEPOOL for additional analysis into how the different approaches to accounting for gas system constraints would impact incentives for firm fuel contracts.

Committee Votes

The MC voted to support an update to ISO-NE’s compliance with Order 2222 that would make distributed energy resource aggregations responsible for submitting their own metering data to ISO-NE.

FERC clarified in October that this metering information could “come from or flow through distribution utilities.” (See FERC Responds to ISO-NE Rehearing Request on Order 2222.) ISO-NE’s current proposal would allow a DERA “to designate itself, a party acting on its behalf or the host participant to be the assigned meter reader.”

The committee also voted to recommend updating the forward reserve offer cap to $7,200/MW-month and delay the publication of forward reserve auction offer data for 12 months to address market power concerns.