As the first phase of ISO-NE’s capacity market overhaul nears its final form, New England stakeholders remain mixed on the proposed move from a forward to a prompt capacity auction.  

While the second phase of the RTO’s capacity auction reform (CAR) project — centered on capacity accreditation changes and splitting capacity commitment periods (CCPs) into seasonal periods — likely will draw more attention, the prompt changes still would cause a major shift in the region’s approach to procuring capacity and could have significant effects on market outcomes.  

ISO-NE’s proposed transition from a forward capacity market, with auctions held more than three years before each capacity commitment period (CCP), to a prompt capacity market, with auctions less than a month prior to each CCP, requires significant changes to the RTO’s rules regarding resource entry and exit from the market.  

In a prompt market, new resources would need to prove they are fully operational to gain a capacity supply obligation (CSO), and resources under development would have no guarantee of future capacity revenues until they come online.  

This also would affect the costs resources are allowed to include in bids: generators could include only incremental costs associated with assuming a CSO in their bids and not include development costs that already have been incurred.  

The shift to a prompt market also would significantly affect ISO-NE’s rules for retiring resources. The RTO currently processes retirements in the capacity auction process, providing the region with about four years’ advanced notice on retirements. In a prompt auction format, ISO-NE has proposed decoupling the retirement process from the capacity auction process and would require retiring resources to submit a binding deactivation notice one year prior to the relevant CCP.  

The effects these changes will have on resource entry and exit is unclear; while some NEPOOL members are optimistic the new auction format will more accurately reflect the capacity available to the region in each CCP, stakeholders also have expressed concern it will create challenges for resource development and could lead to more prolonged reliability must-run (RMR) agreements.  

Tom Kaslow, chief market policy officer at FirstLight Power, said the prompt proposal “appears to present both improvement and concern.” 

He said the requirement for resources to be fully operational before participating in auctions will eliminate market distortions caused by new resources that gain CSOs in the forward capacity market but fail to come online in time to meet their obligation.

However, he said it is unclear how this requirement will affect the ability to develop new resources that lack long-term power purchase agreements with states or utilities. 

“The prompt auction framework also raises questions regarding the extent to which existing resources will be able to reflect their going forward costs, such as major maintenance, in capacity auction offers,” Kaslow said. “In addition, if the cost of new entry is sunk before a new resource’s first capacity auction opportunity and existing resources face difficulty in reflecting the full extent of their going forward costs, the market could face greater volatility where sizable exit and entry occur.” 

Some stakeholders also have raised the concern that ISO-NE’s proposal could increase reliance on long-term state power purchase agreements to ensure resource adequacy. 

This concern is not universal, however, and one representative of a renewable energy company expressed optimism that a prompt market would lower risks for solar and storage developers, as they would not have to commit to a CSO years prior to their commercial operations date.  

ISO-NE said in a statement that the prompt auction format “allows new resources to sell capacity as soon as they are operational and no longer have to predict their commercial date three years in advance.” 

“We generally expect that capacity revenues are just one piece of a project’s economics that developers consider in addition to the expected energy and ancillary services a resource can contribute over the project’s lifetime,” ISO-NE added. “The capacity revenue for a single year comprises only a small portion of these expected lifetime revenues.” 

Some NEPOOL members have argued ISO-NE’s proposed one-year notification timeline for resource retirements could increase the length of reliability-must-run agreements if retiring resources trigger reliability issues, saying that developing a reliability solution within a year would be challenging.  

ISO-NE initially proposed a two-year retirement notification timeline, but reduced it to one year, saying a shorter timeline “allows resources to consider as much relevant information as possible, maintaining as much option value as possible, hence improving the probability of efficient deactivation decisions.” 

At the NEPOOL Markets Committee (MC) meeting in August, the RTO acknowledged “the shortened notification timeline may increase the duration of a reliability retention.” 

“However, the improvement in a resource’s assumptions about future market prices and operating conditions may prevent a premature deactivation, thereby potentially eliminating the need for a reliability retention,” said ISO-NE analyst Kevin Coopey. 

Unclear Effects on Market Outcomes

Multiple stakeholders emphasized the difficulty of forecasting how the prompt changes will affect market outcomes, especially when coupled with the seasonal and accreditation changes. The two phases of CAR will be filed separately with FERC but both are intended to take effect for the 2028/29 CCP.  

The Massachusetts Attorney General’s Office (AGO), which advocates for the state’s ratepayers, has asked ISO-NE to provide quantitative analysis on the prompt proposal, but the RTO has provided little information on how the updated proposal would affect market outcomes.  

ISO-NE commissioned Analysis Group to conduct a preliminary analysis in late 2023 on a prompt-seasonal market. The findings indicated that, relative to the existing forward capacity market, a prompt-seasonal format would reduce total capacity payments by about 12% and that the prompt changes alone would reduce total costs by about 10%. (See NEPOOL Markets Committee Briefs: Jan. 11, 2024.) 

In a recent statement, ISO-NE said this analysis demonstrated “numerous benefits to consumers and suppliers, as well as market efficiency gains, which helped inform the decision to pursue the Capacity Auction Reforms.” 

The RTO plans to conduct a comprehensive impact analysis during the second phase of the CAR project, allowing it to quantify the effects of both the prompt and the seasonal/accreditation changes.  

In a recent interview, the Massachusetts AGO said it has been closely following the proposed resource entry and exit changes associated with a prompt auction, but added it lacks clear insight into how the changes will affect prices, and is eager to see more specific numbers on the expected impact of the proposal.  

Other consumer advocates in the region expressed a similar interest in better understanding how the changes will affect costs for ratepayers. 

Matthew Fossum, director of regional and federal affairs at the New Hampshire Office of the Consumer Advocate, emphasized the importance of ensuring the shift to a prompt market “does not create for New England the kind of issues that we have seen recently in other regions, particularly PJM.” 

“With the long lead times and supply chain we are hearing about for investments in generation resources, and with the uncertainty around state and federal policies at present, we need to be thoughtful about the reforms that shorten the time frame for capacity auctions so New England does not end up designing markets that land us in the same unwelcome place,” Fossum added. 

Connecticut Consumer Counsel Claire Coleman said she hopes transitioning to a prompt auction “will reduce costs for consumers by removing some of the risk that suppliers build into their capacity auction bids” and “will make it easier to bring new energy supply online and facilitate more accurate modeling of what generation assets are available for use within the region.” 

However, she acknowledged the impact on consumers “remains to be seen” and said the Office of Consumer Counsel is approaching the capacity market overhaul “with the hope that some of these changes will result in bills reductions for consumers down the road.” 

Next Steps

In a memo Aug. 20, ISO-NE announced a one-month delay to the NEPOOL voting schedule for the prompt proposal and now plans to seek a vote at the MC in November and the Participants Committee in December. The RTO said this delay will not affect the timeline for commencing work on accreditation.  

Several NEPOOL members said they are anxious to get started with the work on the seasonal/accreditation changes, which almost certainly will be the more controversial phase of the project, and ultimately may have a riskier path to approval with FERC if the RTO is unable to build a broad consensus.