By Rich Heidorn Jr.

SARATOGA SPRINGS, N.Y. — A forward capacity market may have worked for PJM and ISO-NE, but it isn’t the solution for NYISO, the Market Monitor told the Independent Power Producers of New York’s fall conference last week.

PJM and ISO-NE officials told an audience of about 100 that their forward markets have successfully incented new generation to replace retirements in their regions.

But The Analysis Group’s Paul Hibbard said the consulting firm’s 2015 study for the ISO found no compelling benefit to changing from New York’s current monthly prompt auctions. “We couldn’t find in our analysis … a real overwhelming level of support or level of rationale for … going through the effort of moving to a forward capacity market design,” said Hibbard, who moderated the session.

And Pallas LeeVanSchaick of Potomac Economics said instituting a forward market would be a time-consuming distraction from addressing the ISO’s biggest problems.

The Monitor called for “more logical local capacity requirements” and predefined capacity zones “so that resources know that if they come into a particular area to meet a reliability need … that there’s an economic signal that they’ll be rewarded for helping to satisfy.”

“Those would be important whether you have a spot market for capacity or a forward capacity market,” he added.

The Monitor made recommendations on those issues in its 2015 State of the Market report in May. (See NYISO Monitor: Modify Capacity Export Planning.)

Reluctant Converts

Robert Ethier, vice president of market operations for ISO-NE, said his RTO was forced to accept the forward capacity model in FERC-moderated settlement talks. “We were actually focused on a monthly market with a sloped demand curve much like you have here in New York,” he recalled.

Despite its origins, and the repeated changes to market rules since then, Ethier said, “it’s working pretty well.” The RTO says it has attracted 4,700 MW of new capacity resources — versus 4,200 MW of retirements — since 2013.

“That’s sort of the bottom line … for a capacity market: Is it getting you new resources to replace the resources that are exiting the market?” he continued. “At that high level, it’s been successful.”

Among the changes ISO-NE made was adjusting the calendar to address a disconnect in the auction timeline.

Retirements had been allowed up to one month before auction, while new resources had to declare their intent to enter the market a year in advance. Because it was impossible for new resources to respond to late-announced retirements, the RTO found itself with capacity shortfalls in Forward Capacity Auctions 8 and 9.

In April, FERC approved rules requiring retiring generators to declare their intention in March rather than October, while moving the “show of interest” deadline for new capacity market entrants from February to April. (See FERC Approves Changes to ISO-NE Retirement Rules.)

‘Not Here to Sell Anything’

Also on last week’s panel was Stu Bresler, PJM’s senior vice president of operations and markets, who responded to LeeVanSchaick’s criticism by making it clear “I’m not here to sell anything” to NYISO. He also acknowledged that PJM’s Reliability Pricing Model is “not immune” to changes, an apparent reference to a call by some stakeholders for an overhaul. (See Proposal to Revisit PJM Capacity Model Receives Tepid Response.)

But he noted that PJM has added almost 17,000 MW of capacity resources in the last five Base Residual Auctions, well in excess of the less than 2,500 MW of retirements announced. “If we didn’t have the forward capacity market, we’d have needed something else” to attract the new supply, he said.

The new resources mean that PJM, unlike NYISO and MISO, has rarely had to rely on reliability-must-run units. “If you define your region and your locational requirements for capacity sufficiently, you may have [only] some extremely localized issues that … will require some minor out-of-market actions.”

Ethier said ISO-NE has never had to invoke “backstop intervention” for reliability and has limited authority to do so. The capacity market, he said, is what ensures reliability.

“It focuses the mind and sharpens the pencil when you’re playing without a net,” he said.

Different Era, Different Needs

LeeVanSchaick said, however, that the concerns that prompted the capacity markers in the neighboring RTOs don’t apply to New York today.

Unlike the rapid load growth eras in which PJM and ISO-NE developed their capacity markets, New York is facing very little load growth, and new renewable resources are entering the market, driven by public subsidies, he said.

LeeVanSchaick also said the one-year commitment with a three-year forward time horizon is a bad fit for existing resources considering making capital investments they expect to pay back in five to 10 years. “And … the time frame in which they would make that decision is not three years ahead; it might be more like one year ahead,” he added. Forward markets don’t “line up well with those investment decisions, certainly not with the time frame in which demand response providers are looking to increase or decrease their position in the market.”

He said the ISO also needs to increase its reliance on the energy and ancillary services markets to recognize the value of more flexible resources needed to supplement intermittent generators.

And he called for tougher rules on buyer-side mitigation and combatting uneconomic retention.

Cost, Time

The Analysis Group’s Hibbard said his firm’s report estimated it would cost $10 million and take three years to create a forward capacity market.

Both Ethier and Bresler said the additional administrative costs of the forward auctions are insignificant given the size of their $3 billion and $7 billion-plus markets, respectively.

Ethier estimated the forward market increased ISO-NE’s administrative costs by about $1 million annually compared to a prompt market. Bresler said seven PJM employees administer the RPM.

But Ethier acknowledged LeeVanSchaick’s concern about the “opportunity cost” of implementing the market.

“It basically slid all our initiatives out a couple of years. We would have had hourly markets much sooner, for example.”

LeeVanSchaick said the rationing of resources to pursue market initiatives suggests “the ISO budgets are lower than maybe the efficient level of funding for an ISO. … There’s often haggling over a small amount of money to develop a new project [even though] any of the projects that we’re talking about could potentially pay for themselves from the social welfare standpoint in a matter of months.”

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