Why Are Capacity Market Prices Rising? 10 Facts You Need To Know

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1.) What Is The Capacity Market? — It is a forward-looking market-based method of ensuring that New England will have adequate resources to meet all electricity demand plus reserve requirements three years into the future. Forward Capacity Auctions (“FCAs”) are held annually, three years in advance of the operating period. Resources compete in the auctions to obtain a market-priced capacity payment in exchange for a commitment to supply generating capacity in a particular operating year.

2.) There Has Been A Rise In The Generation Of Renewables — As federal and state policies attempt to cut carbon emissions there has been a rise in the generation of renewables. According to the ISO-New England, wind power produced nearly 1% of the region’s electricity in 2014, achieving 800 MW. ISO studies suggest that New England has the potential to generate nearly a quarter of the region’s electricity by wind. Furthermore, by the end of 2014, the region had achieved 900 MW of solar photovoltaic (PV) resources. The grid expects market penetration to rise, and are anticipating 2,500MW of solar generation by 2024.

3.) The Revenue Shift Puts Financial Pressure On Energy-Market Dependent Resources — Although the rise of renewable generation and low natural gas prices (as natural gas is currently the largest electricity generation fuel) is keeping prices down in electricity markets, to offset the loss in revenue in electricity markets, many merchant generation sources are pricing their capacity (i.e., their commitment to generate) at a higher rate. This in turn drives up retail electricity prices up.

4.) Capacity Payments Will Eventually Be Based on an Individual Resource’s Performance — Starting in June 2018, during times when the system is unable to meet its energy or reserve requirements, Capacity payments will be based on an individual resource’s performance. The capacity market will fulfill two primary objectives: (1) To ensure resource adequacy, and (2) to provide appropriate incentives for resource performance.

5.) Expected Growth in Renewables Could Cause More Nuclear & Coal Plants To Retire — Growth in on-site generation (such as on-site solar or wind) may deplete energy revenues that sustain power production plants that generate the power needed to satisfy minimum demand in the region. Federal tax credits and state subsidies allow renewable generators to offer their energy at low prices and still earn a profit. For that reason, additional renewables would reduce energy prices in the region. However, as we know, energy is only one component of the customer’s electricity rate. Although energy prices may decline, the demand of electricity on fewer generation resources will raise capacity prices, which will raise retail electricity rates.

6.) As Wind And Solar Generation Become More Prevalent, Energy Prices Will Continue to Increase — As we see continued growth in the generation of renewables in New England, “the price-reducing effects of renewables on electric energy prices will rise,” ISO New England stated. This will increase the financial pressure on energy-market dependent resources, often baseload resources such as nuclear and coal.

7.) ISO-New England Held the 9th Forward Capacity Auction — They did so in February, in order to plan for upcoming power demand and generation. Results of the FCA 9 auction showed that issues with the regional capacity and energy markets may continue the upward pricing trend in future years, affecting the period from June 1, 2018, through May 31, 2019.

8.) Capacity Prices Have Been Rising Since 2010 — Past auctions have determined that rates have been steadily rising since 2010 and larger increases have been recorded in most recent years. While the rates mainly impacted large end users, increasingly effects of capacity price increases will be seen by all electricity customers’ overall prices.

9.) Capacity Prices Will Be Higher Than They’ve Been In Years — At the last auction, the price for new resources coming into the Rhode Island zone for the 2018-19 period was set at 17.7¢ per kWh. This price is the highest price since ISO’s forward capacity auctions, almost double what the rest of New England generators will be paying. Of course, this does not mean that electricity prices will be that high: as higher capacity prices draw new investment in generation, overall capacity prices may mitigate lower. But it’s a premium added to electricity rates that will affect all electricity customers.

10.) Recent Price Spikes Were Not A Reflection of The Capacity Market — Recent price spikes experienced by consumers were a reflection of the energy market, not the capacity market. Price spikes occurred during extreme cold periods during last winter due to natural gas pipeline constraints coming into New England. Generators in the region have put effort into keeping up with capacity expectations.

(Sources 1. Walton, Robert. “ISO-NE: Renewables Are Driving Up Capacity Market Prices.” UtilityDive. Industry Dive, June 9, 2015. Web. 2. Thompson, Ben. “Region’s Electricity Prices Expected to Keep Rising.” Taunton Gazette. Gatehouse Media, Inc., Jul. 4, 2015. Web. 3. ISO New England Discussion Paper. “The Importance of a Performance Based Capacity Market to Ensure Reliability as the Grid Adapts to a Renewable Energy Future.” ISO New England. ISO New England, June 3, 2015. Web.)

Frequently Asked Questions

Are rising capacity prices due to the continued plant closures scheduled through 2018? This has an obvious and immediate impact. The closure of coal and nuclear facilities has driven up the auction clearing prices.

Is this event producing an electricity peak demand shortfall or deficit that will produce these higher capacity costs? No, system wide peak demand is forecasted to be covered adequately, albeit at higher prices.

Will this begin as of June 2016? The capacity auction has already cleared much higher prices beginning June 2016 and continuing through 2018. It is further exacerbated by zonal differences in Mass.

How long is it expected to last? Capacity auction prices have already cleared though 2018 at very high levels.

Are these higher capacity charges to entice development of adequate generation and/or demand reduction resources? From whom? That is the stated goal. The market is geared toward incentivizing participants to build capacity where it is needed most. In reality, there are no new plants being built where the need is greatest.

Do the increases differ by utility & load zone? The prices are set by capacity zone. In New England there are four capacity zones, made up of combinations of the energy load zones (1) Boston/Northeastern Massachusetts (NEMA), (2) Southeastern Massachusetts load zone (SEMA) + Rhode Island load zone (RI), (3) Connecticut (CT), and (4) Rest-of-Pool, made up of the remaining load zones (Western/Central Massachusetts (WCMA), New Hampshire (NH), Maine (ME) and Vermont (VT)).

How is capacity treated in a supplier’s contract? Some suppliers have allowances written that enable capacity price increases to be passed through to the customer. Sometimes this is very explicit, sometimes it is buried a bit in the material adverse change clause.

Contact Patriot Energy Group for more information.

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