What is Capacity?

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ISO New England (“ISO-NE”) oversees three critical functions across Maine, Vermont, New Hampshire, Massachusetts, Rhode Island, and Connecticut. With the exception of Vermont, all of these states are restructured for electric supply.

The three critical functions of ISO-NE are Grid Operation, Market Administration, and Power System Planning. A brief description of each function is listed below:

  • Grid Operation – Every minute of every day, ISO-NE coordinates and directs the flow of electricity over the region’s high voltage transmission system.
  • Market Administration – They design, run, and oversee the billion-dollar markets where wholesale electricity is bought and sold.
  • Power System Planning – Perform the studies, analysis, and planning to make sure New England’s electricity needs will be met over the next 10 years.

ISO-NE determines what is known as the regions Installed Capacity Requirement (ICR.) The ICR occurs on an annual basis and is a measurement of the installed resources projected to be necessary in order to meet the ISO-NE’s reliability standards, while satisfying the peak demand forecast in New England and maintaining the required reserve capacity. Once the ICR has been established the capacity resources are acquired through a Forward Capacity Market Auction.

Forward Capacity Auctions (“FCA”) for New England are held on an annual basis, every February. The FCA sets out to procure adequate capacity to meet the ICR, as well as to attract adequate capacity resources to replace capacity resources that are being retired (or leaving the market place.) Because it takes a significant amount of time for new generation resources to enter the market, these auctions are held approximately 3 years in advance of the service period when the capacity resources must provide service. For example, the auction held in February 2016 was for the planning period of June 1st 2019 to May 31st 2020. In addition to the annual auctions, ISO-NE also holds capacity reconfiguration auctions at regular intervals. This allows them to procure additional capacity and create a liquid marketplace where capacity resources can trade capacity obligations during an upcoming capacity obligation period.

To provide an idea for how much generation resources are leaving the market versus how much is entering the market, the diagram below illustrates how 4,200 MW of generation either has retired or will retire in less than 5 years:

Salem Harbor Station (749 MW) 4 units (coal & oil)
Vermont Yankee Station (604 MW) 1 unit (nuclear)
Norwalk Harbor Station (342 MW) 3 units (oil)
Brayton Point Station (1,535 MW) 4 units (coal & oil)
Mount Tom Station (143 MW) 1 unit (coal)
Pilgrim Nuclear Power Station (677 MW) 1 unit (nuclear)
Additional retirements are looming

The Forward Capacity Market is working though, and is attracting efficient and fast-starting resources. More than 1,600 MW of new gas-fired generation has come forward in the last few auctions.

Wallingford (90MW) Combustion turbines – June 1, 2018
Footprint (674 MW) Combined-Cycle gas turbine (June 1 2017
Medway (195 MW) Combustion Turbine – June 1, 2018
Towantic (725 MW) Combined-cycle gas turbine – June 2018
In addition, 147 new resources representing 6,700 MW qualified for the auction in Feb 2016.

There are three types of capacity resources that are allowed to bid into the Capacity Auctions: generators, imports, and demand resources. Generators produce electricity that is then dumped into the grid. Imports are power produced in a nearby RTO or ISO and imported it into ISO-NE. Demand resources reduce power consumption at peak times in order to reduce the total amount of supply that is needed to meet demand, because when demand is greater than supply, the grid will experience brownouts or blackouts.

In ISO-NE these demand resources are compensated for reducing electricity load with the same rates they would receive if they had met that demand with generated electricity. Since ISO-NE needs to plan for the maximum demand possible, utilizing demand resources that are able to reduce load is an advantageous approach from a cost standpoint, opposed to having another power plant on hand. When demand is greater than supply, the grid will experience brownouts or blackouts.

The results of the capacity auction set the clearing price for new and existing capacity, or the rate at which capacity resources are paid for the electricity they produce. The capacity payment is what these capacity resources make in addition to any revenue from the actual energy they produce and the reserve markets. The capacity clearing price itself is unavoidable and all electric consumers pay for their share of those capacity costs.

In ISO-NE, the proportion of a customer’s capacity payment is determined by the assignment of a Capacity Tag. A capacity tag is set for a customer by using their peak demand during the peak day/hour on the NEPOOL grid. This is often referred to as the coincident peak. Historically the peak has happened on a July or August afternoon in NEPOOL, but since there is still a theoretical chance that the peak could happen at another time during the year, the tags aren’t finalized until early the following year. The utility starts updating the tags in their system around the May timeframe and they will become effective on June 1st and carry through May 31st of the following year. Once the new tags are active, the customer will continue to carry the capacity payment costs associated with that tag to the generators for the entire year, until they are set with a new tag the following year in a similar manner.

Below is a table that summarizes information pertaining to the system peak load (when the capacity tag would have been set each year) since 2001. The Peak system load for ISO-NE happened on 8/2/20016 between 2 and 3PM at 28,038.24 MW.

The type of meter a customer has also plays a role in the determination of their capacity tag. There are two basic types of meters that a customer can have, a non-interval meter and an interval meter. An interval meter on the other hand records data at set intervals (typically 5 mins, 15 mins, or 1 hour) and reports the data back to the utility continuously and be accessed by the utility, customer, or a supplier.
Since Interval Customer’s usage is recorded in regular intervals they have their own specific load profile. By reducing load during the system peak, it will have a direct impact on the capacity tag that will be set for the customer for the next year.

A non-interval meter only captures usage on an ongoing basis, but only has it recorded when someone drives by and scans the meter or a meter reader physically reads the meter and documents the usage since the last reading. Since the usage is only recorded once per month for non-interval accounts, there is no way to tell when a given customer is actually consuming power during the course of a day, week, month, or year. To handle this, the utility surveys a sample of customers in a given rate class by installing an interval meter. The usage recorded for all of the sample customers in a given rate class allows the utility to create a Class Average Load Profile, which enables a utility or supplier to spread out the monthly usage of a given customer across that profile in order to make a best guess at how much power they were consuming at any point throughout the day.

Non-interval metered customers whose load profile is determined by a Class Average have their tag calculated through a formula that uses their own usage and the class profile. The tag is set based on the overall usage for the month spread out along the same profile for all customers of a given rate class. This means that the capacity tag is harder to impact by timing reduction efforts with the peak day and hour. For these customers only reducing the overall usage for the month the peak day/hour occurs in will have an impact on reducing the capacity tag they are set with.

New accounts that are established will be assigned a capacity tag by the utility in accordance with their tariff for their first year of operation until a tag based on their actual usage can be set for the account. Once that data point is available, that new tag will be used and it will be set each year like any other customer.

Now that you understand the basics of how the capacity market works, how the capacity price is set each year, and how your capacity tag is set you can take steps to reduce how much your company pays in capacity costs.

Note: The information contained in this communication is provided as a courtesy for our client’s general informational purposes only, does not consider individual client circumstances, actual supplier contract or non-price terms, and/or client usage market or changes or anomalies, and is not indicative nor a guarantee of any future result or results. Before making decisions about retail power purchases, you should independently verify all facts important to your decision. The information provided is not a contract for electricity supply nor should it be construed as an offer to sell or as a solicitation of an offer to buy energy contracts or any energy commodity. Reliance on this information for decisions is done so at the sole risk of the reader and past performance is not indicative of future results.
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