Everything You Need to Know About Capacity

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

1) Grid Operation – Every minute of every day coordinate and direct the flow of electricity over the region’s high voltage transmission system.
2) Market Administration – They design, run, and oversee the billion-dollar markets where wholesale electricity is bought and sold.
3) 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.

The NE-ISO 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 NE-ISO’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 2017 (FCA #11) was for the planning period of June 1st 2020 to May 31st 2021. In addition to the annual auctions, the NE-ISO 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.

 

Zones
• NEMA/Boston refers to the Northeast Massachusetts/Boston zone
• SEMA/RI refers to the Southeast Massachusetts/Rhode Island zone
Pricing
• In FCAs #1 through #7, the auction had a floor price. The floor price was eliminated starting with FCA #8.
• In FCA 7, the NEMA/Boston zone cleared at $14.99/kW-month for new capacity; the price for existing capacity was set at $6.66/kW-month in NEMA/Boston.
• In FCA 8, due to a resource shortfall, the auction cleared at $15.00/kW-month, which will be paid to new capacity in all zones and existing capacity in NEMA/Boston; existing capacity in all other zones will receive an administratively set price of $7.03/kW-month.
• In FCA 9, administrative pricing rules were triggered in the SEMA/RI zone due to inadequate supply. New capacity in the zone will receive the auction starting price of $17.73/kW-month and existing capacity in the zone will receive an administratively set price of $11.08/kW-month.
• In FCA 10, all resources within New England and Québec imports cleared at $7.03/kW-month; New York imports cleared at $6.26/kW-month; and New Brunswick imports cleared at $4/kW-month.
• In FCA 11, all resources within New England and Québec and New York imports cleared at $5.30/kW-month; and New Brunswick imports cleared at $3.38/kW-month.

There are three types of capacity resources that can 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 NE-ISO. 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 NE-ISO 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 the NE-ISO 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.

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 NE-ISO, 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 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 2016 in NE-ISO happened on 8/12/2016 between 2 and 3PM at 25,111.431 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 records data at set intervals (typically 5 mins, 15 mins, and/or 1 hour) and reports the data back to the utility continuously so it can be accessed by the utility, customer, or a supplier.  Since an Interval Customer’s usage is recorded in small, regular intervals, they have their own specific load profile that documents their electricity consumption over time. By reducing load during the system peak, interval customers will see a direct impact on the capacity tag that they will be set with for the following year.

By contrast, a non-interval meter only has the usage recorded once per month, so there is no way to tell when a given customer is consuming power during a day. As a result, utilities developed what is known as a Class Average Load Profile that allows the utility and/or suppliers to spread out the monthly usage over the profile and come up with a best guess at the hourly usage habits for non-interval customers. These Class Average Load Profiles play a large role in determining a non-interval customer’s capacity tag.

For non-interval customers, the use of a load profile makes the capacity tag harder to impact by timing reduction efforts with the system peak. Reducing for a single hour in tandem with the system peak, will only have 1/744th of the impact as that of an interval customer doing the same thing (24 hours in a day and 31 days in July/August). For non-interval customers reducing the overall usage for the entire month the systems peak occurs will have the greatest 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.

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