Overview of the Capacity Markets in the
United States
2008 APEX Conference in Sydney, Australia
October 13-14, 2008
Hung-po Chao
Director, Market Strategy and Analysis
The Need for Capacity Markets
• To provide long-term financial commitment to
obtain adequate resources to meet customers’
needs
– To attract new investments in generation capacity and
demand resources
– To defer old capacity retirement
• Electricity markets continue to evolve
– Demand side does not yet fully participate
– Price cap is still needed
Presentation Title
© 2007 ISO New England Inc.
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Capacity Markets in the U.S.
• ISO New England
– Forward Capacity Market (FCM)
• PJM ISO/RTO
– Reliability Pricing Model (RPM)
• New York ISO
– Installed Capacity Market (ICAP)
© 2008 ISO New England Inc.
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The Forward Capacity Market (FCM)
at ISO New England
Background
• Historically, New England has had a monthly Installed
Capacity (ICAP) market
– Very low prices
– Many Reliability Must Run (RMR) contracts
• ISO developed Locational ICAP (LICAP)
• States and some stakeholders objected
• Result was settlement process which led to FCM
– Settlement reached March 2006
The Forward Capacity Market
(FCM) in New England
© 2007 ISO New England Inc.
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Transition Payments
• Effective December 2006 through May 2010
• Fixed capacity payments to all resources
• Payments adjusted for historical unit availability
Date
Payment
($/KW-month)
Estimated Total
Payment
($Billion)
12/01/2006 – 05/31/2007
$3.05
0.6
06/01/2007 – 05/31/2008
$3.05
1.2
06/01/2008 – 05/31/2009
$3.75
1.4
06/01/2009 – 05/31/2010
$4.10
1.6
© 2008 ISO New England Inc.
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FCM – Design Features
• Primary auction for capacity approximately three years
before the delivery year
• Allow new proposed capacity projects to compete in the
market and set price
• Facilitate participation by all resources: supply and
demand
• Market buys just enough capacity to meet New
England’s Installed Capacity Requirement (ICR)
• Zonal purchases
• Pay-for-performance and energy price hedge for load
The Forward Capacity Market
(FCM) in New England
© 2007 ISO New England Inc.
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FCM Design – Major Components
•
Qualification
– Ensure that auction participants are real
– For both existing and new capacity resources
•
Forward Capacity Auction (FCA)
– Zonal purchase of capacity resources
– Declining clock auction
•
Reconfiguration Auctions
– To buy and sell (exchange) capacity obligations before and during the
commitment period
•
Capacity Product
– Must offer in day-ahead energy market
– Measure and pay-for-performance during shortage events
– Financial obligation to provide energy during high priced periods
•
Financial Assurance
– Help to ensure that New capacity offers deliver on commitment
The Forward Capacity Market
(FCM) in New England
© 2007 ISO New England Inc.
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Forward Capacity Market Results
• Capacity market transition payments of $3.05/kW-month
were made to all ICAP resources in accordance with the
FCM Settlement Agreement
• The ISO evaluated over 13,000 MW of new capacity
projects submitted in the qualification stage for the first
Forward Capacity Auction
• The first FCA was successfully completed in February
2008 with competitive offers from 6,102 MW. A total of
approximately 1,813 MW of new resources was selected
© 2008 ISO New England Inc.
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Forward Capacity Auction Results
• The first FCA held February 4-6, 2008
– Procurement met regional ICR for 2010-2011
Commitment Period
– FCA was successful and went smoothly
• No technical problems or observed anti-competitive
behavior
• Prices
– FCA starting price was $15.00/kW-mo
– FCA ending price was $4.50/kW-mo
• Floor price negotiated as part of Settlement Agreement
• Over 1,800 MW of new Supply and Demand
Resources cleared the auction,
© 2008 ISO New England Inc.
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Total Resources Cleared in FCA-1: 34,352 MW;
Total Resources Needed: 32,305 MW
New Demand Resources
(1,188 MW)
New
Hampshire
64
5%
Maine
170
14%
Connecticut
238
20%
Vermont
71
6%
Rhode
Island
78
7%
Massachu
setts
567
48%
New Supply Resources
(626 MW)
New
Vermont Hampshire
10
50
Maine
2%
8%
0
Rhode
0%
Island
21
3%
Connecticut
Massachu
354
setts
57%
190
30%
Values represent MW and percent
© 2008 ISO New England Inc.
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New Supply Resources Cleared in FCA-1:
Traditional fuel still dominates supply
Nuclear
80
Landfill Gas 12.8%
3.6
0.6%
Wind
10
1.6%
Diesel
1.9
0.3%
Total: 626 MW
Values represent MW and %
Hydro
19.1
3.1%
Gas
511
81.7%
© 2008 ISO New England Inc.
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New Resource Show of Interest for FCA#2
in December, 2008
• More Show-of-Interest (SOI) applications in
FCA-2 than FCA-1
• Approximately 15,864 MW of New Resources
seeking qualification
– 8,985 MW of new generation
• Includes 581 MW of Wind, primarily in ME and NH
• Includes 8,046 MW of CC and CT
• Also includes Hydro, Fuel Cells
– 5,098 MW of new imports
– 1,781 MW of new Demand Resources
© 2008 ISO New England Inc.
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The Reliability Pricing Model (RPM)
at PJM ISO/RTO
Background
• The RPM replaced the previous PJM capacity market
construct to ensure PJM’s long term resource adequacy
– It was implemented on June 1, 2007
• The RPM design was developed through a multi-year
stakeholder discussion and a FERC settlement process
• The primary driver was to address projected reliability
concerns and infrastructure investment issues
– PJM was facing the prospect of persistent and worsening
imbalances between supply and demand
• Four auctions have been conducted so far
© 2008 ISO New England Inc.
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RPM- Design Features
• Three Year Forward Auctions
– Residual auction after specification of self-supply and bilaterals.
– Provides price signal and forward commitment process that
allows new entry to participate or existing units to retire with
forward notification.
• Locational Constraints
– Recognize limited ability to import capacity in certain areas due
to transmission, voltage, or stability limitations (as identified in
PJM’s RTEP analysis).
– Higher capacity prices in constrained areas
– Lower capacity prices in areas with significant excess capacity
© 2008 ISO New England Inc.
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RPM- Design Features (Cont’d)
• Variable Resource Requirement (VRR)
– Recognizes the Cost of New Entry.
– Recognizes the value of additional capacity above the reserve
margin thereby reducing volatility in capacity prices.
– Sloped demand curve reduces market power concerns.
• Ability of Transmission and Demand Resources to
participate
– Allows direct competition between various options including new
generation resources and demand response to address reliability
requirements.
– Provides opportunity for incremental transmission upgrades to
provide solutions to capacity import limitations
•
© 2008 ISO New England Inc.
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Capacity Supply and Demand in the
20011/2012 Base Year Auction
© 2008 ISO New England Inc.
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Summary of RPM Clearing Prices
© 2008 ISO New England Inc.
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Trend of Demand Response Participation
before and after RPM Implementation
© 2008 ISO New England Inc.
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The Installed Capacity Market (ICAP)
at New York ISO
Background
• The design of the Northeastern installed capacity markets
was born of the pre-existing planning and operating practices
of the power pools in the Northeast.
• The New York market structure addresses the need for:
– system reliability (insured through installed capacity requirements);
– overall market design coordinating energy, capacity and ancillary
services
– reining in potential market power
– encouraging robust competition
– mitigating potential barriers to trade
– certainty, market stability
– recognizing the political realities of energy price caps and regulatory
oversight
© 2008 ISO New England Inc.
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NYISO ICAP- Design Features
• ICAP Requirements:
– Are based on a Reserve margin set in advance for the upcoming
Capability Year by the New York State Reliability Council
(NYSRC)
• All ICAP Requirements are translated into UCAP
(Unforced Capacity) Requirements
– Unforced Capacity is a measure of the expected supply based on
the historical performance of each resource when in demand
(dispatched)
© 2008 ISO New England Inc.
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NYISO ICAP- Design Features
• Load Serving Entities (LSEs) meet their NYISO-allocated
UCAP requirements by:
– Self-Supply or Bilateral Transactions with Suppliers
– Purchasing in the Capability Period Auctions (6-month strip)
– Purchasing in the Monthly Auctions (for balance of Capability
Period)
– Paying for the balance of their obligation procured on their behalf
in the Spot Market Auction (1-month) using a Demand Curve
• All supply is certified and checked out monthly.
© 2008 ISO New England Inc.
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NYISO ICAP- Locational Features
• Due to transmission constraints into certain localities,
areas or zones, some LSE’s must procure a substantial
portion of their ICAP/UCAP requirements from local
resources
• There are two such transmission constrained zones in
New York:
– New York City
– Long Island
© 2008 ISO New England Inc.
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NYISO ICAP “Demand Curve”
• Initially a monthly auction was designed as a deficiency
auction where LSEs that were short were required to buy
the balance needed at the clearing price in the NYISO
deficiency auction
• The market price could be anywhere between a preset
maximum deficiency price and zero, essentially following
a vertical demand curve
• This design resulted in volatile market outcomes and
eroded the quality of any price signals
• The deficiency auction is replaced by a spot auction (one
month) that relied on a sloped demand curve, which
would lead to more certain and rational price signals
© 2008 ISO New England Inc.
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Questions?