Benefits of New England’s Proposed
Capacity Market
David LaPlante, Vice President, Wholesale Markets Strategy
April 26, 2006
1
Effective Capacity Market Completes
Wholesale Market Design
• Wholesale markets kicked off in 1999 with single energy
clearing price as interim design
• Standard Market Design brought locational energy prices
and multi-settlement in 2003
• Ancillary Services Markets improved in 2006 by adding
locational reserve market to encourage quick start
facilities and opportunity for demand to bid directly into
market
• Capacity Market improvements are last major piece of
market design
March 2006
© 2006 ISO New England Inc.
2
Markets Creating Development Activity:
Potential Capacity Additions
1600
1400
1200
Not yet known
Nuclear
Oil
Wind & Biomass
Natural Gas/Oil
MW
1000
800
600
400
200
0
2006
2007
2008
2009
2010
2011
March 2006
© 2006 ISO New England Inc.
3
Growing Peak Drives Need to Build More
Resources
ISO-NE Summer Peak as Percent of Average Hourly Load
175
165
155
145
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
March 2006
© 2006 ISO New England Inc.
4
Forward Capacity Market Goals
• Induce investment to maintain adequate resources over
the long term
• Allow new capacity resources to compete and set price
• Assure high level of performance from resources when
needed
• Address market power in capacity market and energy
market
• Together with other markets, send price signals for both
an efficient mix and efficient operation of resources
March 2006
© 2006 ISO New England Inc.
5
FCM Encourages Appropriate Investment
in All Resources
• Holding auction three years in advance of need allows
time for new development
• New capacity: Option to select five year commitment
• Easier to attract investment, reducing risk
• Existing capacity: Gets annual auction price
• Provides stable revenue stream to support reliable
operations
March 2006
© 2006 ISO New England Inc.
6
FCM Includes All Resources
• Demand recognized as important resource
– To meet capacity needs and/or reduce capacity obligation
• Opportunity for energy efficiency to participate in FCM
market
– New programs may be eligible for transition payments
• Intermittent resources to be treated as capacity resource
• Demand Resources and Intermittent Resources Working
Groups formed to develop eligibility details
March 2006
© 2006 ISO New England Inc.
7
FCM Protects Consumers
•
Capacity resources must be available during hours
of high prices/operating reserves shortage for full
payment
–
Works to mitigate reliability issues seen during January
cold snap
•
Capacity payments reduced when energy price
exceeds a threshold
•
Consumers don’t pay twice for capacity and energy
March 2006
© 2006 ISO New England Inc.
8
FCM Addresses Market Power
• Bids from new capacity are assumed to be competitive
• Requires existing capacity to offer into the market
– New England market is concentrated, especially in smaller zones
– Risk that owners of large amounts of generation could withhold
capacity and force prices higher
– Market Monitor will review bids of existing capacity
• Places limits on offers for those that wish to retire or
leave the market
March 2006
© 2006 ISO New England Inc.
9
Effort to Prepare and Administer FCM
• Approve bidder qualifications
– Financial assurance interconnection analysis site and schedule
for new development
• Review and monitor offers
– Self supply criteria
– Restriction for de-list and export bids
• Reports to FERC
– Requirements for different zones
– Market Monitoring determinations
• Determine Installed Capacity Requirement (ICR) for
2010-2011 power year by next summer
• First FCM auction first quarter of 2008
March 2006
© 2006 ISO New England Inc.
10
Overall Action Plan for Reliability,
Adequacy, and Cost Control
• Complete market improvements to build reserve
resources and new capacity
• Encourage capacity resources with diverse fuel types
– Tackling state siting barriers to the development of non-gas
generation
• Reduce the growth in peak demand
– Time differentiated retail rates for large customers
March 2006
© 2006 ISO New England Inc.
11