According to the Independent System Operator of New England (ISO-NE) in regard to the completion of its 2018/2019 forward capacity market (FCM) auction, system-wide clearing prices rose significantly for existing resources for the second year in a row, which reflects the need for additional capacity resources in the region. The first seven auctions settled at the floor price of $2.95 to $4.50 for delivery years 2010/2011 through 2016/2017, as shown in the chart below. The clearing price rose to $7.03 last year and $9.55 this year. As we reported previously, the Southeast Massachusetts/Rhode Island zone saw a capacity shortfall that triggered special administrative pricing rules.
The chart below shows the capacity required plus the surplus procured in the auction, and the entire column represents the total capacity procured. The clearing price shown is the system-wide price paid to existing resources.
Capacity Required & New Resources
The capacity required in the region ranged from 31,965 MW to 33,456 MW in the first seven auctions. The price increases have coincided with narrowing capacity surpluses resulting from resource retirements, increasing demand and limited development of new generation capacity.
- Retirements – ISO-NE noted after last year’s auction that major generating facilities representing over 3,200 MW of capacity, as well as 600 MW of demand resources, would be retired before the 2017/2018 auction.
- New Capacity – Limited capacity has been added since the 2012/2013 auction (which took place in 2009), although ISO believes that the 1,060 MW added in 2018/2019 shows suppliers are responding to price signals.
- New Demand Resources – Excluding the first auction, demand resource additions have averaged 357 MW per year, though the past two years have seen a slight uptick (394 MW and 367 MW, respectively).
Retail Price Impact
Although it is difficult to determine how capacity markets affect retail pricing, the constraints in the capacity market could spell price increases over the next three years. Beyond that year, it is difficult to say whether new generation will come online – or otherwise become available in the New England market through new transmission capacity bringing power from other markets.
This underscores the value of participating in demand response programs that pay customers for curtailing demand during peak hours. In general, reducing demand during on-peak hours when capacity is at a premium can significantly reduce electricity costs.