overview of the capacity markets in the united states 2008 apex conference in sydney, australia...
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![Page 1: 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](https://reader035.vdocument.in/reader035/viewer/2022062517/56649eb35503460f94bbb43b/html5/thumbnails/1.jpg)
Overview of the Capacity Markets in the United States
2008 APEX Conference in Sydney, AustraliaOctober 13-14, 2008
Hung-po ChaoDirector, Market Strategy and Analysis
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Presentation Title© 2007 ISO New England Inc.
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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
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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
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The Forward Capacity Market (FCM) in New England
© 2007 ISO New England Inc. 5
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
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Transition Payments
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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• Effective December 2006 through May 2010
• Fixed capacity payments to all resources
• Payments adjusted for historical unit availability
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The Forward Capacity Market (FCM) in New England
© 2007 ISO New England Inc. 7
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
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The Forward Capacity Market (FCM) in New England
© 2007 ISO New England Inc. 8
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
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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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© 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,
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© 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)
Massachusetts56748%
Rhode Island
787%
Vermont716%
New Hampshire
645%
Maine17014% Connecticut
23820%
New Supply Resources (626 MW)
Connecticut35457%
Massachusetts19030%
Maine0
0%
New Hampshire
102%
Rhode Island
213%
Vermont508%
Values represent MW and percent
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© 2008 ISO New England Inc.
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New Supply Resources Cleared in FCA-1: Traditional fuel still dominates supply
Gas511
81.7%
Nuclear80
12.8%
Wind10
1.6%
Diesel1.9
0.3%Landfill Gas
3.60.6%
Hydro19.13.1%
Total: 626 MWValues represent MW and %
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© 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
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The Reliability Pricing Model (RPM)at PJM ISO/RTO
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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
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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?