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

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

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

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

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

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


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• Effective December 2006 through May 2010

• Fixed capacity payments to all resources

• Payments adjusted for historical unit availability



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



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

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


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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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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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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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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

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


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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


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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

•


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Capacity Supply and Demand in the 20011/2012 Base Year Auction


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Summary of RPM Clearing Prices


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Trend of Demand Response Participation before and after RPM Implementation


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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


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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)


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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.


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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


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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


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Questions?

Documents

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