Big numbers for New England electricity auction might not be enough to bring new capacity

Many generators cheered the recent results of ISO New England’s forward capacity auction.  The market cleared at what one analyst called an “astonishing” price of $15/kW-month. That is five times the clearing price in the last year’s auction.

The high price, prompted by a sudden swing from surplus capacity to a deficit, should be enough to encourage developers to build new power plants, which is what capacity markets are designed to do.

The auction establishes the price at which generators or other source of electricity are paid for capacity. In other words, they get paid for being there, and they get paid for it all the time, not just during generation or peak demand. That ensures there will be capacity available during those peak periods.

That, at least, is the theory, but in the looking glass world of capacity markets, that might not be the outcome.

The theory is that capacity markets supply the “missing money” needed to augment energy. That’s because spot prices that by themselves do not provide sufficient revenues to support investment in new power plants, particularly since the reliability of the grid requires some plants may need to sit idle and might never be called upon to generate electricity, or at least enough to earn a decent return. The capacity prices do that, in theory.

When capacity is scarce, prices rise and developers enter the market to build new plants, restoring the equilibrium of supply and demand. So $15/kW-day should be enough to attract generation investment, considering that last year’s forward capacity market cleared at $3.15/kW-day.

But nothing is that simple in capacity markets. Only 1,370 MW of new resources will get the $15 price. The rest of the supply resources in New England–with the exception of the region around Boston–will be paid at the $7.025/kW-day price ceiling.

It’s not $15, but it is still more than the $3 floor price that prevailed last year.

ISO-NE does not reveal bidders’ identities, so the new resources are not known. But under ISO-NE rules, a confluence of events left little time for developers of new plants to qualify to bid in this year’s auction.

Most analysts believe the new resources that cleared the market are imports into the region. The only new resource to make an appearance in the recent ISO-NE capacity market is Footprint Power’s Salem Harbor project in Massachusetts.

Last year, Footprint’s project, which is in the “constrained” region around Boston, cleared at $15/kW day. Existing generation in that region cleared at $6/kW-day Generating resources in the rest of the ISO, however, cleared at the $3.15/kW-day floor price.

Under order from the Federal Energy Regulatory Commission, ISO-NE removed the floor price for this year’s auction. Most analysts expected prices to crater. Their predictions never had a chance to be tested, because the fundamentals of the market changed so dramatically.

The prospect of low prices prompted some generators to remove themselves from the market, and prompted a complicated regulatory process that resulted in the triggering of the price ceiling. (Yes, the same year the floor went away, a ceiling was imposed.)

One of the announced retirements pushed ISO-NE to the edge. EquiPower Resources, a unit of private equity firm Energy Capital Partners, in October announced plans to retire its 1,500-MW Brayton Point plant in Massachusetts. That plant burned both coal and residual fuel.

All of a sudden, the region was going to be short capacity. That triggered a rule that invoked the ceiling price. ISO-NE set a price and had it approved by FERC. The triggered ceiling price was put into ISO-NE rules to attract investment at times when the market is short of capacity. So are developers lining up to invest in New England?

The astonishing price of this year’s forward capacity market is, in fact, more of an anomaly than a price signal.

Suffice it to say that the wide variation between the clearing prices this year and last year was largely the result of the way ISO-NE draws the demand curve that sets the parameters for its auctions. That is set to change next year.

The region could still be short of capacity next year. The only new resource known to have bid into a recent auction was Footprint’s Salem Harbor project, which bid in last year. So generators might well step up and bid new plants into the auction.

That would be the desired outcome, but in the real world getting any new resource sited in New England is very difficult.

The Cape Wind offshore wind project is the poster child for how difficult it is to build anything, even a renewable energy project, in New England. The project, proposed within sight of the Kennedy’s compound in Hyannis, Massachusetts, has been battling with environmentalists and local activists for nearly a decade and is still not built.

Even the Salem Harbor project, which is designed to replace an old, inefficient coal plant with a new, efficient and 50% cleaner gas-fired plant, is facing an eleventh hour challenge from the Conservation Law Foundation.

It’s hard to know what kind of new resource could successfully navigate the vagaries of development in New England. It is possible that EquiPower could repower Brayton to burn gas. But one of the factors the company will undoubtedly weigh in making that decision is what effect new generation would have on the prices its other 1,810 MW of relatively new gas-fired plants in the region would reap from coming capacity auctions.

The market signal coming from the ISO-NE capacity auction may be that existing resources are more valuable than new resources, at least for now.

Platts