Dive Brief:

• Capacity prices in the Midcontinent Independent System Operator's just-held annual Planning Resource Auction jumped to $236.66/MW-day from $5/MW-day a year ago across the grid operator's central and northern regions, driven by an uptick in projected electricity use and a dip in power supply.

• The auction results indicate an increased chance MISO may have to order temporary blackouts if there are times when power demand outstrips supply, Zak Joundi, MISO executive director, said Friday during a conference call with stakeholders.

• MISO's capacity market has historically sent flawed price signals, leading power plants to retire when they are actually needed, according to David Patton, president of Potomac Economics, the grid operator's independent market monitor.

Dive Insight:

When MISO and the Organization of MISO States, a group representing state utility commissions, released their annual resource adequacy survey in June it appeared there was enough capacity across the grid operator's footprint to meet its needs for the capacity year that starts June 1, 2022.

However, the expected 3.4-GW to 13.9-GW surplus turned into a 1,230-MW shortfall in four zones in MISO's northern and central region, which requires about 101 GW of peak capacity, according to an April 15 presentation by the grid operator's staff. That shortfall triggered "cost of new entry" pricing across all seven zones in the region.

In part, the shortfall was driven by an increase in electricity use as the effects of the Covid-19 pandemic eased, according to Joundi.

Also, although nameplate generating capacity — the amount a power plant can produce at full output — increased in the region since the last auction, accredited capacity fell by 3.2 GW in MISO's north and central region as coal-fired power plants were replaced by wind and solar resources, which are accredited at 15% and 50% rates, respectively, Joundi said. A 100-MW wind farm, for example, counts as 15 MW in MISO's capacity auctions to reflect its overall output.

Capacity in MISO's southern region cleared at $2.88/MW-day, up from 1-cent/MW-day in last year's auction. There is a 2-GW surplus in the region, according to Joundi.

"We need to see more capacity being built … but from a reliability standpoint, the system will not be compromised," Joundi said. "But we should expect that as we enter this [capacity] year with less capacity in the north-central region that we are likely to see more usage of the emergency procedures."

MISO's northern and central region is at heightened risk for controlled "load sheds," or planned blackouts, Joundi said.

MISO's market is flawed, according to Patton. "If we're going to say that reliability is an imperative, we need to fix this market because we can't expect the market to support reliability if we know that it's not designed to produce efficient economic signals," Patton said during the conference call. 

The demand side of MISO's market is "mismodeled," which leads to inefficient decisions by market participants, according to Patton.

In the last four years, power plants totaling 4 GW to 5 GW retired, even though they appear "clearly economic," Patton said. "Our capacity market doesn't price capacity efficiently, so it sends out a clear economic signal to retire."

Potomac Economics didn't find any signs power plant owners withheld capacity, so the auction result was driven by fundamentals, Patton said.

The capacity auction results will increase costs for utilities in the Midwest subregion that were short on capacity supplies for the upcoming planning year, David Sapper, Customized Energy Solutions director of market intelligence for MISO markets, said in an email Monday.

In the wake of the auction, calls to change the auction demand curve could get strong cross-sector stakeholder support, according to Sapper.

"The market monitor and many stakeholders have long supported moving to some sort of administrative sloped curve, while other stakeholders are interested in strengthening auction scarcity pricing or moving to a voluntary auction with traditional demand bids," Sapper said.

It’s unclear if stakeholders will support MISO paying to expand the transfer capability between its northern and southern regions to reduce the capacity price difference between the areas, he said.

MISO's capacity shortfall could grow, according to ICF analysts.

In 2023, ICF expects 8.7 GW of retirements and only 3 GW of new accredited capacity across MISO, analysts said Friday in an email.

Utilities will likely try to limit their exposure to the auction price volatility by increasing self-supply and bilateral contracts, which would put upward pressure on bilateral contract prices, according to ICF.

They said there is an increasing need to reform the MISO resource adequacy construct to provide proper economic signals.

MISO could use a sloped demand curve to help set capacity prices instead of a vertical one, which would reduce the price volatility, according to the analysts. The vertical demand curve fails to capture the reliability value of excess capacity, which contributes to capacity prices that are too low to spur investments in new power plants, they said in a research note last week.

Potomac Economics estimated that if a sloped demand curve had been used in the 2021 auction, the price would have been $150/MW-day in MISO's north and central region compared with $5/MW-day, the analysts noted.

MISO's Resource Adequacy Subcommittee is scheduled to review the auction results at an April 20 meeting.