Dive Brief:

• ISO-New England will present a proposal to its board of directors this week to reform the forward capacity market (FCM) to handle greater amounts of subsidized generation while preserving price signals for unsubsidized resources and facilitating an orderly exit for retiring power plants. 
• Under the proposal, retiring resources that earn capacity supply obligations (CSOs) in the FCM could transfer those obligations to new, subsidized resources that do not have CSOs. The existing resource would then retire and pay the subsidized resource for meeting the obligation.
• The price paid to those new resources would be determined by a second auction, labeled a substitution auction, in a manner similar to the settlement process that occurs today between the real-time and day-ahead energy markets. 

​Dive Insight:

The ISO-New England proposal aims to provide a market-based solution to the integration of subsidized generation resources in wholesale power markets. 

Across the nation, subsidized resources — typically renewables and nuclear plants — are pushing down wholesale power market prices, reducing revenue for generators and stoking fears of a collapse of the organized market model.

In March, the Federal Energy Regulatory Commission called for a technical conference on the issue, and ISO-NE staff plans to present their proposal as a model for other grid operators at the conference May 1 and 2 in Washington. 

According to a four-page summary of proposal posted online, the existing forward capacity auction (FCA) would be split into two parts — a primary auction and a substitution auction.

In the first stage, the ISO would run the FCA as it does today, using the minimum offer price rule (MOPR) and current capacity demand curves. Retirement offers below the clearing price would receive a CSO, similar to the current model, and establish the capacity price and determine all resources' initial capacity awards. 

But, the ISO proposal notes, subsidized resources are unlikely to clear that primary FCA due to the MOPR, which prevents resources below a certain price from being awarded CSOs. To allow them to participate, a second auction — the substitution auction — would occur immediately after. 

In that auction, resources with retirement bids that retained CSOs in the first auction may transfer those obligations in their entirety to new, subsidized resources that did not clear the first stage. This auction would be run without the MOPR or administrative demand curves, and the transfer price would be the substitution auction's clearing price.

If there are no retirement offers, subsidized resources would not get CSOs that year, but could participate in the next year's auctions.

The final capacity payments and supply obligations for resources would be combined across the two auctions in a manner similar to the settlement process for the day-ahead and real-time electricity markets. 

"[A]ll resources that clear in the primary FCA are credited at the first-stage FCA clearing price," ISO-NE staffers wrote, "and then each resource that sheds or acquires an obligation in the second-stage substitution auction is credited or charged for the change (or deviation) in its obligation at the substitution auction clearing price."

Under this system, existing resources that obtain CSOs in the primary auction could shed their obligations for a lower cost than if they retained them. 

"In effect, existing resources that transfer their obligations in the substitution auction receive a net payment for voluntarily retiring," staffers wrote, "akin to a ‘severance payment.’"

The two-part capacity auctions would deliver a number of benefits, according to the proposal, including the preservation of competitively-based capacity prices for existing resources and the orderly replacement of aging resources with new, cleaner generation.

"As new subsidized (non-emitting) resources enter the market, the resources that elect to retire sooner are likely to be among the older, less-efficient, and higher-emitting units in New England’s power system," staffers wrote. "For this reason, the substitution auction might reasonably be viewed as an auction-based 'cash for clunkers' secondary market."

The proposal is no panacea for all organized market problems, ISO-NE CEO Gordon van Welie cautioned in a presentation on the proposal. If no existing generation resources are scheduled to retire, no new subsidized resources would acquire capacity obligations that year. And issues of winter fuel security would need to be "addressed in a separate process."

ISO-NE staff will present the proposal to the grid operator's board on April 20 for approval.