A downward revision to ISO New England's Net Installed Capacity Requirement for its next capacity market auction results in a large demand curve shift, which could further decrease capacity prices that closed at six-year lows in the 2019 auction, analysts said Thursday.
"We estimate the downward revision to the Net Installed Capacity Requirement could push capacity clearing prices in Forward Capacity Auction 14 down to around $3/kW-month," Kieran Kemmerer, power market analyst with S&P Global Platts Analytics, said in an email.
"While the demand fundamentals are bearish, elasticity in the supply curve could offer some support preventing further price erosion," Kemmerer said, adding that "ISO-NE's Inventoried Energy Program will provide additional revenues for struggling generators, however these revenues may be insufficient for these resources to clear at the anticipated low prices."
A 1,260 MW downward revision to the Net ICR results in a large leftward shift in the auction demand curve, Kemmerer said in a Wednesday client note.
The Net ICR changes need to be approved by the Federal Energy Regulatory Commission and ISO-NE plans to file its ICR values with the commission by November 5, according to an August 29 presentation given to the Power Supply Planning Committee that was posted to the grid operator's website.
The Power Supply Planning Committee, which is a sub-committee of the New England Power Pool Reliability Committee, released the updated ICR and corresponding demand curve values for FCA 14 in the latter half of August.
ISO-NE's FCA 13 capacity market auction in February closed at a clearing price of $3.80/kW-month, compared to $4.63/kW-month in the previous year's auction, an 18% decline, which was the lowest clearing price in six years, the grid operator said.
FCA 14 will secure capacity for the 2023 to 2024 delivery year.
The ICR and related demand curve changes showed a reduction in required capacity "that has bearish implications for clearing prices," Kemmerer said.
Updated load forecasting methodology for FCA 14 drove approximately 950 MW of the 1,260 MW Net ICR downward revision. The other main driver was an improvement in the historical outage rates for generators (from 7% to 5.7%), which is indicative of increased availability, according to the research note.
New England power generators are also concerned about the potential bearish revenue implications associated with the Net ICR changes.
ISO-NE's proposal would "substantially decrease" the Net ICR capacity requirement for the next auction and "that action will undoubtedly put downward pressure on prices if accepted by FERC," Bruce Anderson, vice president of market and regulatory affairs at trade group New England Power Generators Association, said in an email Thursday.
NEPGA has raised a number of concerns with how the ISO modified its load forecasting methodology, which drove the Net ICR decrease, including that it was done based in part on only a handful of days in summer 2018, Anderson said.
Additionally, the Inventoried Energy Program will add some revenue opportunities into the market - but only to make up for the lack of value placed on fuel security in the wholesale markets. "However, if the Market Monitor mitigates capacity offers based on those expected IEP revenues (as it has announced it will do) some resources may be faced with net zero (or in some cases even net negative) revenues between energy and capacity revenues," he added.
"That's one of the reasons we have argued so strongly against that type of mitigation treatment for the energy security measures," Anderson said.
MYSTIC PLANT RETIREMENT
As part of a current FERC proceeding regarding cost-of-service compensation for Exelon's 703-MW Mystic 8 and 714-MW Mystic 9 combined-cycle gas-fired units near Boston, a deadline of January 10, 2020, has been set for Exelon to decide whether to retire the units.
The company had previously announced their retirement, but ISO-NE said the units were needed for reliability.
Exelon's decision will determine whether Mystic 8 and 9 will retire at the end of May 2023 (the end of the FCA 13 capacity commitment period), or whether they plan to continue in operation under the cost-of-service agreement for another year, through the 2023/2024 capacity commitment period, ISO-NE spokeswoman Marcia Blomberg said in an email.
The NEPOOL Participants Committee is scheduled to vote on the proposed ICR-related values both including and excluding Mystic Units 8 and 9 on October 4.
An Exelon spokesman said in an email the company would not be able to respond to questions by press time.
