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© 2013 Day Pitney LLP Overview and Update on the Ever-Evolving New England Wholesale Capacity Market presentation to Boston Bar Association May 23, 2013.

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Presentation on theme: "© 2013 Day Pitney LLP Overview and Update on the Ever-Evolving New England Wholesale Capacity Market presentation to Boston Bar Association May 23, 2013."— Presentation transcript:

1 © 2013 Day Pitney LLP Overview and Update on the Ever-Evolving New England Wholesale Capacity Market presentation to Boston Bar Association May 23, 2013 Presented by: Paul N. Belval Sebastian M. Lombardi

2 Page 2 | 5/23/2013 Presentation to Boston Bar Association © 2013 New England Wholesale Capacity Market Introduction of Wholesale Electricity Components Sold Overview of New Englands Forward Capacity Market Update on Key Challenges and Evolving Solutions

3 Page 3 | 5/23/2013 Presentation to Boston Bar Association © 2013 Introduction - Wholesale Power Markets The Markets Energy Capacity Other Ancillary Services

4 Page 4 | 5/23/2013 Presentation to Boston Bar Association © 2013 Wholesale Electricity Cost Components Source: Wholesale Load Cost Report, ISO New England Inc. (March 2013) Monthly Regional Network Load Cost Report (Jan Total Wholesale Load Cost in 2012: $7,332,216,296

5 Page 5 | 5/23/2013 Presentation to Boston Bar Association © 2013 New England Wholesale Capacity Market KEY TERMS Installed Capacity Requirement (ICR) - Amount of capacity needed to reliably serve New England. Forward Capacity Auction (FCA) – A periodic auction held by ISO New England to procure generating capacity or demand reduction capacity to satisfy ICR. Capacity Commitment Period (CCP) – The period from June 1 to May 31 that defines the duration of a capacity obligation procured in the FCA.

6 Page 6 | 5/23/2013 Presentation to Boston Bar Association © 2013 New England Wholesale Capacity Market KEY TERMS (cont.) Offer - Amount of capacity for a New Resource that is bid into an FCA. De-list Bid - Amount of capacity from an Existing Resource that is proposed to be withdrawn from an FCA. Capacity Supply Obligation (CSO): MW of capacity obligation assigned to a Resource during all of or a portion of a specific Capacity Commitment Period.

7 Page 7 | 5/23/2013 Presentation to Boston Bar Association © 2013 Why have Capacity Markets? Ensure adequate resources are available where and when they are needed to keep the lights on Units that operate only during peak demand times would require huge payments in energy market to recover their full costs during few hours of operation Society has been unwilling to allow prices to rise to such levels, even in the small number of hours when high prices would be required Separate and assured revenue stream necessary to keep generators that are required for reliability and available to operate when needed Help to stimulate new generation and demand resources that are desired to meet future needs

8 Page 8 | 5/23/2013 Presentation to Boston Bar Association © 2013 New England Wholesale Capacity Market New Englands Forward Capacity Market (FCM): Forward market where ISO New England procures enough capacity to meet reliability needs 3 years in the future ISO New England procures needed capacity through an annual auction

9 Page 9 | 5/23/2013 Presentation to Boston Bar Association © 2013 New England Wholesale Capacity Market Installed Capacity Requirement (ICR) ICR is the amount of installed resources (both generating and demand) needed to meet ISO-NEs Resource Adequacy Criterion Calculated outage probability – one day in ten years criterion. To meet this requirement, ISO-NE calculates how much capacity should be needed to meet the expected demand (i.e.. How much electricity is going to be used 3 years from now?) and handle foreseeable uncertainties associated with load or performance of the capacity resources

10 Page 10 | 5/23/2013 Presentation to Boston Bar Association © 2013 New England Wholesale Capacity Market What Resources Can Meet the Need? Supply Resources Oil, coal, nuclear, natural gas, intermittent renewable generation Demand Resources Distributed generation, energy efficiency, load management Imports

11 Page 11 | 5/23/2013 Presentation to Boston Bar Association © 2013 Forward Capacity Market: Qualification Process to Participate in Auction Qualification process begins over a year before the auction New Resources (i.e., Resources that have not cleared in any previous Forward Capacity Auction) Rigorous process to assure that new resources are real To qualify, New Resources must submit sufficient documentation indicating their ability to operate at a specific MW value for the relevant Capacity Commitment Period Must clear as new for one auction

12 Page 12 | 5/23/2013 Presentation to Boston Bar Association © 2013 Forward Capacity Market: Qualification Process (cont.) Existing Resources (i.e., Resources that have cleared in any previous Forward Capacity Auction) If existing, resource automatically treated as price-takers in the auction based on historical capabilities, unless they exit by delisting. If resource does not want to take on a capacity obligation, must submit permanent or static de-list, or export, bids at qualification time (during auction Existing Resource can submit dynamic de-list bid) - - all such de-list bids are subject to reliability reviews *Minimum project size for all eligible Resources = 100kW

13 Page 13 | 5/23/2013 Presentation to Boston Bar Association © 2013 Forward Capacity Auction Mechanics Descending clock auction conducted in discrete rounds (held in February) During process, the price in the auction will be lowered and some resources will remove themselves from the auction Existing Resource Will clear if no action taken in auction (Existing Resources are price takers) and will receive a CSO for a one-year commitment period Will not clear if Existing Resource submits de-list bid (varied forms) New Resource Can offer into the auction to receive a CSO for a Capacity Commitment Period of 1-5 years, in one-year increments Will clear if New Resource offers at a price at or below the FCA clearing price Will not clear if New Resource offers at price above FCA clearing price Outcome of Forward Capacity Auction sets the initial Capacity Supply Obligation (CSO) for resources

14 Page 14 | 5/23/2013 Presentation to Boston Bar Association © 2013 What Does it Mean to be Selected? Every Resource that clears in an FCA receives a Capacity Supply Obligation and a price (or capacity payment) for that obligation. Capacity Payment: Monthly payments to Resources with a Capacity Supply Obligation However, with payment comes all sorts of obligations...

15 Page 15 | 5/23/2013 Presentation to Boston Bar Association © 2013 Obligations and Penalties in FCM Example of a Resources Obligation: Generating Capacity Resource that has a CSO must offer its obligated capacity into the Day- Ahead Energy Market and Real-Time Energy Market whenever and to the extent the resource is available Penalties Capacity payments reduced by: Penalties assessed when resources are not available in real-time during the most needed hours (Shortage Hours/Events) Peak Energy Rents (PER) PER $ = revenues obtained from reduction in capacity payments when energy prices are extremely high

16 Page 16 | 5/23/2013 Presentation to Boston Bar Association © 2013 New Rule for Next Forward Capacity Auction Minimum Offer Price Rule (MOPR) Intended to address price suppressing effect of Out-of- Market (OOM) resources Beginning with the next Forward Capacity Auction (FCA #8), New Resources will be assigned an Offer Review Trigger Price Offer Review Trigger Price (ORTP): Default floor on lowest price that a particular resource can offer into the auction

17 Page 17 | 5/23/2013 Presentation to Boston Bar Association © 2013 FCM Redesign Efforts Under Consideration Key Challenges: What are you paying for versus what you are getting? Scope and definition of obligations? New Englands increased reliance on natural gas Potential Solution: FCM Performance Incentives Pay-for-performance mechanism Over-performing resources would be paid a premium through revenue transfers from under-performing resources

18 Page 18 | 5/23/2013 Presentation to Boston Bar Association © 2013 New England Wholesale Capacity Market Is It Worth It and To Whom? Forward Capacity Market provides added revenue for generation and demand side resources But efforts, and therefore costs, of qualifying and clearing are not insignificant (i.e., MOPR makes clearing an FCA more difficult for new renewables, absent state request accepted by FERC) Penalties now add a downside risk Not required to participate in FCM to be in other markets, but once resource clears in one FCA, it is committed for the rest, absent a de-list

19 Page 19 | 5/23/2013 Presentation to Boston Bar Association © 2013 New England Wholesale Capacity Market Can You Finance It? Challenge of addressing Capacity Resources in a Financial Model Long-lived assets, but annual market redesign More frequent tweaking of Market Rules Revenues are provided on a year-to-year basis – no assurance of revenue long-term Consider as an additional payout for equity, not as cash flow for the bank

20 Page 20 | 5/23/2013 Presentation to Boston Bar Association © 2013 Questions?


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