Next ISO-NE capacity auction could see higher clearing price: Platts Analytics

New York — ISO New England's proposed capacity auction parameters including demand curve changes coupled with the retirement of the natural gas-fired Mystic units, put upward pressure on auction clearing prices, which cleared at record lows in Forward Capacity Auction 14, S&P Global Platts Analytics said.

The proposed Net Installed Capacity Requirement, which serves as the key parameter driving changes to the demand curve used in the auction, increased 780 MW from February's FCA 14, driven primarily by a forecast load increase, Platts Analytics said in a Sept. 9 research note.

In the first week of September, ISO-NE's Reliability Committee released updated ICR values for the upcoming FCA 15 for the 2024-2025 commitment period, which will be held in February 2021.

The installed capacity requirement is a measure of the installed resources projected to be needed to meet reliability standards given total forecasted load requirements for the New England Control Area and to maintain sufficient reserve capacity to meet reliability standards, according to the Federal Energy Regulatory Commission.

"We expect that the corresponding change in the auction demand curve, as well as the retirement of Mystic 8 & 9 (1,400 MW previously treated as price-takers) will result in clearing prices ranging from $2.80-3.60/kW-month, or an increase of $0.80-1.60 from the $2 clear in FCA 14," the Platts Analytics analysts said.

Exelon said in August that it will retire its 1,400-MW Mystic units 8 and 9 when a cost-of-service agreement spanning June 1, 2022, through May 31, 2024, expires.

The retirement of Mystic 8 & 9 will remove 1,400 MW of $0 supply while IS-ONE's Energy Security Improvements are likely to change the shape of the supply curve, Platts Analytics said.

Demand curve changes

A decline in resource and tie availability, as well as an increase in the load forecast from FCA 14, result in a 780-MW (or 2.5%) increase in the Net ICR.

ISO-NE attributes roughly 100 MW of the increase in peak load requirement to electric vehicle charging loads and while that figure is unlikely to change as it relates to the auction demand curve, it is high relative to Platts Analytics' expectations for EV charging demand during peak summer load in 2024.

"The increase in Net ICR to be used in FCA 15 results in an outward shift in the auction demand curve, which has inherently bullish implications for clearing prices," Platts Analytics said.

New England peak load under normal weather conditions during the 2024-2025 delivery period is forecast to be 29.3 GW and 31.4 GW under extreme weather conditions, according to ISO-NE.

Last year's peak power demand reached 24.0 GW on July 30 and ISO-NE's all-time peak demand was at 28.1 MW on Aug. 2, 2006.

Despite hosting two auctions with the Competitive Auctions for Sponsored Policy Resources market mechanism in place, just 54 MW of state-sponsored resources have cleared in the secondary auction.

CASPR first went into effect for the 2019 capacity market auction and was used for the second time in the February 2020 auction that procured future capacity at the lowest price in ISO-NE capacity market history, $2.00/kW-month.

Clearing prices have been too low for resources willing to retire to obtain a capacity supply obligation, which they would then pass on to supply in the secondary "substitution" auction, Platts Analytics said.

"While the expected upward move in clearing price is likely to enable some demand to participate in the substitution auction, we see opportunities for new generation clearing in the primary auction to be limited," the analysts said.

However, new gas-fired generation could clear with forward around-the-clock spark spreads around $13/MWh for the 2024-2025 commitment period and based on the fact that the 630-MW Killingly Energy Center cleared FCA 13 which had a $3.80/kW-month clearing price, according to the research note.