FERC approves NYISO capacity market rule changes targeting 100% carbon-free grid

The Federal Energy Regulatory Commission approved a major New York ISO capacity market overhaul aimed at complying with a state law that requires a carbon-free power grid by 2040.

In doing so, a majority of commissioners concluded that the May 10 order restores the use of buyer-side mitigation, or BSM, rules — a major point of contention at FERC in recent years — to their original purpose of guarding against buyer-side market power.

"The outcome represents extensive collaboration and hard work with stakeholders to craft a solution that attracts investment in clean technologies while maintaining reliability of the electric system for consumers," Rich Dewey, President and CEO of the New York ISO, said in a statement.

The NYISO filed the proposed capacity market rule changes (ER22-772) with FERC in January to comply with New York's Climate Leadership and Consumer Protection Act of 2019. The law requires New York to get 70% of its electricity from renewable energy resources by 2030 and have a 100% carbon-free power grid by 2040. It also mandates 6 GW of additional solar capacity by 2025, 3 GW of energy storage by 2030, and 9 GW of offshore wind by 2035.

Held at intervals over the course of a year, the NYISO's capacity auctions are designed to ensure that enough electricity supply is available to meet demand on a spot, monthly and seasonal basis.

Buyer-side market power occurs when market participants who would benefit from cheaper prices submit artificially low offers.

The NYISO's previous capacity market construct, required in February 2020 by a Republican majority at FERC, applied BSM rules to new generation resources entering installed capacity auction zones covering New York City and the Lower Hudson Valley. Those rules effectively required resources receiving state subsidies to submit bids at an administratively set price floor, raising the prospect of state-subsidized resources failing to clear in NYISO's capacity auctions.

The NYISO's January filing proposed to exempt clean energy resources such as wind, solar, and battery storage from its BSM rules if they are needed to comply with New York's energy and climate legislation. The filing also featured several other key capacity market changes, including a revised method for calculating a generation resource's contribution to overall grid reliability.

Proposal addresses 'three significant harms'

FERC accepted the NYISO's filing effective May 11, finding that its proposal reflects New York's right under the Federal Power Act to plan its own generation mix. The commission further found that the proposal adequately protects against the exercise of buyer-side market power, acknowledging that in recent years, the agency has sought to use BSM rules to blunt the effect of state subsidies.

"In particular, we find that the NYISO's proposal reduces the risk, present under the current BSM rules, of at least three significant harms: over-procurement of capacity, inflated capacity market prices, and inefficient price signals from the capacity market," FERC said.

A Brattle Group analysis estimated that New York consumers would pay an additional $400 million to $900 million annually by 2030 under NYISO's existing BSM rules, the commission noted.

"By artificially raising capacity offers, the existing BSM rules can undermine the [installed capacity] market's ability to send accurate signals about supply and demand fundamentals in the NYISO, which are needed to guide efficient entry and exit," FERC said. "Taken together, these three potential harms associated with the current BSM rules may frustrate the basic purpose of the capacity market: ensuring resource adequacy at just and reasonable rates."

FERC said the grid operator and its market monitoring unit will continue to guard against the exercise of buyer-side market power "and take appropriate action as necessary."

New capacity accreditation framework

FERC also concluded that the NYISO's new capacity accreditation framework will more accurately reflect an individual generation resource's reliability contribution.

Under the new framework, the NYISO will recalculate capacity accreditation factors for all generation types annually to reflect how the state's grid reliability needs will change with the addition of more renewable energy resources.

A resource class may be assigned a different capacity accreditation factor based on local system needs within an individual capacity zone.

In approving the new construct, FERC rejected concerns raised by clean energy advocates who said the NYISO's proposal would "systematically discriminate" against resources with correlated output profiles.

"Resources with correlated output profiles add declining resource adequacy value to the system as their penetration increases, and this is a real and measurable reliability consequence of their correlated output," FERC said. "A resource that can only generate energy during certain hours of the day only provides a resource adequacy benefit to the extent that there is a risk of unserved load during those hours."

FERC conditioned its approval on the NYISO making an additional rate filing within 90 days from when it concludes a second round of stakeholder negotiations to reflect the new market framework's final implementation details.

Partial dissent, concurrences

FERC Commissioner James Danly attached a partial concurrence and dissent to the May 10 order, saying the NYISO's new market construct will inevitably depress capacity market prices.

"We cannot ignore the effects of state subsidies in order to favor certain categories of generators, even if those also happen to be the generators preferred by the states, and even if that state preference is enshrined in state law," Danly said. "When the inevitable price suppression caused by unmitigated state subsidies results in the premature retirement of too many conventional, dispatchable resources, reliability will be compromised."

Commissioner Mark Christie wrote a brief concurrence to highlight his support for the NYISO's marginal capacity accreditation framework. "The use of marginal valuations is more accurate, and thus superior, to a methodology that uses average valuations," Christie said.

Christie also reiterated that the NYISO's status as a single-state grid operator was crucial to winning his support for its broader proposal.

"Here the record shows — and this is critically important to my analysis — that no one has suggested that this single-state ISO's proposal to accommodate the resource decisions made by the New York legislature will harm consumers in other states," Christie said, citing an earlier concurrence in a separate NYISO transmission proceeding.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.