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Future New England forward capacity auction prices could decline further

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Future New England forward capacity auction prices could decline further

The clearing price in the ISO New England's Forward Capacity Auction 12, or FCA 12, slumped to the lowest level in five years and could drop further in future auctions due to the possible implementation of new market rules, analysts from ICF said during a March 6 webinar.

The Federal Energy Regulatory Commission is expected to rule on one such proposal this month, in time for the next forward capacity auction in February 2019. Known as the Competitive Auctions for Sponsored Policy Resources, or CASPR, the ISO-NE's proposal is aimed at creating a two-part power market capacity auction that would accommodate states' energy policies by allowing newer generation to replace aging assets that are willing to retire for something akin to a severance payment.

In a filing in early January, ISO-NE proposed to hold a forward capacity auction as it has in the past but immediately follow that with a so-called substitution auction. In the substitution auction, existing resources that clear the primary auction but are willing to permanently retire can offer to transfer over those capacity supply obligations to a new resource through a sealed-bid auction at the lowest price at which the plant is willing to leave the market.

If the CASPR proposal is implemented, New England forward capacity auction clearing prices could come under additional pressure, as existing marginal resources could bid lower and retain a capacity supply obligation, which would allow them to participate in the substitution auction, the ICF analysts said. Additionally, by replacing expensive marginal resources with state-sponsored resources, forward capacity market prices could drop further in future New England capacity auctions.

In the last few years, the ISO-NE forward capacity market has undergone changes, including pay-for-performance incentives, a sloped demand curve, a seven-year price lock-in for new resources and the ability to defer a capacity obligation for one year under extraordinary circumstances.

Finalized results of the FCA 12 show that the clearing price was $4.63/kW-month, down 67 cents, or 12.6%, on the year. The ICF analysts attributed the weaker clearing price in FCA 12 to lower net cost of new entry, a continued transition to a convex-shaped demand curve, increased energy efficiency and lower net installed capacity requirements.

The annual auction is held three years before each capacity commitment period to provide time for new resources to be developed. Resources clearing in the auction receive a monthly payment during the delivery year in exchange for their commitment to provide power or curtail demand when called upon by ISO-NE.