Results for the Midcontinent ISO's fifth annual Planning Resource Auction are likely to show generally softer clearing prices year over year, although several constrained regions could break out higher, according to analysts from UBS Securities LLC.
For the 2017-2018 planning year auction in the Midwest, which covers the period from June 1, 2017, to May 31, 2018, UBS is calling for substantially lower RTO-wide pricing of about $10/MW-day to $20/MW-day for unconstrained regions. However, clearing prices could come in firm to higher from last year in some constrained areas, including Zones 4 (Illinois) and 7 (Michigan), where prices could run as high as $100/MW-day.
Results of MISO's auction for the 2016-2017 planning year detailed a better-than-50% drop in Zone 4 prices but a massive year-over-year increase of almost 2,000% for prices in Zones 2-3 and 5-7. In 2016, Zone 1 cleared at $19.72/MW-day, Zones 2-7 cleared at $72.00/MW-day and Zones 8-10, including MISO South, cleared at $2.99/MW-day.
In parameters released March 21 by MISO, regional demand is expected to be 800 MW lower year over year, with supply projected to rise by 300 MW.
While the parameters looked bearish, according to UBS equities analyst Julien Dumoulin-Smith, a series of market changes could inject some bullishness into regional pricing, particularly in Zone 4. The biggest change is that export units that are committed into PJM as pseudo-tied units are now being accounted for in the Local Clearing Requirement, or LCR.
Pseudo-ties allow for "the real-time transfer of control of a generating unit or load from the 'native' [balancing authority] in which that unit or load is physically located to an 'attaining' [balancing authority] in a different location," according to MISO.
"While parameters could still change, the most glaring [year on year] difference is the increase in the Local Clearing Requirement (LCR) for Illinois Zone 4 region due to changes in how exports to PJM are treated," Dumoulin-Smith wrote in a recent research note to clients. "We now see a potential for an increased pricing point [year on year] at max $100/MW-day vs. $72/MW-day [last year], but caution that flattish is a safer assumption given potential increase in Demand Response participating in the auction as well as MISO-South imports into Illinois; we note a $70-100/MW-day range is also consistent with bilateral pricing trends noted of late."
The voluntary auction is part of MISO's resource adequacy process, which also allows participants to self-supply to meet the required reserve margin. The annual auction sets the price paid to power plant owners that agree to have their generators available when called upon at peak times. MISO's resource adequacy construct combines regional and local criteria to achieve a least-cost solution for the region as a whole and ensure each local zone has sufficient resources within their boundaries to meet their own needs.
In the 2016 auction, less supply in the MISO Midwest region due to retirements and capacity exports contributed to higher clearing prices in several zones. Last year's auction results were also likely affected by a series of auction changes mandated by an order from FERC.
The most notable of the changes affected the determination of the initial offer reference price level applicable in the auction, which is the basis for a general offer price cap. Previously, the reference level was calculated as the opportunity cost of forgoing the value of exporting capacity to neighboring regions. The order reduced the initial reference level to $0/MW-day. As a result, any resource desiring to offer above the conduct threshold of 10% of Cost of New Entry had to obtain approval from the market monitor to support the offer.
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