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Upcoming MISO capacity auction likely to see relatively weak prices

Marketanalysts expect results from the MidcontinentIndependent System Operator Inc.'s annual capacity auction coveringthe 2016-2017 period will show much weaker prices year over year. Results ofthe fourth annual Planning Resource Auction are slated to be released April 14.

"Expectationsfor Thursday's 2016/17 MISO capacity auction results are very low. We forecastprices in the $10-40/MW-day range for Illinois, which we believe is . Thiscompares to $150/MW-day in last year's auction," according to an April 13note from Morgan Stanley Research.

"Thedrivers of the expected decline in prices are a lower local procurementrequirement in Illinois, higher forward sales, and more restrictive offer capsimposed by FERC. Our forecasted range is derived by applying potentialsupply-demand balance changes to the 2015/16 offer curve. However, we note thatgiven the vertical demand curve construct the auction results are heavilyinfluenced by bidding behavior and are challenging to accurately predict, thuswe see a very wide range of possible outcomes and view the results as awildcard event," the analysts wrote.

Inlast year's auction,which covered the 2015-2016 planning year from June 1, 2015, to May 31, 2016,MISO Zone 4, which covers much of Illinois, cleared at $150.00/MW-day, upalmost 800% on the year and more than 4,000% higher than the eight neighboringzones, all of which cleared below $3.50/MW-day. Zones 1-3 and 5-7, whichrepresent MISO North and MISO Central, excluding Illinois, cleared at$3.48/MW-day. Zones 8-9, representing MISO South, cleared at $3.29/MW-day.

Thevoluntary auction is part of MISO's resource adequacy process, which alsoallows participants to self-supply to meet the required reserve margin. Theannual auction sets the price paid to power plant owners that agree to havetheir generators available when called upon at peak times. MISO's resource adequacyconstruct combines regional and local criteria to achieve a least-cost solutionfor the region as a whole and ensure each local zone has sufficient resourceswithin their boundaries to meet their own needs

Inthe previous two auctions, Zone 4 cleared at $16.75/MW-day and $1.05/MW-day for 2014/2015 and 2013/2014, respectively.Despite the strong prices in Illinois in the prior-year auction, much of theavailable capacity in the state did not clear and received no payment, theanalysts added.

Theanalysts also said that while various other regional capacity markets havetaken measures to improve the auction construct over the last few years, theMISO capacity market design still boasts some problems.

"Instead,the MISO capacity market is plagued by several issues, including a large amountof fully regulated vertically integrated utilities that are price takers($0/MW-day offers) and the use of a vertical demand curve that results in pricespikes during tight market conditions and low prices otherwise," accordingto the analyst note from Morgan Stanley Research.

MISOcapacity market reform initiativesare moving ahead, with MISO holding a series of meetings to discuss potentialdesign changes. Currently, the timeline calls for a formal filing with FERC onJuly 1, with a target to conduct the first auction under the new construct forthe 2019-2020 delivery year.

"We believe progress in MISO capacity market reformswill be more important to follow than Thursday's auction results, as they couldhave more meaningful positive implications for Dynegy. Currently, there is aproposal to shift deregulated MISO demand to a three year forward auctionconstruct using a sloped demand curve. Sloped demand curves are currently usedin PJM, New York and New England, and tie market pricing to Cost of New Entry(CONE) and the true value of capacity, resulting in clearing prices thatcorrelate to the amount of capacity actually available in the market (i.e.capacity prices will gradually increase as the market gets tighter toincentivize new entry before a shortfall is reached)," Morgan StanleyResearch wrote. "Conversely, the current vertical demand curve in MISO canresult in prolonged periods of low capacity prices when cleared capacityexceeds procurement targets, and brief periods of high prices driven byshortfall events or bidding strategy. A three year forward construct, insteadof the current 1-year, would also provide more clarity on future revenues forDynegy's MISO assets."

For moredetailed capacity market data, visit our CapacityMarket Pages.