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Analysts expect price drop in upcoming ISO New England capacity auction

Analysts expect that the clearing price in the upcoming 11th annual ISO New England Inc. capacity auction will come in well below the prior year's price, as new generating capacity continues to replace recently retired and retiring generators.

In a Jan. 25 report, analysts with UBS Securities LLC said they have lowered their clearing price expectation for the upcoming forward capacity auction to $5.50/kW-month. The auction, which covers the delivery year 2020/2021, will begin Feb. 6, with results to be issued by Feb. 9.

In February 2016, the RTO's 10th Forward Capacity Auction, or FCA 10, which covered the capacity commitment period June 1, 2019, through May 31, 2020, cleared after four rounds of competitive bidding at a price of $7.03/kW-month, or about $230.50/MW-day. The $7.03/kW-month clearing price was more down more than 25% from the $9.55/kW-month price for most resources clearing in FCA 9.

"We are updating our forward capacity auction (FCA) analysis for upcoming FCA 11, lowering expectations further to the bottom end of our prior range, and down from prior expectations of flat at $7.03/kW-[month], with this lower price effectively driven by continued new plant clears," UBS analyst Julien Dumoulin-Smith said.

The FCA 10 acquired 31,371 MW of generation, including 1,459 MW of new generation, which includes three large, dual-fuel power plants totaling 1,300 MW proposed for Southeast Massachusetts, Rhode Island and Connecticut.

The new plants, which are expected to help mitigate recent or pending retirements of more than 4,200 MW of coal, oil and nuclear generation, include 484 MW at PSEG Power LLC's Bridgeport Harbor 6 in Bridgeport, Conn.; 333 MW at NRG Energy Inc.'s Canal 3 in Sandwich, Mass.; and 485 MW at Invenergy LLC's Clear River Energy Center in Burrillville, R.I., which ISO New England refers to as the Burrillville Energy Center.

"We see the inclusion of the Burrillville plant as largely offsetting any hopes for higher prices this year, with this plant likely the decisive 'clearing' asset with an additional 500 MW [combined cycle gas turbine] unit still poised to clear (after clearing the first 500 MWs last year). Further, with the 'full' capacity of the plant having seemingly failed to clear last year, the full 500 MWs of the initial unit is likely to fill in this year," UBS said. "We suspect a similar dynamic could emerge in which this second unit (or any other of several developer proposals for new plants) is the winning bidder at a price modestly higher than 5.50, but still lower than last year's price (say in the $6/kW-month range); bottom line, given just how small the New England market is, bids from a single plant could well dictate price trends."

"The new demand-side curve adds an interesting 'kink' in the auction process, muting prospects for upside off this latest curve. Further, the auction implements for the first time a regional demand cure, albeit to limited real effect. Broadly, neither of these have a meaningful impact with prices set to clear low — and largely at the same price across the footprint," the UBS report noted.