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NYISO market monitor proposes changes to operating reserve valuation, capacity market pricing

Highlights

Compensation needed for reserves that can reduce congestion

Capacity pricing would be more granular, zones increased

New York — Energy and capacity market improvements that would improve operating reserve valuation and price power generation capacity based on marginal reliability value have been recommended by the New York Independent System Operator's market monitoring unit, an executive said Tuesday.

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The energy and ancillary services market recommendations packaged together in Potomac Economics' 2018 State of the Market Report for NYISO's Markets are "the most important," with the capacity market recommendations coming second, Pallas LeeVanSchaick, vice president at Potomac, said in a phone call Tuesday.

Potomac recommended a package of improvements to the energy and ancillary services markets that include compensating resources for maintaining operating reserves that can reduce congestion.

Efficiently incentivizing investment in peaking resources "has become particularly important" since the Department of Environmental Conservation's proposed "peaker rule could lead a large share of peakers in New York City to retire," the report said.

However, power generation capacity prices in 2018 were less than half of the capacity revenues needed to cover the proxy units' entry costs, the market monitor found. While this is largely due to ample generation capacity that currently exists, the peaker rule and retirement of the roughly 2,000-MW Indian Point nuclear plant in the early 2020's will decrease that capacity.

"Over 3,000 MW of downstate generation is expected to retire between 2023 and 2025 as a result of new emissions regulations aimed at peaking units," Matthew Schwall, director of market policy and regulatory affairs at trade group Independent Power Producers of New York, said in an email.

"A portion of those units are critical to maintaining reliability, which means repowering or new entry is necessary. In order to attract investment, which is also needed for meeting public policy goals, the market monitor has recommended, and the NYISO is developing, smart market enhancements that will increase the value of energy and ancillary services provided by generators with critical and efficient characteristics, thereby shifting reliance from capacity revenues," Schwall said.

In addition to the E&AS recommendations, Potomac has proposed Locational Marginal Pricing of Capacity, or C-LMP, that would eliminate the existing capacity zones and "clear the capacity market with an auction engine that will include the planning criteria and constraints," according to the report.

The existing capacity zones would be eliminated, but replaced with individual pricing areas that could be smaller than the current zones, LeeVanSchaick explained. "It would be more granular than the way it's done now, with the number of zones going from four to over 10," he said.

Capacity prices would be determined by the marginal reliability value of the capacity in each area, LeeVanSchaick said.

2018 MARKET DYNAMICS

"In recent years, fossil fuel price fluctuations have been the primary driver of changes in wholesale energy prices," according to the report which the grid operator posted to its website Monday.

These observed price fluctuations are "expected in a competitive market because most of the marginal costs of thermal generators are fuel costs," Potomac said.

Average power prices increased 23% to 36% across New York State from 2017 to 2018, primarily driven by increased load levels and higher 2018 natural gas prices.

All-in power prices "increased significantly in 2018 from the historically low levels seen in 2017," ranging from $32/MWh in the North Zone to $64/MWh in Long Island. Most of the year-over-year price increase resulted from higher gas prices, especially during the severe cold weather in the first half of January 2018, according to the report.

But higher summer load conditions further contributed to higher 2018 power prices. In 2018, both peak load and average load levels were "consistent with levels witnessed in recent years except 2017," which was "unusually mild," the report noted.

The annual peak load level was slightly below 32 GW, rising sharply by 7% from 2017 "because of hotter summer weather," Potomac said.

Energy prices accounted for 69% to 86% of the all-in power price in each region, with capacity costs being the second largest component, accounting for nearly all of the remaining wholesale market costs, according to the report.

-- Jared Anderson, jared.anderson@spglobal.com

-- Edited by Gail Roberts, newsdesk@spglobal.com