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Houston — Mandatory power capacity markets in the US Northeast region are at an inflection point, with federal regulators about to issue an order regarding market rule changes for PJM Interconnection that could decrease prices. ISO New England also is set to run its second auction under new rules in February, and the New York Independent System Operator's capacity market construct is in question heading into the new year.

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Commodities 2020 | S&P Global Platts

Capacity markets, which pay generators for maintaining available capacity that can be delivered at a future date, were designed when nuclear power, coal- and natural gas-fired generation resources played a larger role in regional power generation fuel mixes.

However, states have begun supporting renewable energy resources through renewable portfolio standards and other mechanisms. The downward impact on power prices from renewables growth, the rapid growth of natural gas production and gas-fired generation, and flat to declining utility load growth also have forced states to start providing out-of-market subsidies to financially challenged baseload nuclear plants.

The increased participation of these subsidized resources in competitive capacity market auctions have led power grid operators to adjust market rules and designs in an effort to level the playing field between resources that receive state support and those that do not.

"Expectations for flat to declining load growth fundamentally point to lower capacity clearing prices," Kieran Kemmerer, power market analyst with S&P Global Platts Analytics, said.

In ISO-NE and PJM, updates to the respective demand curves alone offer downside as much as $1.35/kW-m in ISO-NE's upcoming FCA 14 and $20/MW-d in PJM's upcoming auction for the 2022/23 Delivery Year, and changes to auction rules could impact clearing prices further," Kemmerer said.

PJM

PJM, which is the largest power market in the US, serving 65 million people in all or parts of 13 states and the District of Columbia, is in the midst of a major capacity market redesign.

The Federal Energy Regulatory Commission issued an order in June 2018 that found PJM's existing capacity market tariff to be unjust and unreasonable, setting off a major rule-adjustment proceeding (EL18-178). FERC said the capacity market pricing model had become "untenably threatened by out-of-market payments provided or required by certain states."

PJM submitted a proposal to FERC in October 2018 upon which the commission is expected to rule imminently. PJM cancelled its 2019 capacity market auction as it awaits FERC's ruling.

S&P Global Platts Analytics estimates that PJM's proposed changes filed with FERC, along with capacity market demand curve changes could result in a $10-20/MW-day decrease in capacity clearing prices.

In August, the PJM Load Analysis Committee released proposed updates to long-term load forecasts, suggesting compound annual declines in energy of 0.12% over a 15-year forecast.

"PJM's forecast for declining loads comes at a time when large amounts of subsidized resources are being considered to be treated as price-takers in the capacity auction under the Resource Carve Out proposal. We maintain that this treatment alone could result in a $10-20/MW-day decrease in RTO clearing prices, with further declines possible if more extra-marginal resources elect this treatment," the analysts said in a research note.

NYISO

The future of the NYISO's short-term, monthly capacity market structure is up in the air as state regulators consider whether it is the best mechanism to help meet ambitious greenhouse gas emissions reduction targets and other goals.

The New York Public Service Commission initiated a review of state's resource adequacy program in August, largely in response to Governor Andrew Cuomo signing the US' most aggressive climate change program a month earlier.

The state's landmark Green New Deal, officially called the Climate Leadership and Community Protection Act, calls for a carbon-free power system by 2040 and codifies the goal of achieving net-zero greenhouse gas emissions by 2050.

The state-owned New York Power Authority, which owns roughly 25% of the state's generation capacity sees two main paths forward.

Largely maintaining the existing capacity market system with modifications needed to achieve the public policy goals or a state-administered integrated resource plan approach.

Industry sources have suggested the latter approach would be controversial and likely involve protracted litigation, thus making existing capacity market enhancements a more likely option.

The NYPSC is accepting reply comments in the proceeding by January 10, 2020. The next steps are currently under review and a notice will be issued when a decision is made, New York Department of Public Service spokesman John Chirlin said in an email.

ISO NEW ENGLAND

New England's power grid operator is gearing up for its second capacity auction under new rules designed to reconcile the participation of subsidized resources alongside unsubsidized resources, known as Capacity Auction with Sponsored Resources.

ISO-NE also recently filed with federal regulators proposed net Installed Capacity Requirement and other changes for its 14th Forward Capacity Auction to be held in February 2020 that could reduce capacity clearing prices.

The ICR is a measure of the installed resources projected to be needed to meet reliability standards given total forecasted load requirements for the New England Control Area and to maintain sufficient reserve capacity to meet reliability standards, according to FERC.

The net ICR used in FCA 13 was 33,750 MW and that auction closed at a clearing price of $3.80/kW-month, compared to $4.63/kW-month in the previous year's auction, an 18% decline, which was the lowest clearing price in six years.

Kieran Kemmerer, power market analyst with S&P Global Platts Analytics, estimated the downward revision to the net ICR could push capacity clearing prices in FCA 14 down to around $3/kW-month.

Commodities 2020 | S&P Global Platts

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

-- Edited by Rocco Canonica, newsdesk@spglobal.com