ISO-NE Proposes Capacity Market Reforms to Manage State-Subsidized Generators

On April 20, 2017, staff from the Northeast’s Independent System Operator, ISO New England Inc. (“ISO-NE”), presented a proposal to its ten-member Board of Directors on how to better incorporate state-subsidized new resources into ISO-NE’s Forward Capacity Market (“FCM”). The proposal contemplates a two-stage process whereby retiring resources that clear the annual Forward Capacity Auction (“FCA”) can transfer their capacity obligations to state-subsidized generators in exchange for payment and permanent retirement. If approved by the Board of Directors, stakeholder discussions could begin in May, with associated tariff revisions filed with FERC in December.

ISO-NE, along with the other organized markets in the Eastern interconnection, is  grappling with the impact of state-subsidized generators in energy and capacity markets. Motivated by concerns ranging from job-retention, environmental protection, and fuel diversity, states across the country are stepping-up efforts to financially support certain in-state energy generators. Critics argue that this financial support is problematic in organized energy and capacity markets because it allows uneconomic generators to bid into those markets, thereby distorting price signals and making unsubsidized merchant generators less competitive.

In response to these concerns, ISO-NE proposed a new two-stage FCA process in an attempt to both accommodate state-subsidized generators while minimizing negative economic impacts in the markets. Under the proposal, ISO-NE’s normal FCA process constitutes the first stage: generators bid into the capacity auction, market mitigation is imposed to limit uneconomic bids from subsidized generators, and a clearing price is established and awarded to the resources that cleared the auction. The second stage involves a new “substitution auction” through which resources that placed retirement bids and cleared the first auction can transfer those obligations to new, state-subsidized resources. Because the substitution auction would not impose market mitigation restrictions, the new subsidized resources could offer lower bids than in the first-stage auction, which would allow retiring resources to essentially “buy-out” their obligations at a lower rate to the new generators—what the proposal likens to a “severance payment.” If no retirement offers clear the first auction, subsidized resources would not be eligible to obtain capacity obligations for that year, but would be eligible to participate in following annual auctions.

ISO-NE’s proposal comes at a time when generation subsidies are being debated across all organized markets and are the focus of a two-day FERC technical conference in May.

The proposal’s highlights can be found here. Depending on feedback and approval from the ISO-NE Board of Directors, public discussions on the proposal could begin with ISO-NE stakeholders next month, with associated tariff revisions submitted to FERC in December.

A version of this blog post first appeared on the Washington Energy Report, hosted by Troutman Sanders, LLP.

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