ISO-NE capacity auction yields record low price

The latest annual auction for the New England electric forward capacity market cleared at the record low price of $2.00 per kilowatt-month, for commitments to provide capacity in the future capacity year from June 1, 2023 to May 31, 2024.

Regional transmission organization ISO New England Inc. operates the New England region's wholesale electricity markets, including separate markets for electric energy and capacity products. In the energy market, resources compete on a daily basis to provide power and are paid for the electricity they produce. In addition to this energy market, ISO-NE operates a Forward Capacity Market to procure sufficient resources to meet the future demand for electricity. The grid operator holds annual Forward Capacity Auctions, three years in advance of a future operating period, in which generators and other resources compete to obtain a commitment to supply capacity in exchange for a market-priced capacity payment. Under recently adopted "Pay for Performance" market rules, if a resource has a capacity supply obligation but fails to perform during a shortage event, the resource must refund part of its capacity payment for payment to resources that over-performed during the shortage event.

On February 3, 2020, ISO-NE held its 14th Forward Capacity Auction. Through FCA 14, the grid operator procured 33,956 megawatts of capacity for the 2023-2024 capacity commitment period, including 28,978 megawatts of in-region generation, 3,919 megawatts of demand resources, and 1,059 megawatts of imports into New England from New York, Quebec, and New Brunswick. This procurement results in 1,466 megawatts of surplus supply over the net Installed Capacity Requirement, under a "sloped demand curve" auction rule that allows New England to acquire slightly more or less than its capacity target depending on market prices.

According to ISO-NE, the primary auction clearing price was $2.00 per kilowatt-month for all regional resources and imports. ISO-NE vice president for system planning Bob Ethier described the results as "record low prices". As recently as FCA #8 held in 2015, capacity was priced as high as $15 for new resources and $7.025 for existing resources, but capacity auction clearing prices have tended to decline since then, reaching $4.63 for FCA #12 and $3.80 for last year's FCA #13. Factors that may have driven down the clearing price include a reduction in demand relative to the previous auction, in the form of a reduced Installed Capacity Requirement.

ISO-NE projects the estimated cost of the capacity market in 2023-2024 to be about $980 million, down from its $1.6 billion estimate for the 2022-2023 capacity commitment period. Lower capacity market clearing prices will directly result in reduced future capacity market revenues for participating generators. This could place increased pressure on generators who have historically relied on capacity revenues, such as peaking power plants that seldom run. In theory, lower capacity market prices could result in lower electricity costs for consumers, unless generators demand higher prices in the energy market (or elsewhere, such as for renewable attributes) to make up for reduced capacity market revenues.