ISO-NE players split over 2-part capacity auction proposal
ISO-NE unveiled its two-part capacity auction in April 2017 after a series of stakeholder meetings over how to better integrate state energy policies into its wholesale market construct.
The concern is that resources supported by state energy policies — like renewable energy mandates or nuclear credits — will push down capacity market prices as they proliferate, forcing unsubsidized resources out of the market and potentially threatening reliability.
To fix that, ISO-NE proposes to split its capacity markets in two. The first round of capacity auction would work much like the current one, with resources subject to existing minimum pricing rules and other obligations.
Then, in a second auction, retiring resources that earn capacity supply obligations in the capacity market could transfer those obligations to new, subisidized resources that do not have the obligation. The existing resource — like a coal plant — would then retire and pay the subsidized resource — such as wind or solar — for meeting the obligation.
The price for those resources would be determined by this “substitution auction” in a manner similar to the settlement process that occurs today between the real-time and day-ahead energy markets.
“Because no [minimum pricing rule] is applied in the substitution auction, sponsored new resources seeking [capacity supply obligations] can offer at, and the substitution auction will tend to clear at, a lower price than the primary auction,” ISO-NE wrote in its proposal at FERC. “Accordingly, existing resources that clear as demand in the substitution auction are generally able to shed their obligations at a lower price than they receive in the primary auction.”