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NYISO Capacity Market Buyer-Side Mitigation Impact

On February 20, the Federal Energy Regulatory Commission (FERC) approved four market rules in order to protect competition and electricity generation supply in NYISO.  The decision makes it more difficult for renewable energy resources, energy storage, and demand resource responses to have their place in the capacity market that serves New York City and surrounding areas (excluding Long Island).  Recently, the FERC set a minimum offer price rule (MOPR) in PJM’s capacity market as well.  The MOPR is a type of buyer-side market power mitigation that applies to PJM’s annual capacity auctions where electric power suppliers offer to be available to provide power for a one-year period in the future and receive a capacity payment for that availability regardless of whether they are needed to provide the energy.  This is all done to keep things at a level playing field and to ensure that prices are not unfairly driven down. 

What does this mean for NYISO?

NYISO’s current buyer-side mitigation (BSM) rules demand that all new resources in mitigated capacity zones be subject to a price floor when bidding into the capacity market.  The price floor is equal to 75 percent of the unit’s net cost of new entry (net CONE).  In order to regulate the capacity market, NYISO imposes rules to prevent marketers from artificially suppressing prices.  These bills were originally intended to prevent price manipulations because they would moderate the impacts of market power used by buyers in the capacity market, who also supply capacity and have an incentive to suppress market prices.  Adding a relatively small amount of cheap supply can significantly reduce market prices.  Since utilities may act as both buyers and sellers in capacity markets, a company that buys more capacity than it sells could try to manipulate prices by offering artificially low sales bids.  This could yield a profit by reducing market prices and subsequently saving the utility more money in its purchases of capacity than the amount lost through artificially low sales bids.

How will this impact consumers?

In 2019, New York passed the Climate Leadership and Community Protection Act (CLCPA), requiring the state to meet 70% of its energy needs from renewable resources by 2030, increasing to 100% by 2040.  The ruling also requires the procurement of 3,000 MW of energy storage resources by 2030, 6,000 MW of solar photovoltaic generation by 2025 and 9,000 MW of offshore wind generation by 2035.  These new policies shouldn’t apply to resources receiving state support because the purpose of these out-of-market payments is to encourage renewable energy, not to lower prices or manipulate the market.  Applying BSM to state-supported resources that contribute to New York’s wholesale capacity market creates obstacles when trying to adopt clean energy resources.  The FERC’s order will lead to an increase in charges that utilities pay to NYISO, ultimately landing in consumers’ utility bills.  Renewable energy resources, such as wind and solar, which are incentivized by many states will now be required to meet a minimum price in the capacity auction even though cost declines in their technologies often make them cheaper than fossil fuel alternatives.

Read: How Carbon Pricing Will Facilitate NYISO’s Clean Energy Transition

The FERC’s decision on BSM is also a hindrance to New York’s clean energy goals.  Renewable energy certificates (RECs) are generated for every MWh of clean energy generated in NY, with a $/MWh paid to the generator.  Applying BSM to state-supported resources will require these renewable resources to bid into NYISO’s capacity market at a price that assumes these “subsidies” (RECs) don’t occur.  Therefore, these resources will have to bid in at a price that is too high to be cleared by the market.  Meanwhile, fossil fuel plants’ price bids will clear and will replace renewable resources that would have cleared had they not received RECs.  These fossil fuel plants won’t be used consistently in producing energy day-to-day, if at all.  Instead, the fossil fuel plants would be paid high capacity prices by consumers just for existing.  New York may still be able to meet its clean energy goals, but the price will be much higher as consumers will pay for capacity that will likely rarely be used.

EnergyWatch’s cloud-based energy management platform, watchwire, helps you monitor your energy usage and manage uncertainty about pricing.  New legislation like this often causes changes (i.e. increases) to a company’s utility bills that need to be understood and properly budgeted. Watchwire tracks all billing line items so you can analyze year-over-year variances in pricing components such as capacity, create accurate energy budgets, and ultimately track budget variances. Reach out to EnergyWatch to learn more.