ISO New England has proposed a "substitution" auction, which includes transfer payments among capacity supplies, to address what it called a "collision course" between the capacity market and state's efforts to bring new capacity to the market through non-capacity market revenues

According to the ISO, "[T]he ISO’s proposal provides financial incentives for existing, high-cost capacity resources to transfer their capacity obligations to subsidized new resources and to permanently exit the capacity market. This exchange of obligations is coordinated by conducting the annual Forward Capacity Auction (FCA) using a two-stage, two-settlement process. In the first stage, the ISO clears the FCA as it does today, including application of the current Minimum Offer Price Rule (MOPR) to new capacity offers. This first (or ‘primary’) stage of the FCA uses the existing capacity demand curves, establishes the competitively-based capacity clearing price, and determines all resources’ initial capacity awards."

"In the ISO’s proposal, a new second stage would be added to the annual FCA. The second stage is designed to accommodate subsidized resources that participated in the primary FCA but did not clear (that is, did not acquire an obligation) due to the MOPR. Specifically, promptly after conducting the primary FCA, the ISO would administer a secondary market known as a substitution auction. In the substitution auction, existing capacity resources with retirement bids that retained capacity obligations in the primary FCA may then transfer their obligations (in their entirety) to subsidized new resources that did not clear in that first stage. The transferring resources must pay the subsidized new resources for accepting the capacity obligations, and the transferring existing resources must then permanently retire from the FCM," the ISO said

"Importantly, no MOPR is applied in the substitution auction. That enables new subsidized resources to offer at a lower price than in the primary FCA. Because of this, the substitution auction will generally produce a different (lower) clearing price than the primary FCA. That, in turn, enables existing capacity resources that retained capacity obligations in the primary FCA to shed (or ‘buy out’) their obligations for a lower cost than if they retained their obligations. In effect, existing resources that transfer their obligations in the substitution auction receive a net payment for voluntarily retiring – akin to a 'severance payment,'" the ISO said

"The quantity of subsidized new resources that enter (acquire obligations) through the substitution auction must be aligned with the quantity that exit (after transferring their obligations), to ensure that system reliability is preserved and that consumers are not adversely impacted. The substitution auction’s outcomes therefore do not affect the capacity payments to other existing resources that obtained capacity obligations, as their payment rate continues to be determined by the competitive capacity clearing price established in the primary FCA. This proposal thereby preserves competitively-based capacity prices for new and existing competitive resources that acquire capacity obligations in the FCM," the ISO said

"A key feature of this two-stage auction process is its settlement. Although the clearing prices and (some) resources’ capacity supply obligations may differ between the primary auction and the secondary (substitution) auction, each resource’s final payment would be determined by a familiar, well-established process – the two-settlement system for sequential auctions. Specifically, capacity payments and supply obligations would be combined across the two auction stages in a manner that is analogous to the two-settlement process in the ISO’s day-ahead and real-time energy markets. That is, all resources that clear in the primary FCA are credited at the first-stage FCA clearing price, and then each resource that sheds or acquires an obligation in the second-stage substitution auction is credited or charged for the change (or deviation) in its obligation at the substitution auction clearing price," the ISO said

"This proposed approach builds upon the existing FCM design and should be technically straightforward for the ISO to implement. That should enable it to be implementable in the near-term (namely, for FCA 13 in February 2019)," the ISO said

See the links below for more

ISO proposal overview

Slides

Tags:
Capacity Market   ISO New England   ISO-NE  

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