New resource retirement rules in effect for region’s capacity market
July 28 update to article originally posted April 14: Information added below on the materiality threshold accepted by the Federal Energy Regulatory Commission on July 27, plus a link added to FCM Participation Guide instructions on submitting retirement delist bids.
On April 12, the Federal Energy Regulatory Commission (FERC) accepted ISO New England’s proposed changes to the way power resources can exit the Forward Capacity Market. (Read the FERC order.) These ISO retirement reforms will improve the economic efficiency of the capacity market and further reduce the potential for market power issues. The changes are effective March 1 so they apply to the next Forward Capacity Auction (FCA) to be held February 2017.
The retirement reforms were prompted by concerns raised by the ISOs Internal Market Monitor (IMM) and External Market Monitor (EMM) about the use of nonprice retirement requests to exit the capacity market. These requests were observed to be economically inefficient and could be used to exercise market power. Additionally, the capacity auction timeline did not provide an early enough signal of the need for new resources to replace retirements.
Revised timeline allows more notice of potential retirements
As part of the retirement reforms, the retirement request window has been moved ahead of the deadline for new resources to submit a show of interest in the FCA. This will allow more time for new resources on the verge of entering the market to react to retirement information.
In addition, the earlier submission of retirement information is better aligned with the capacity zone determination process and allows more time for any needed regulatory review or remedial action related to a resource’s retirement.
“Priced” retirements have replaced nonprice retirement requests
Under the retirement reforms, a resource owner considering the retirement of a resource must now submit the price it believes it needs from the auction in order to keep the resource profitable and avoid retirement. This is done through the use of the new retirement delist bid option. (See the FCM Participation Guide for instructions on submitting retirement delist bids.)
The IMM will review this retirement bid price and adjust it, if necessary, to mitigate any potential exercise of market power that could occur through economic withholding if the initially submitted price is determined to be unjustified. (For example, an owner may submit a capacity price of $10.00/kW-month, but the IMM may determine that only $8.00/kW-month is justified.) However, a 10% materiality threshold is applied to balance the potential harm that would come from mitigating where there is no exercise of market power. Where the participant’s submitted bid price is at or below 10% of the IMM price, the IMM will accept the participant’s price. The final IMM-accepted prices are then filed with and reviewed by FERC. (For details on the materiality threshold, read the ISO’s May 12 compliance filing.)
After receiving its IMM determination, a resource owner has three options:
- No action—If the resource owner does nothing, its retirement bid—or the lower IMM price, if applicable—is entered in the auction. If the resource clears the auction at that price, it will receive a capacity supply obligation—a requirement to be available to satisfy the region’s electricity needs in three years’ time. If it does not clear, it must retire.
- Conditional retirement—This option lets an owner specify that it will take on a capacity supply obligation only if the market clears above its original retirement bid—not a lower IMM price (if applicable). Otherwise, the resource leaves the market and is retired. Instead of entering the original bid into the auction, however, the IMM price is used as a proxy to ensure that the clearing price is not increased above competitive levels.
- Unconditional retirement—This option allows a resource to retire without participation in the FCA to be sure of not receiving a capacity supply obligation. However, if the IMM determined the retirement to be uneconomic (i.e., the resource is expected to remain profitable if it were not retired) and the resource owner has a portfolio of resources, a portfolio benefits test will be applied. The test compares the estimated capacity revenue that the portfolio would earn with and without the retiring resource. If the retirement could cause an increase in FCA prices that may advantage the portfolio, a proxy bid at the IMM price is entered into the auction to protect the FCA clearing price from the exercise of market power.
The retirement reforms also introduce a second run of the FCA’s clearing algorithm (the process by which the FCA clears the market) in certain circumstances when a proxy bid is used. That’s because when a proxy bid is used, the FCA may conclude with the region procuring less capacity than it would otherwise. Rerunning the FCA clearing algorithm without the proxy bid gives the region a chance to procure additional capacity, if needed.