Prompt Capacity

Reforms begin in the capacity markets

Judi Dench sings Sondheim’s “Send in the Clowns.” A song about timing.

RTO Auctions and Timing

Most RTO auctions are designed to be simple, at least on a theoretical basis.

Energy auctions run frequently. Energy auctions guide real-time dispatch of power plants. The Merit Order Queue is supposed to ensure that the less expensive plants are dispatched first. In ISO-NE, energy auctions run every five minutes.

Capacity auctions run infrequently. These auctions pay for capacity….that is, they pay for the ability of a power plant to come online. Hopefully, the capacity auctions ensure that dispatchers have enough power plant capacity available for the energy auctions. In ISO-NE, capacity auctions run three years ahead of the energy auctions.

If a power plant is chosen in the capacity auction, it is assured an income stream in the future, whether the plant is dispatched frequently or infrequently. Also, if someone wants to build a power plant, and the not-yet-constructed power plant is chosen for the capacity auction, the owners of that (planned) plant can go to their bankers and show that they will have an income stream for the plant.

Of course, nothing is simple on the grid. Some RTOs don’t have capacity auctions (like ERCOT). Others have seasonal capacity auctions (like MISO). Others constantly fiddle with their capacity auctions: you can read my posts on the PJM auctions here, here, and here.

Capacity Payments

So many questions! What if a power plant is paid for capacity but can’t or won’t come online when the grid needs it? This situation has led to Pay for Performance plans, in which the “bad” power plant gives some of its capacity payments to the “good” power plants that came online when called. And yes, this gets complicated. I have an example in Shorting the Grid (page 115 ff.) ISO-NE describes its stop-loss mechanism here.

And what about different types of power plants? Capacity payments generally are paid per MW-installed of the plant. But should a wind turbine (which is only online when the wind blows) receive the same per-MW payment as a nuclear plant which is online over 90% of the time? Not really.

Therefore, different types of power plants have different “capacity accreditations.” Plants are assigned a capacity credit (or capacity value) as a percent of their installed capacity. This capacity credit is supposed to reflect the plant’s useful availability to the grid. Accreditation calculations are different for every RTO that has capacity auctions. This is an immense swamp. Once you enter, it’s hard to leave.

ELCC

The granddaddy of many accreditation algorithms is ELCC, or Effective Load Carrying Capacity.

For example, in many areas, the wind blows more steadily at night, but that is when demand on the grid is lowest. Therefore, the capacity accreditation for wind is usually less that the capacity factor, because wind at night does not necessarily help the grid meet its obligations. The Wikipedia article on Capacity Credit is excellent.

Capacity Made Simple (Oversimplified)

Capacity payments that are derived from an ELCC scheme have two main parts:

1) Capacity factor: the percentage of time the electricity is available

2) Timing: How does electricity availability match the needs of the grid.

The first factor is determined by the power plant configuration. The second factor is more about the grid. In practice, both factors depend on the season and on modeling.

Capacity Made Complicated

The ELCC scheme is based on the power plant and its interactions with the grid. But there’s another issue: when do the auctions run? “Prompt Capacity,” the subject of this post, is about scheduling the auctions. As ISO-Newswire described the situation: Capacity Market Reforms Take Shape as Stakeholder Discussions Continue.

ISO-NE used to hold capacity auctions three years in advance. This is not the usual auction. The plant doesn’t have to exist at the time that the gavel came down. Theoretically, the plant can be built in the three years between the auction and the beginning of the CSO.

Auctions that are three years in advance led to many problems. Would the company build the power plant in time for it to be ready for use? If the power plant is already built, will it be well maintained? Will it be ready to run when called upon?

A lot can happen in three years.

Capacity Made Realistic

This summer, Christopher Nolan of ISO-NE wrote a succinct slide deck on the advantages of a prompt market compared to the old three-year-in-advance market.

With the new reforms, capacity payment will be seasonal and prompt. Payments will be awarded shortly before the season begins. Payments will only go to plants which are already built. There will be no payments for plants that a company hopes to build within a few years. Capacity payments (seasonal) will be designed on the expectation of more wind in winter and less solar in winter. They will also account for the fact that natural gas is sometimes not available in winter.

In other words, seasonal and prompt means reality-based. I like that.

Nolan makes many excellent points. With the new system:

1) capacity must be commercial before acquiring a Capacity Supply Obligation (CSO). Under most circumstances, a power plant without a CSO will not get a capacity payment.

2) Non-Commercial Capacity (NCC) will be prohibited from acquiring a capacity supply obligation. Therefore, such capacity won’t be required to make a Forward Capacity Market deposit.

3) “NCC Trading FA” (a way for non-commercial power plants to hedge their auction risk) won’t be necessary.

There are many more advantages, but you can easily read his slide deck for yourself. Assessment of capacity will be much easier for the RTO. If you can’t get a capacity payment until your plant is commercial, then nobody needs to be concerned with your attempts to raise capital. Simplicity is good. It is rare in the RTO world.

(Since my husband and I are in the middle of selling our Vermont house, I see prompt capacity as parallel to a cash offer to buy a house. A cash offer is not dependent on the buyer qualifying for a loan. To use real estate terms, Prompt Capacity has fewer Contingencies.)

Prompt capacity will be a great simplification for the ISO-NE capacity auctions. I mostly applaud it.

Mostly Applaud?

So far, I have shared the facts. Now, I share my opinion.

This reform is overdue. Very overdue. In my opinion, the capacity auctions have not increased the reliability of the New England grid. Instead, they have provided endless opportunities for legal wrangling, expensive reports, and expensive oversight.

Why do I “mostly” applaud the new ISO-NE schedule for capacity payments? Well, I have often said that the RTO auction system is a mess, and the RTOs will eventually return to some kind of guaranteed payment methodology.

Piecemeal moves, such as this one, have problems. They leave blank spaces for new rules and old lawyers.

In short, I mostly applaud the move to prompt capacity. This is the right direction for the grid. But I’m not willing to break out the champagne just yet.