What Is a Capacity Market?
Capacity markets provide economic incentives to attract investment in new and existing supply-side and demand-side capacity resources in New England as needed to maintain bulk power system reliability requirements.
Forward Capacity Market
Culminating four years of development and staged implementation, ISO New England launched the final phase of the region's Forward Capacity Market (FCM) on June 1, 2010. The market provides economic incentives to attract investment in new and existing capacity resources in New England. This helps to ensure that sufficient capacity is available for reliable operation of the bulk power grid.
Developed through industry and regulatory consensus, the FCM contains an auction structure through which capacity resources compete to obtain a market-priced capacity payment, in exchange for a commitment to be available in the years ahead to meet the region's electricity needs. These resources may provide decreased electricity use through demand rResources or supply from generating resources. FCM includes several innovative elements.
Auction: ISO New England projects the reliability needs of the power system roughly three years in advance and holds an annual auction for power resources, including new and existing power plants and demand resources. In order to participate in the competitive auction, capacity resources must first complete a qualification process demonstrating their ability to provide capacity for their proposed megawatt amount and location. The first auction was held in February 2008 for the capacity needed in 2010.
Pay-for-Performance: This mechanism reduces payments to those resources that are not available during periods of high demand for electricity. The intent of this process is to provide a strong incentive for resources to perform when they are most needed.
Minimizing Risk: A key element in FCM is a provision called the "Peak Energy Rent" deduction. The provision reduces capacity market payments to power system resources when prices in the energy market go above a certain level. This usually occurs when electricity demand is high, or low-cost power plants are out of service, and the ISO must turn to expensive resources to meet the region's electricity demand. The Peak Energy Rent deduction helps to ensure a competitive energy market by providing suppliers with a strong incentive to avoid unusually high energy prices. In addition, the Peak Energy Rent deduction provides wholesale buyers with a form of insurance against high energy bills: When prices in the energy market are unusually high, the monthly capacity payment each producer receives is lowered. That helps to stabilize wholesale electric bills from month to month.
Reducing energy use: Another innovative feature of FCM is its acceptance of demand resources (energy efficiency, load management, and distributed generation) as capacity, which enables these resources to compete with generating resources in the auction. Allowing these demand resources into the market provides new incentives to move forward on projects and also encourages conservation measures. ISO New England has already seen a significant increase in demand resources as a result of FCM.