Evaluating the Capacity Market Consequences of Alternate Resource Portfolios

Analysis Group Principal Todd Schatzki and Vice President Chris Llop completed a study, developed as a part of the New England Independent System Operator's (ISO-NE) 2016 Economic Analysis, to help inform stakeholders about market outcomes under a range of potential future scenarios. These scenarios reflect different assumptions about the retirement of current resources and the development of new resources, including aggressive expansion of renewable resources such as expanded on-shore wind, off-shore wind, behind-the-meter solar, batteries, and imported power delivered through new transmission.

The study, "Capacity Market Impacts and Implications of Alternative Resource Expansion Scenarios," demonstrates the tradeoffs between competitive capacity market prices, the total quantity of resources supported (based on ISO-NE markets and other revenue sources), and the economic viability of existing resources. The analysis also shows that current market rules to mitigate the effects of out-of-market resource entry (often called Minimum Offer Price Rules) would only have limited impact on capacity market clearing prices.

The study's findings provide valuable information about the market implications of out-of-market revenues, including those arising from state policies. Across the US, the interaction between state policies and competitive wholesale markets has received increased attention as these policies – aimed at achieving policy objectives from mitigation of climate change to generation of new jobs – influence resource decisions. In regions with organized wholesale markets for electricity, tensions have emerged between these policies and the organized capacity markets designed to create price signals that incentivize the development of new resources when needed, prompting several regions to consider options to balance the effect of out-of-market resources on capacity market price formation with the goal of avoiding excess resource supplies. This study informs these deliberations.

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