US power capacity markets in flux amid energy transition toward renewables


Power grid operators, market participants and stakeholders in the eastern US are in the process of updating capacity market designs to account for the growing share of renewable energy entering these markets. Key issues include fairly valuing the capacity each resource brings to the system, and how that capacity contributes to reliability.

The New England and New York Independent System Operators and PJM Interconnection operate capacity markets that collectively pay billions of dollars to power generators for committing to supply power at a future date. ISO-NE and PJM run three-year forward capacity markets and the NYISO administers a short-term capacity market.

These markets were initially designed when the resource mix consisted mostly of thermal generation resources like coal, natural gas, and nuclear power, with some hydropower on the renewable energy side. However, state-level policies designed to address climate change by reducing greenhouse gas emissions largely by using wind and solar power, along with corporate-level focus on ESG and decarbonization are changing the power generation resource mix.

Thermal and hydropower resources have higher capacity factors — the ratio of power produced by a generating unit for a given period compared with the power that could be produced at full output during the same period — than intermittent renewables.

“We have a changing resource mix so making an apples-to-apples capacity comparison that is fair among these diverse resources is an important issue,” Jason Burwen, vice president of energy storage at the trade group American Clean Power Association, told S&P Global Commodity Insights.

“The second part of the conversation is that we are having real-world instances of extreme weather impacting similar resource types resulting in bad outcomes,” Burwen said.

Making these apples-to-apples capacity comparisons in the midst of a changing supply mix combined with extreme weather events all come together in a conversation about how to evaluate resource adequacy within this new environment, he said.

New approaches

This energy toward much greater volumes of transitions has prompted power system operators to implement new approaches for measuring the capacity value of renewable energy resources using Effective Load Carrying Capability methodologies. PJM is implementing the ELCC approach in its capacity market, the NYISO is taking a similar approach and ISO-NE has been studying it.

ELCC is a dynamic method for measuring a resources’ contribution to reliably serving load.

Understandably, fairly implementing new market rules using ELCC has been messy in some cases.

For example, a group of PJM power generators has called renewable energy capacity resource deliverability into question, saying the volumes of capacity cleared in previouss have been overstated, and setting up a disagreement over who should pay for transmission upgrades going forward.

This latest PJM capacity market controversy surrounds whether wind and solar resources have been acquiring capacity obligations greater than what they can deliver. Accredited wind and solar power MWs “supported by non-deliverable auction energy” have been included in and cleared in previous capacity markets and were included in the supply stack for the 2023-2024 auction, the PJM Power Providers Group, or P3, said in a letter to PJM’s board of managers.

The group suggested that PJM should remove these wind and solar resources from the June capacity auction. P3 lists a dozen members on its website, including Calpine, Vista, Tenaska, NRG, LS Power and others.

However, a group of stakeholders representing renewable energy interests responded with its own letter to the PJM board that argued the core of P3’s complaint is that PJM considers intermittent resources’ full historical output when determining their capacity value, with P3 asserting this longstanding practice somehow violates PJM’s tariff and raises imminent reliability risks.

PJM’s management board responded to both stakeholder groups in a March letter that said PJM has reviewed P3’s claims regarding implementation of the ELCC methodology and accreditation of renewable resources and determined that its ELCC implementation “is compliant with the Reliability Assurance Agreement.”

The debate over renewable energy resource deliverability continues, but renewable energy resources were not removed from the June capacity auction. The debate is shifting focus toward transmission upgrades needed to increase deliverability.

The New York grid operator recently had an ELCC proposal approved by the Federal Energy Regulatory Commission. In a compliance filing, the NYISO defended its approach to determining the marginal reliability contributions of capacity resources by using the ELCC methodology.

Part of the stakeholder discussion around capacity market rule changes centered on whether a marginal or an average ELCC approach should be adopted. PJM has chosen to use the average approach, while the NYISO has proposed the marginal approach.

Reliability concerns

The latest capacity market twist came in New England where the American Clean Power Association and another clean energy trade group have asked FERC to address ISO-NE market rules that allegedly favor gas-fired generation resources.

ISO-NE warned in December 2021 that natural gas pipeline constraints could threaten the six-state grid operator’s power system during extended periods of extremely cold weather.

Nearly half of all power generation resources within ISO-NE’s footprint use gas as their primary fuel, and gas-fired power plants currently generate almost half of all electricity consumed annually in the region.

Graph: ISO NE power supply

New England also heavily relies on gas supplies for home heating, with local gas distribution companies holding firm long-term delivery contracts that give them priority over power generators when pipeline capacity is limited.

The concern is that gas-fired capacity resources — unlike other resource types, like nuclear or hydroelectric generators — are not required to show they have access to sufficient fuel supplies when they receive a real-time dispatch order from ISO-NE, according to the March complaint.

“ISO-NE assumes that fuel is always available to a natural gas resource, including a gas-only resource that is actually at significant risk from natural gas and pipeline availability limitations during cold weather winter conditions,” the groups told FERC.

An ISO-NE spokesperson said stakeholders are already working on revisions to the grid operator’s capacity accreditation methodology. ISO-NE anticipates filing proposed changes with FERC ahead of its 19th forward capacity auction, scheduled for January 2025 that covers the 2028-2029 commitment period.

“Capacity accreditation keeps coming up at FERC, and in earlier conversations FERC made clear they are paying attention,” ACP’s Burwen said.

“The important thing is to make sure that market rules maintain reliability and don’t give undue preference to any given resources,” he said.

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