SOLAR TODAY - March/April 2012

What Is a Wholesale Capacity
Market, Anyway?

In many U.S. regions, the power grid has been deregulated. To enable wholesale competition for electricity, the local power company still owns the poles, wires and meters, but they no longer own the central station power plants. Independent companies own the power plants and operate them for profit. In such a region, a system operator runs a series of wholesale power markets through which electricity suppliers buy power from the power plants every day.

Let’s take New England, where I live and do most of my work. ISO-NE runs all of the wholesale markets. The easiest one to understand is the energy market. Every day before noon, each power plant owner submits an offer to sell energy the following day. The ISO-NE organizes these offers in order of price, from lowest to highest. Those who purchase power, likewise, submit their bids to buy energy. The ISO-NE stacks up all of the offers and all of the bids and clears the market. Those generation owners who cleared now have a schedule to provide power the following day, and the buyers now have a guaranteed delivery at a set price. Of course the details are much more complicated, but that’s basic idea.

The capacity market, as the name implies,
is a payment for the capacity to produce ener-
gy, especially during peak load hours like
hot summer afternoons or winter evenings.
Whether it is the ISO-NE Forward Capacity
Market (FCM), the New York Independent
System Operator Installed Capacity Market
(ICAP), the PJM Reliability Pricing Model
(RPM) or another regional model, the con-
cept is the same. Those who can produce
(or, in some places, conserve) energy during
peak load hours are eligible to be paid for that
capacity. To my knowledge, only ISO-NE and
PJM currently allow PV generators to partici-
pate in their capacity markets.

What’s Involved in Participating?

I will focus on New England’s FCM as a concrete example. The specifics in other regions will differ, of course, and some limit their capacity market to only central station power plants. As the television advertisements say, check your local listings for details.

Let’s say that over the past few years you’ve
installed a number of successful PV projects,
and you have ongoing meter data on many of
them. On a sunny day, these projects produce
100 k W of total AC output. In New England,
you can submit a qualification package to the
demand savings per month (written as $3.50/
kW-month). Most active market players
expect that price to fall in the near future, both
because of market conditions (we currently
have more supply than we need) and because
of certain market design details. Figure 1 below
shows the annual market-clearing prices and a
near-term projection of expected future prices
in the ISO-NE FCM. You’ll note that in New
England, each capacity market year runs from
June through May of the following year, so
prices change each June.

What Is the Auction Timeline Like?

The trick in New England is that the capacity auction is held three years in advance of the delivery year, and therefore the qualification process starts a full four years in advance. Hence

If the details sound daunting, you have the option of finding
an aggregator. These folks would gladly sign up a few more projects
and share some of the revenue from the auctions.

ISO-NE, get qualified to participate in a FCM auction, clear in that auction and then be paid for this 100 k W of load reduction.

The bottom line: Your customer’s solar panels are every bit as effective in providing (or offsetting) power as a large central station power plant. Therefore, you and your customers should get paid for it.

As in all markets, prices fluctuate over time
based upon supply and demand conditions,
as well as on the rules of how one can partici-
pate. During the eight-year period from 2007
through 2015, the ISO-NE FCM price has
averaged roughly $3.50 per kilowatt of peak
the “forward” in “Forward Capacity Market.”
The same is true in PJM, but not so in other
areas. These forward capacity markets are a
relatively new idea, meant to provide the devel-
oper of a new power plant time to complete its
project. For example, the first step toward par-
ticipation in the auction to sell capacity for June
2012 was all the way back in September 2008.
If you were to start from scratch today, the pro-
cess would go like this: You would figure out
where your projects are and will be located, add
up the capacity and submit a Show of Interest
application to the ISO-NE in January 2013 (see
figure 2, below).