The Federal Energy Regulatory Commission late April 9 approved updated capacity market demand curves for the New York ISO but not without contention as four of the agency's five members issued partial dissents.
While the demand curve calculations are technical, they play an important role in setting the amount of capacity to be procured in upcoming auctions and the price of that capacity.
The NYISO establishes new demand curves every four years to help determine the amount of installed capacity, or ICAP, the state's load-serving entities need to acquire to maintain system reliability, as well as to help set auction prices.
In setting the curve, the grid operator looks at the gross cost of new entry — the embedded cost of a hypothetical new peaking plant — and the likely energy and ancillary services revenues the plant would earn from participating in the NYISO's markets. The difference between the two reflects the revenue the proxy resource would need to receive from the capacity market to obtain sufficient revenues to support market entry.
The New York ISO in November 2020 proposed new ICAP demand curves (ER21-502) for the 2021-2022 capability year and parameters for the updates to take place annually for the following three capability years. The proposal used the H class frame turbine as the peaking plant for use in establishing ICAP demand curves, replacing the F class frame turbine approved during the last demand curve reset for 2017-2021.
The grid operator also sought to change the assumed locations of the peaking plants for the New York Control Area, or NYCA, and G-J locality demand curves. It would maintain the use of a gas-only peaking plant without selective catalytic reduction, or SCR, emissions control technology for the ICAP demand curve for the NYCA, while demand curves for the G-J locality, New York City and Long Island would continue to use dual-fuel peaking plants with SCR technology.
The NYISO asked the commission to act on the filing by Jan. 29, noting that it needed to begin preparing in February for the 2021 summer capability period ICAP auctions. FERC in late January found the NYISO's proposal deficient and requested clarifications, which the grid operator subsequently provided.
FERC's order and the dissents
The April 9 FERC order mostly accepted the proposal but directed the grid operator to submit a compliance filing to retain a 20-year amortization period for the new peaking plant instead of switching to a new 17-year period as proposed. "We believe that NYISO’s basis for proposing the use of a 17-year amortization period is speculative and may result in unnecessarily high net [cost of new entry] estimates," the order stated.
However, the commission signed off on the rest of the proposal. For instance, it agreed that the NYISO should continue to model dual-fuel capability and the use of SCR technology for the hypothetical peaking facility used in establishing the G-J locality demand curve. The agency also approved the financial parameters proposed by the NYISO, including a proposed ROE of 13% and 6.7% cost of debt for the proxy facility.
In a partial dissent, Chairman Richard Glick took aim at the decision to allow the NYISO to continue to include dual-fuel capability in the cost assumptions for the peaking facility used to establish the demand curve for the G-J locality. He argued that the NYISO failed to show that such capability is needed given that a less expensive natural gas-only unit connected directly to an interstate pipeline could be sufficient.
On a more general level, Glick said the issue shows "the extent to which we are not dealing with a market in any ordinary sense of the term."
"The administrative exercise of arguing about the cost attributes of a mythical power plant is about as far afield from market competition as anything I can imagine," Glick asserted. "We should not lose sight of these facts when presented with arguments about the need to prevent out-of-market actions from sullying the otherwise pure 'market' that exists today."
Glick also urged the NYISO to consider adopting a different proxy unit or other reforms in light of New York’s goal to have all power demand in the state be served by 100% zero-emission resources by Jan. 1, 2040. "Before long, a gas-fired resource may no longer represent a likely new entrant, even when reserve margins are tight," he predicted.
Commissioner James Danly, joined by Neil Chatterjee, dissented from the majority’s rejection of the 17-year amortization period for the proxy unit. Danly claimed that the majority's decision was based on speculative assumptions about how New York will go about meeting its emissions reduction goals. He also disputed that the cost impacts of a 17-year amortization period would be "unnecessarily high."
Finally, Commissioner Allison Clements argued that the NYISO failed to demonstrate that a peaking facility with dual-fuel capability meets the requirement that it be "the unit with technology that results in the lowest fixed costs and highest variable costs among all other units’ technology that are economically viable."
"As the commission’s recent inquiry into capacity market design principles suggests, it is far from clear that basing the NYISO demand curve around the costs of a proxy gas unit continues to make sense in the current context where the majority of new resources entering the NYISO market are doing so pursuant to state and local policy directives, as well as customer demand for clean resources, rather than solely responding to wholesale market price signals," Clements wrote. "But so long as existing market rules remain in place, NYISO should be required to make the demonstration mandated by its tariff."
