Analysis: Generators eye New England power auction

OREANDA-NEWS. Merchant generation owners in New England are hoping for increased profits as the regional grid operator today launches the forward capacity market auction for the June 2018 - May 2019 period.

New England's forward energy markets are relatively flat — and so is demand growth. The trend increases the importance of capacity markets revenue for power plants.

Many market observers expect auction clearance prices — and revenue to generators — to remain higher than the historical norm prior to 2014. Morgan Stanley analyst Stephen Byrd in a note today said he expected an increase in clearance prices from last year's record highs in most of New England as new market participants set the clearance price.

But major changes to forward capacity market rules in the past year make prospects for merchant and other generators more uncertain.

The most important change creates a two-tier payment system for capacity resources. The clearance price in the auction will determine the base annual payment. But generators who during scarcity conditions supply less electricity than their obligation will have capacity payments clawed back while over-performing resources will get an added performance bonus.

The pay-for-performance reform should benefit generating resources with firm fuel arrangements: nuclear reactors, the few remaining oil- and coal-fired plants and gas-fired generators with firm transportation arrangements on natural gas pipelines.

The unspoken assumption by grid planners — and many state regulators — is that the reform should spur building more natural gas delivery infrastructure as power plants work to avoid penalties. But planning horizons still differ between the power and gas industries: new power plants can lock in an auction price for seven years at most while transportation contracts for new pipelines are 10 years and longer. Pipeline developers have to race against time to add new capacity before June 2018.