On February 11, 2014, the Federal Energy Regulatory Commission (FERC) issued an order on ISO-New England Inc.’s (ISO-NE) proposed revisions to its Forward Capacity Market (FCM) Offer Review Trigger Price (ORTP) provisions for the upcoming Forward Capacity Auction for the 2018-2019 period (FCA 9). This decision may present new opportunities for new onshore wind projects in this upcoming auction.
ISO-NE administers the FCM, in which resources compete in an annual FCA to provide capacity to New England three years in advance of the relevant Capacity Commitment Period. Resources whose capacity clears the FCA acquire capacity supply obligations, which they must fulfill three years later.
Development of an ORTP
ISO-NE has a Minimum Office Price Rule, which is supposed to act as a "screen" for potentially new uncompetitive resources offers in an FCA. It does so by setting benchmark prices intended to represent the low end of the range of competitive offers in order to prevent new resources from offering at prices significantly below their true net cost of entry.
Prior to a capacity auction, ISO-NE compares capacity supply offers from new resources to benchmark prices in order to protect against the exercise of buyer-side market power that could inappropriately suppress capacity prices. ISO-NE calculates a benchmark price, an ORTP, by resource technology type (e.g., combustion turbine) based on certain revenue and cost assumptions. When market participants submit supply offers for new resources, the ORTP acts as a screen:
Offers at or above the relevant ORTP are accepted into the FCA with no further review
Offers below the relevant ORTP may be accepted into the FCA, but must first be justified to the Internal Market Monitor (IMM) during a unit-specific review process
To calculate ORTPs, ISO-NE uses a publicly available capital budgeting model to calculate ORTPs equal to the FCM revenue required in the first year for a new project to break even.
ISO-NE’s model also considers likely non-capacity revenues and expected capital and operating costs, along with assumptions regarding depreciation, taxes, and the discount rate, to reach a specific ORTP for each technology type. ISO-NE deliberately sets ORTPs at the low end of the competitive range of expected offers in order to subject resources to unit-specific review only when it appears that their offers could not be commercially plausible, absent out-of-market (OOM) revenues. The ORTPs are subject to a full recalculation every three years, and can be adjusted in-between the full recalculations.
ISO-NE’s Proposal for FCA 9
ISO-NE proposed revisions to FCA 9 ORTPs earlier than required under the three-year cycle to set them at a level consistent with expected prevailing market conditions for the 2018-2019 Capacity Commitment Period, basing its revisions on a report issued by The Brattle Group. The changes include:
A change in the year in which the prices are identified (i.e., expressing prices in 2018 dollars to correspond to the 2018-2019 Capacity Commitment Period)
An increase in the after-tax weighted-average cost of capital (Cost of Capital) from 6.3 percent to 7.2 percent
An increase in the Renewable Energy Credit price from $9.25/MWh to $49.30/MWh to better reflect market prices
While ISO-NE’s proposal and FERC’s order address several types of resources that can participate in the FCA, its findings on onshore and offshore wind are noteworthy:
Onshore Wind: A $0.000/kW-month ORTP
For generation resources, ISO proposed to update model inputs with the following ORTPs: (1) $13.424/kW-month for a combustion turbine; (2) $8.866/kW-month for a combined-cycle gas turbine; and (3) $0.000/kW-month for onshore wind, a significant change from the onshore wind ORTP for FCA 8, which was $14.00/kW-month.
ISO-NE’s proposed $0/kW-month ORTP for onshore wind was opposed by several parties on the grounds that: (1) it was based on a 35 percent capacity factor that was unjustified and unrealistic; (2) inclusion of Federal Renewable Energy Production Tax Credit (Production Tax Credit) and Renewable Energy Credits as sources of Out Of Market (OOM) revenues was inappropriate; and (3) the estimate of the market Cost of Capital in New England was too low.
FERC accepted ISO-NE’s 35 percent capacity factor for onshore wind as consistent with the goal of subjecting to IMM review only those offers that plainly appear commercially implausible absent OOM revenues. FERC noted that ISO-NE developed the 35 percent capacity factor by assuming that a developer would try to build a new wind resource in a location that is preferred for wind (i.e., Maine), and that the project would use the latest technology – factors that FERC deemed appropriate for establishing the ORTP at the low end of the range of competitive offers.
For Production Tax Credit and Renewable Energy Credits, FERC held that neither should be considered OOM revenues – which are excluded from a unit-specific review if an offer does not exceed a resource’s ORTP:
The relevant, Commission-approved Tariff provision defines OOM revenues as any revenues that are (i) not tradable throughout the New England Control Area or that are restricted to resources within a particular state or other geographic sub-region; or (ii) not available to all resources of the same physical type within the New England Control Area, regardless of the resource owner. Neither Production Tax Credit nor Renewable Energy Credits revenues fall within this definition. (Order at Para 32)
However, FERC also rejected the notion that resources participating in FCA 9 for the 2018-2019 Capacity Commitment Period would receive Production Tax Credits, as source of expected non-capacity revenue for new wind resources. FERC noted that the Production Tax Credit is currently unavailable to projects that did not begin construction by December 31, 2013, and, given the relatively short construction period for onshore wind, it is unlikely wind resources participating in FCA 9 will have begun construction by the December 2013 deadline.
The result is that Renewable Energy Credits, but not the Production Tax Credit, will be considered in the ISO-NE’s non-capacity revenue assumption in the capital budgeting model, which will help resources obtaining them to meet their ORTP thresholds. This holding may have no effect for the FCA 9, because onshore wind has a $0.000/kW month ORTP threshold, but that threshold could be increased in subsequent years.
The FCA 9 $0/kW-month ORTP for onshore wind resources arguably eliminates the possibility of a new onshore wind resource being subject to any IMM review for potentially uneconomic offers. Opponents of this change argued that the new ORTP was effectively a categorical exemption from the Minimum Offer Price Rule and would allow for an unlimited number of uneconomic MWs to clear in the FCA, but proponents countered that onshore wind resources typically do not need capacity revenue, and thereby can legitimately bid zero in a capacity auction.
Offshore Wind: The FCA Starting Price Will Apply
If no specific ORTP is calculated for a particular type of resource, the technology is grouped into a bucket "all other technology types," and is assigned an ORTP equal to the FCA starting price. This bucket includes technology types for which either ISO-NE could not obtain specific information, or that would have had an ORTP above the FCA starting price.
ISO-NE did not calculate a specific ORTP for offshore wind because it decided there was not sufficiently reliable cost information available to develop an ORTP using a full, "bottom-up" analytical approach. Instead, ISO-NE proposed to set the ORTP for offshore wind at the FCA starting price.
In its filing with FERC, NEPOOL noted that, during the stakeholder process, EMI – the developer of the nation’s first offshore wind project – proposed an amendment, which was supported by other stakeholders, to include a technology category for offshore wind in the ORTP table and to set the ORTP value to $0/kW-month, based on what these stakeholders argued was sufficiently reliable cost information for a "bottom-up" analysis similar to the one used by the IMM for other technology types. In this proceeding, National Grid noted that EMI provided information to ISO-NE that documents third-party and governmental sources supporting an offshore capacity factor of 45 percent or more, and an area-specific offshore capacity factor of 47.4 percent.
FERC held that ISO-NE adequately explained its determination that insufficient cost data exists to conduct a full calculation of offshore wind, noting that The Brattle Group considered available cost data related to offshore wind for ISO-NE, including that provided by stakeholders, and found it insufficient to conduct a "bottom-up" analysis to develop an ORTP for offshore wind. FERC agreed with ISO-NE’s determination that deducing accurate capital and operational cost data from projects in other countries may lead to faulty or misleading input assumptions, and may undermine the buyer-side market power mitigation that is the purpose of the ORTP construct.
In accepting ISO-NE’s decision to set the offshore wind ORTP to the FCA starting price, FERC noted that offshore wind resource participants may always seek approval for an offer price lower than the FCA starting price through the unit-specific review process.
Commissioner Norris filed a concurrence to FERC’s decision, urging it to more thoroughly consider whether the MOPR should apply broadly to all new resources and whether this broad application unfairly inhibits state goals for the procurement of renewable resources.
We expect rehearing petitions to be filed on this decision, and would not be surprised to see the case ultimately before a U.S. Court of Appeals, given the effect that the new ORTP calculations may have on future Forward Capacity Auctions.