[co-author: Mack Ramsden]*
On Friday, May 27, 2022, the Federal Energy Regulatory Commission (FERC) issued an order approving ISO-New England’s proposed tariff revisions, which phase out the ISO’s minimum offer price rule (MOPR) by 2024. The tariff revisions institute an interim Transition Mechanism to organize ISO-New England’s 2022 and 2023 capacity auctions, which will together allow 700 megawatts (MW) of state-sponsored renewable resources to participate without application of the MOPR. In 2024, the Transition Mechanism will be replaced by the MOPR Reforms, which will effectively abolish the MOPR for most capacity auction entrants and eliminate the practice of bid mitigation currently applied to state-sponsored resources in New England.
FERC’s order responded to a March 31, 2022 filing by ISO-New England and the New England Power Pool Participants’ Committee (NEPOOL) that jointly proposed modifications to the ISO’s use of the MOPR in its forward capacity auctions. The filing framed the proposed modifications as setting the region’s wholesale electricity markets on a middle path between two possible trajectories. ISO-New England argued that if (as under the current market design) New England states continue to supply renewable resources with revenue and those resources cannot rely on revenue from forward capacity auctions, the region may see an “overbuild” of capacity. On the other hand, if those resources are allowed to compete in capacity markets, market inefficiencies may proliferate and reliability of service may be less assured.
The capacity market modifications approved by FERC proceed in two stages. First, a Transition Mechanism intended to smooth the transition away from the current market design will organize the 2022 and 2023 capacity auctions. Then, beginning with the 2024 capacity auction, a new market design (the “MOPR Reforms”) will go into effect and terminate the MOPR’s application to state-sponsored resources.
The Transition Mechanism: ISO-New England’s 2022 (FCA 17) and 2023 (FCA 18) capacity auctions
The Transition Mechanism will apply to Forward Capacity Auctions (FCAs) 17 (which began in April 2022 and covers the capacity commitment period June 1, 2026 – May 31, 2027) and 18 (which will take place in 2023 and covers the capacity commitment period June 1, 2027 – May 31, 2028). The Transition Mechanism continues the use of primary and substitution auctions and preserves the MOPR currently in operation, with key revisions:
- A Renewable Technology Resource (RTR) exemption. This provision will exempt, under certain circumstances, up to 300 MW of capacity for FCA 17 (with carryforward for unused capacity to FCA 18) and 400 MW for FCA 18. This exemption resembles the RTR which operated from 2014 until 2018.
- Retention of the Competitive Auctions with Sponsored Policy Resources (CASPR) mechanism with elimination of the CASPR test price. The “test price” rule, aimed at discouraging uncompetitively-low de-list bids in the primary auction, has been eliminated as the ISO and FERC now believe that such bids are sufficiently disincentivized without regulatory intervention.
- An updated definition of Sponsored Policy Resource (SPR). The Transition Mechanism broadens the existing definition of SPRs to allow resources funded to achieve decarbonization or net-zero carbon standards to qualify.
The Transition Mechanism is designed to moderate the speed of change in the capacity markets and in the region’s generation fleet. In justifying its decision to temporarily preserve the MOPR in this diminished form, ISO-New England explained that eliminating the construct entirely could force existing power plants to retire sooner than would otherwise be the case. ISO-New England further asserted that if those retirements occur before state-sponsored renewable resources become commercially available at sufficient capacity, or before the ISO can properly assess and account for the relative reliability contributions of the entering and exiting resources, significant reliability risks could arise in the region. If certain of those state-sponsored resources encounter delays in their financing, permitting, construction, or interconnection, ISO-NE noted, regional reliability risks would be exacerbated.
The MOPR Reforms: ISO-New England’s capacity auctions in 2024 and beyond
Under the new market design, which will structure FCA 19 and subsequent capacity auctions, the ISO will sort resources into three tranches, of which the first two will be exempt from the MOPR:
- De minimis resources: Resources with a qualified capacity of 5 MW or less and passive demand-response resources.
- Competitive entrants and Sponsored Policy Resources: State-sponsored resources qualifying within the expanded definition of SPRs instituted in the Transition Mechanism (and described above) and new “competitive entrants” not receiving out-of-market revenues.
- All other resources: Other resources that make a below-cost offer must pass certain tests as part of an “incentive rebuttal” process in order for their bid to go unmitigated.
Though they are not included in these revisions, ISO-New England has indicated to FERC that it is working on two additional reforms, planned (but not assured) to be instituted for FCA 19 in 2024. These “market design enhancements” comprise:
- A new methodology for accrediting capacity values. ISO-New England will implement a process for accrediting capacity values of resources according to their marginal reliability contribution to reducing expected unserved load, rather than according to their ability to serve gross peak load.
- A day-ahead ancillary services market design. Though FERC rejected this provision previously, the ISO continues to believe that devising a system for compensating ancillary services (which the ISO currently does not compensate) will be necessary to ensure grid reliability as intermittent renewable resources grow their share of the region’s generation capacity.
Impacts of the Transition Mechanism and MOPR Reforms on state policy goals, markets, and market participants
The elimination of the MOPR by 2024 is welcomed by many as a necessary correction to ISO-New England’s management of the region’s wholesale electricity markets. No party to the FERC proceedings approving the change protested this portion of the revisions. By enabling state-sponsored resources to reliably access capacity revenues, the MOPR Reforms should work to accelerate progress toward New England states’ decarbonization goals, reduce friction between the ISO and state policymakers, and engender renewable energy investor and developer confidence.
The Transition Mechanism has generated more controversy, primarily because it delays the implementation of the MOPR Reforms. Several stakeholders protested that the interim construct violates the Federal Power Act, that the MOPR should be abolished immediately, and that continued application of the MOPR to state-sponsored resources will force New England electricity consumers to pay for capacity they do not want or need, a stance with which two of the five FERC Commissioners signaled agreement in a concurrence. Still, the Transition Mechanism will enable up to 700 MW of state-sponsored capacity to win capacity obligations over the next two years, far more than the cumulative 54 MW that submitted successful bids in the four CASPR auctions prior to 2022.
State-sponsored resources that would benefit from securing capacity revenue in coming years should determine whether they qualify under the new expanded SPR definition to avoid MOPR mitigation. Such resources are more likely to compete successfully in capacity auctions under both the Transition Mechanism and MOPR Reforms market designs than they may have been in the past. Resources contemplating exiting the capacity markets in the next half-decade should scrutinize the differences in how substitution auctions will be conducted under the Transition Mechanism and under the final market design, in order to determine how the different designs reward retirement. And finally, all market participants should watch the headlines as ISO-New England develops its plans to deploy a new capacity accreditation methodology and day-ahead ancillary services market, especially to see which resources benefit from these policies. Both policies have the potential to significantly alter the wholesale market landscape when they do arrive in FCA 19.
*Mack Ramsden, Summer Associate at Foley Hoag LLP.