- 25 Jun 2018
- By Owain Johnson and Adila McHich
An electricity capacity market is a market-based solution that some Independent System Operators (ISOs) like New York ISO (NYISO) utilize to ensure that new generation capacity is developed on time with adequate resources while also enabling existing power producers to recover their capital investments.
The NYISO Installed Capacity (ICAP) is a niche market designed to promote resource adequacy, to provide suppliers with the means to recover a portion of their fixed capital costs, and to offer a pricing signal for investment. Load Serving Entities (LSEs) are required to maintain adequate capacity to meet peak load demand. This market was created because of the need for LSEs to show the availability of electricity supply from which the load will be served.
These capacity requirements are based on forecasting each LSE's contribution to its transmission district peak load plus an additional amount to cover the Installed Reserve Margin (IRM). The IRM is the real foundation of the capacity market. The IRM is established annually by the New York State Reliability Council (NYSRC) and is based on the Northeast Power Coordinating Council’s resource adequacy standard (“NPCC Resource Adequacy Standard”). This standard reflects the probability that the disconnection of a firm’s supply due to a resource deficiency (Loss of Load Expectancy, or “LOLE”) should be on average no more than once in ten years.
NYISO uses the IRM as an input to generate the Minimum Installed Capacity Requirement for the entire New York Control Area (NYCA) as well as the locational minimum unforced capacity requirements which each LSE needs to procure to meet its capacity requirement and resource adequacy.
Certain areas within NYCA have transmission constraints and so NYISO has established three areas called Localities within the NYCA where Locational Minimum Installed Capacity Requirements are imposed. These are New York City, Long Island, and the G-J Locality which is referred to as the “Lower Hudson Valley Zone”.
In the past, utilities relied on bilateral deals with other LSEs or self-generation to satisfy their capacity requirements. However, today the NYISO has offered a capacity market which is different from the day-ahead and real-time energy markets in that the transacted items are capacity (the ability to provide power at any point in time) instead of consumption (the amount of power provided over a period of time).
The NYISO ICAP Market consists of three auctions: The Capability Period Auction, the Monthly Auction, and the Spot Auction.
- Spot auction: This is a mandatory auction where LSEs can procure their capacity requirements and offer to sell in the upcoming obligation month only. The spot auction is based on demand and supply dynamics which serve as investment price signals. The capacity clearing prices are established based on sloped ICAP Demand Curves. Spot auctions are run two to four days prior to the start of each month.
- Monthly auction: This auction is voluntary and covers for any obligation month in the Capability Period. Auctions are held at least 15 days prior to the start of each month.
- Capability1 Period Auction: It is also known as the “Strip Auction”. It allows LSEs to procure Unforced Capacity2 (UCAP )for six-month terms at a single price.
The capacity procured from all three markets can be delivered to fulfill the NYISO ICAP requirements, while the spot auction sets the monthly price to be paid for capacity by the consumer.
The NYISO capacity market plays a critical role in ensuring resource adequacy while the energy and ancillary markets provide operational reliability for the lowest cost possible for consumers.
CME Group (NYMEX) offers NYISO capacity futures for Lower Hudson Valley, In-City, and Rest of the State (of New York). View contract specifications for the NYISO Capacity Market futures offered by CME Group:
NYISO NYC In-City Capacity Calendar-Month Futures
1. May-October for the Summer Capability Period and November-April for the Winter Capability Period
2. UCAP represents the percentage of ICAP available after discounting the outage rate.
Futures and options trading is not suitable for all investors, and involves the risk of loss. Futures are leveraged investments, and because only a percentage of a contract’s value is required to trade, it is possible
to lose more than the amount of money initially deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those
funds should be devoted to any one trade because they cannot expect to profit on every trade. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME
rules. Current rules should be consulted in all cases concerning contract specifications.
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About the Author
Adila Mchich is Director of Energy Resources & Product Development at CME Group.
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