February 7, 2023
Trevor McManamon, Director of Market Development
The transition from fossil fuels to renewable energy is accelerating across the country. As the mix of energy resources shifts towards more variable renewable generation, such as wind and solar, the availability of demand-side flexible resources to smooth out fluctuations in supply is taking on new importance. At Leap, we analyze changes across the energy landscape to help our partners maximize the value of their flexible assets. Major shifts in a region’s energy mix impact how these flexible resources are compensated in energy markets. This summer, we’ll see this play out in New York City, where prices in the Installed Capacity (ICAP) market are poised to soar.
New York’s unique market structure
Capacity markets compensate energy resources for being available to produce power or curtail energy when needed to balance the grid. The New York Independent System Operator (NYISO) capacity market structure is unique amongst the northeast ISOs and regional transmission organizations (RTOs). In New York, the majority of capacity sells on a seasonal basis, typically just days ahead of being committed to deliver for a month. Nearly all of the capacity registered and available does sell in the market.
In contrast, PJM and ISO-New England have capacity markets that typically clear years ahead of actual delivery, and they have the same price for the entire year. Though these markets still have significant capacity price volatility, the structure dampens this volatility slightly. NYISO’s prompt and seasonal auction structure, combined with a relatively steep linear downward-sloping demand curve, can lead to significant price swings based on abrupt, yet relatively minor changes in supply or demand.
This summer, Leap is forecasting a significant uptick in capacity prices in the downstate areas of NYISO relative to the past two years, which have seen especially depressed pricing. The primary reason for this change is the implementation of a new nitrogen oxide (NOx) emissions policy that is triggering major changes in New York’s energy resource mix.
An aggressive new rule to tackle NOx emissions
At the end of 2019, the New York Department of Environmental Conservation adopted a new rule that lowers the allowable NOx emissions threshold from peaking fossil fuel power plants during the summer “ozone season” from May through the end of September. Peaker plants tend to operate on hot summer days, contributing harmful levels of ozone that exacerbate already poor air quality. The new NOx emissions rule, which goes into effect in a phased manner from 2023-2025, aims to better protect the residents and workers of New York by reducing pollution from some of the least efficient power plants in the resource mix.
Many older power plants do not have the proper emission controls in place to meet these new requirements. They are faced with three difficult choices: retire the plant, only run it during winter months or take on a heavy capital expenditures to install emission controls. While there has been a mixture of responses, two plants in particular have announced plans to retire in 2023. This summer, nearly 1GW of old, fossil fuel peaking generators will retire, including a number of turbines at the Astoria power plant. Some plants, such as Hudson Avenue Gas Turbines 3 and 5 and multiple turbines at the Gowanus Barges Units 1 and 4, have already retired in November of 2022.
A highly lucrative summer capacity market
The retirement of these generators reduces the available energy supply in New York and has major implications for the capacity market. The reduction in supply of approximately1 GW of nameplate capacity, relative to the prior summer, is the primary driver behind our expectation for a nearly 5x increase year-over-year in summer capacity prices for resources in New York City ( from ~$3/kW-mo to ~$15/kW-mo). Also contributing to rising capacity prices is a higher peak demand forecast in New York, resulting from increased electrification as well as the return of more normal levels of electricity demand following the decrease caused by the COVID-19 pandemic. As a result, flexible resources participating in the ICAP market are looking at a highly lucrative summer.
More and more old, dirty fossil fuel generators in New York and other regions will retire as emission limits tighten and mandates to transition to carbon-free energy sources become more aggressive. This will lead to a higher need, and better incentives, for clean, flexible resources to participate in capacity and energy markets to help balance the grid. As the energy transition accelerates, we will continue to see higher valuations for the flexible loads supporting the shifting energy mix.
