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WHOLESALE POWER MARKETS: HOW ARE ADAPTATIONS FARING? SCOTTMADDEN, INC. | 36 Market operators and states make administrative changes to compensation of energy resources. Paying for Capacity Performance NOTES: *As of this release, NYISO strip auction results for 2016/2017 were not yet announced. Bearish Outlook: ISO-New England’s February 2016 auction for 2019–20 resources yielded prices lower than most analysts expected. Many point to higher bonus depreciation for new build alternatives, which may have contributed in lower prices than expected. This outcome came despite a resource performance program similar to PJM’s CP program. Some expect this to weigh on PJM’s next auction. One bright spot: expectation that full implementation of CP will lead to higher capacity prices by 2020–21. Selected ISO Capacity Auction Results by Delivery Year (in $/Megawatt-Day) $600 Capacity Price (in $/MW-Day) • In 2015 and early 2016, PJM’s Capacity Performance (CP) resource proposal was accepted by FERC. CP allows PJM to procure “pay for performance” capacity resources, including generation, demand response, and energy efficiency. Providers must produce power when called upon, regardless of extreme weather or system conditions, or incur significant financial penalties. CP was instituted in response to significant generator availability issues the prior two winters • PJM has conducted two transitional auctions—for 2016–17 and 2017–18 capacity resources. The transition allows for changes— dual fuel for firm gas contracts, O&M, weatherization, etc.—to phase in support for the more stringent CP requirements • CP requirements increased capacity prices (see chart at right), but did not raise them to the offer cap, which is based upon cost of a new entrant, typically the cost of a new gas- combustion turbine • Additional transition auctions remain for delivery years 2018–19 and 2019–20. The 2020-21 auction will be the first 100% CP solicitation and therefore the first one without any transition effects • Nuclear generators are supportive of CP, which compensates for their “always on” capabilities. Only as additional auctions occur, and any penalties for non-performance are assessed, will it be seen whether CP’s pricing signals will improve the capacity market and what types of resources will be most valuable $500 $400 With Capacity Performance $300 $200 $100 $0 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Delivery Year ISO-NE Rest of Pool (Fwd. Capacity Auction) NYISO Rest of State (Summer; Strip Auction*) PJM- RTO (Base Residual Auction) PJM - Transition Incremental CP Auction Results Sources: SNL Financial, ScottMadden analysis