Locational Generation Capacity Payments in New England
27 April 2005
By Amparo Nieto
At NERA's Marginal Cost Working Group Spring Conference on 27 April 2005, Amparo Nieto, a NERA senior consultant, presented "Locational Generation Capacity Payments in New England" to members of the Marginal Cost Working Group, comprised of energy professionals from electric and gas utilities across the US.
In her presentation, Ms. Nieto highlighted the problems of the existing capacity market in the New England Regional Transmission Organization and explained the key design elements of the locational installed capacity (LICAP) mechanism proposed by the New England Independent System Operator (ISO-NE).
The current New England capacity market is characterized by high-price volatility and by market clearing prices that do not signal the higher value of capacity resources in import-constrained areas, or "load pockets." Combined with market power mitigation measures in the energy and operating reserve markets, this leads to insufficient incentives for the required infrastructure. The proposed LICAP mechanism would create separate capacity prices for three import-constrained zones, an export-constrained zone, and the remainder of New England. The ultimate goal is to introduce incentives for generation investment in areas where it is most needed, and gradually reduce the reliance on out-of-market reliability contracts.
Ms. Nieto emphasized how the goals of limiting price volatility in the capacity market, improving revenue predictability, and mitigating market power have led the ISO-NE to propose a new capacity payment scheme that relies more on regulated parameters and less on the results of market forces. She discussed the merits of the method and highlighted the problems that may prevent this mechanism from achieving some of its intended goals.
To learn more about Ms. Nieto's expertise in economic regulation of electricity and gas industries, please contact her by using the link below. For information about NERA's Marginal Cost Working Group, please visit the link located in the right-hand column of this page.
