For suppliers active in NYISO, capacity market price exposure presents an additional price risk to manage and hedge - especially since NYISO conducts its auctions seasonally and on a prompt-month basis. But not to worry! TRUELight provides support and analysis to address the question of how NYISO capacity prices will move over the next several years.
For suppliers active in NYISO, capacity market price exposure presents an additional price risk to manage and hedge.
Unlike in other popular ISOs, such as PJM and ISO-NE, where long-term forward auctions provide forward price discovery in advance, NYISO conducts its auctions seasonally and on a prompt-month basis. As a result, suppliers often default to purchasing capacity in the short term monthly auctions, although higher collateral requirements if you do clear the auction directly often lead suppliers to look at capacity hedges through physical bilateral transactions.
Though capacity prices are historically not as volatile as energy, it does fall into the category of a commodity that must be procured, meaning one should aptly hedge capacity forward to lock in margin and ensure profitability. This is especially the case if you are signing up customers on long-term fixed price deals.
In short, NYISO capacity prices can be a) risky and b) ambiguous. Not a great combo.
To help mitigate this, TRUELight provides support and analysis to address the question of how NYISO capacity prices will move over the next several years.
To tackle this question, we turn to market fundamentals.
Ultimately, capacity prices are dictated by supply, demand and transmission capacity. A final point of inquiry is regulatory changes, of which the impact of carbon pricing reigns supreme.
The retirement of the Indian Point nuclear power plant is the elephant in the room when it comes to NYSIO capacity. A major source of LHV (Lower Hudson Valley) capacity, the retirement of this plant will surely result in bullish pressure on capacity prices.
However, will there be more additions to the supply stack to at least wash out the supply hole left by Indian Point? This is likely, as a number of large natural gas combined-cycle generators and renewables are lined up in the generation queue in the coming years.
While baseline demand is expected to grow over the next few years, the negating impact of energy efficiency measures, load response, and behind-the-meter generation will net these gains out. This will leave net demand in a state of general decline over the next few years.
The third and critical component to consider for forward capacity prices is transmission capacity. There are currently several major transmission projects in the queue, while only a few have a reasonable level of likelihood to actually be developed. Our experts assist portfolio management clients in foreseeing which projects will come online and what the impact will be on LHV, NYC and ROS (Rest-of-State) capacity prices.
A final element to consider is the impact of carbon pricing. Placing a price on carbon emissions will increase costs on most thermal generators, which make up a significant portion of the NYISO supply stack.
Looking out over the next several years, major fundamental drivers are generally bearish on NYISO capacity prices. The lone firmly bullish point is Indian Point’s retirement, but this will likely be made up for by:
1. New natural gas and renewable generation builds
2. Stagnant-to-declining demand
3. New high-voltage transmission builds
If you are a supplier locking in long-term fixed price deals in NYISO, being aware of forward capacity risks is essential. You should consider capacity another part of your Net Open Position (NOP), alongside energy and RECs.
For expert services assessing NYISO capacity risks, reach out to the TRUELight Energy portfolio management team today at email@example.com to make sure you are set up for long-term success in NYISO.