The price consumers pay for electric supply is made up of a series of components. Although the price of wholesale energy is often the focus, it is actually only a portion (recently 50% or less) of the overall cost. One element that has recently increased significantly, especially in the New England market, is capacity.
Capacity prices are set through periodic auctions where New England power plant owners bid to assure that there will be enough generating capacity on the hottest and coldest days. The bidders compete with each other and set capacity prices three years out. This forward-looking, market-based method ensures that New England will have adequate resources to meet all electricity demand plus reserve requirements well into the future. Recently, the spike in forward capacity settlement prices reflect the closure or planned closure of several older coal, oil and nuclear power plants. Another factor impacting capacity prices is the increase in renewable generation. Although renewable generation resources results in lower energy prices at times along with positive environmental effects, it unfortunately does not provide significant levels of capacity to meet peak loads which results in higher capacity prices.
When analyzing forward market opportunities and arranging future electric supply contracts; consider the impact of not only energy prices but also capacity costs. While energy can move up and down with market conditions such as weather, a decision must be made as to accept the risk by letting the price vary or reduce it by fixing all or a portion of the price. Capacity makes up a large portion of the price and is an indisputable charge that has already been set by ISO New England and will not change with variations in the price of energy.
The chart below shows the capacity price for various ISO-NE regions. As you can see there was a large increase in capacity in June 2016 for the NEMA Boston region and an even more drastic jump in June 2017 for all areas.
RO NEISO (Rest of ISO-NE), NEMA (Northeast MA) SEMA/RI (Southeast MA/Rhode Island)
Outlined below is a comparison showing the components that make up the cost of electric supply. Capacity is shown in red, which in forward markets will account for about 21% of the overall price, compared to 13% historically.
