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ISO-NE | Summer 2011 Forward Reserve Market Auction Results and Potential Market Implications

by Burhan Koc, Portfolio Manager, NYISO & ISO-NE, GDF SUEZ Energy Resources NA

The results of the Summer 2011 Forward Reserve Market (FRM) auction are summarized as follows:

A few key points to highlight:

  • There was no price separation between Connecticut and Rest of System for the first time since the inception of the Locational Forward Reserve Market.  This appears to reflect the increase in supply of quick start that has come online in Connecticut and the decrease in the local requirement.
  • Auction clearing prices dropped in part due to lower capacity clearing price, from $4.50/KW-mo to $3.60/KW-mo. (Generators that clear in the Forward Reserve Market receive the net of the FRM clearing price and the capacity clearing price).  Prices cleared in this auction at a $0.90/KW-mo. premium over the capacity price.
  • A new cost allocation methodology will be implemented beginning June 1.  This allocation is based on “proxy prices,” which are the prices at which the auction would have cleared if only system-wide requirements were in place.  At a high level, and assuming zero penalties, the allocation works as follows:

Costs allocated to load across the system = (TMOR proxy price less capacity clearing price) * TMOR system wide requirement (750 MW for this auction)  + (TMNSR proxy price less capacity clearing price) * TMNSR system-wide requirement (800 MW for this auction) 

Costs allocated to zones with local requirements (Connecticut) = costs remaining after Step 1 above (note that for this auction there will be zero costs to allocate in this step)

Since there was no price separation in this auction and no MWs above the system-wide requirements were purchased, the allocation will be straightforward; the costs will be spread to all load.  On a monthly basis, costs (net of penalties) will be spread across the peak hours in the month and allocated to load in each peak hour based on its share of the total system load in that hour.

The bottom line is that the Forward Reserve cost to customers will go down and, given the recent supply-demand trends in FRM auctions, this cost is expected to remain low compared to historical levels.

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