Capacity Markets

Capacity represents the need to have adequate generating resources to ensure that the demand for electricity can be met at all times. In a capacity market the utility or other electricity supplier are required to have enough resources to meet its customers’ demand plus a reserve amount. Suppliers can meet that requirement with generating capacity they own, with capacity purchased from others under contract, or with capacity obtained through market auctions.

Regional transmission organizations (RTOs) or independent system operators (ISOs) are organizations in their respective regions that ensure that adequate resources are available to reliably generate and transmit electricity so that there is enough power supply to meet the demand. As part of this of this process, the RTOs/ISOs in several electricity markets make payments to power generators for their available capacity—independent of the cost of the energy produced. These payments provide an incentive for generators to locate in that market and they help guarantee that there will be sufficient generation to meet the maximum energy requirements of the market at all times.

In order to fund the capacity payments to generators, the ISOs and RTOs manage the process of selling capacity—which is typically done through an auction conducted by the ISO/RTO—to energy suppliers and load serving entities (LSEs), like Direct Energy Business, based on the customer loads they serve within those markets. Capacity markets include:

New York Independent System Operator (NYISO) Covers the state of New York

New England Independent System Operator (NEPOOL or ISO-NE) Covers Maine, Massachusetts, Rhode Island and Connecticut

Pennsylvania Jersey Maryland Interconnection (PJM) Covers Pennsylvania, Maryland, New Jersey, Delaware, District of Columbia, and parts of Ohio, Illinois and Michigan

Midwest Independent System Operator (MISO) Covers Pennsylvania, Illinois, Michigan, and Ohio

The charges associated with the procurement of capacity are typically indicated as "ICAP," which is installed capacity, or "UCAP," which is uninstalled capacity, on an electricity bill. Some suppliers or utilities may bundle this cost in with an all-inclusive supply price and others may pass it through as a separate line item, depending on what type of contract or product a customer has with their supplier.

Determining capacity obligations

Generally speaking, capacity obligations are determined by a customer's peak load contribution (PLC) or peak monthly demand during a certain timeframe. The timeframe for determining this peak is calculated differently in each ISO/RTO and in the case where a customer is taking supply from an LSE, their host utility is responsible for providing the PLC to suppliers.

  • MISO: In this market, a consumer's peak demand is based on the highest hourly demand during the month and can therefore vary each billing cycle.
  • NYISO and ISO-NE: In this market, a consumer's PLC is determined by the customer's usage during the "peak hour from the previous year." The peak hour is the hour during which the usage was the highest across the RTO, as published by the RTO. Once a customer's PLC is established, it is set for the plan year. The plan year is May 1-April 30* in NYISO and June 1-May 31* in ISO-NE
  • PJM: In this market, a customer's PLC is determined by their usage during the "five peak hours" (totaled and averaged) from the previous year. The five peak hours are the hours during which the usage was the highest across the RTO, as published by the RTO. Once a customer's PLC is established, it is set for the plan year, which is June 1-May 31*.

The Cost of Capacity

The procurement of capacity is the obligation of the supplier, utility or LSE based on the customer load they serve in a particular ISO/RTO. And, the procurement process and final cost in each market varies as well.

  • MISO: The cost of capacity is determined by the price of the bilateral capacity supply contracts that suppliers enter into, along with a MISO-mandated reserve margin.
  • NYISO & ISO-NE: The cost of capacity is determined by auctions conducted by the RTO throughout the course of the year.
  • PJM: The cost of capacity is determined by auctions conducted by the RTO about once a year.

Generally speaking, the cost for capacity is a factor of a consumer's capacity obligation (i.e. their PLC or peak demand) measured in kilowatt hours, and the daily cost of capacity (cost for their supplier to procure capacity in their market) measured in dollars per kilowatt hour, as well as the number of days in a particular billing cycle. Because all of these numbers can vary by market and by month, capacity charges can also vary by billing cycle.

* PLC values are typically set for the plan year, however values could be re-evaluated and updated throughout the given plan year. The utilities send updates to load serving entities, like Direct Energy Business, with the effective dates of the new PLCs. PLC values are scaled up for applicable zonal scaling factors and forecast pool requirements within any given wholesale market.

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