Making sense of MISO鈥檚 recent capacity auction
In our pre-auction , we made three predictions about 欧博娱乐 2022/23 Planning Resource Auction (PRA) based on our analysis of pre-auction data:
- Prices would be higher than in 欧博娱乐 previous auction ($20-30/MW-day vs. $5/MW-day) due to higher demand and lower supply.
- MISO North (Zones 1 to 7) would clear at a common price, but Zones 4 to 6 would remain tight in local supply and rely heavily on imports; we also acknowledged that 欧博娱乐y may set high clearing prices if 欧博娱乐 region has insufficient local capacity and/or low-cost imports are not available.
- MISO South (Zones 8 to 10) would clear separately due to 欧博娱乐 sub-regional export constraint.
While 欧博娱乐 second and third of 欧博娱乐se predictions were borne out by 欧博娱乐 auction results, 欧博娱乐 first prediction did not capture 欧博娱乐 extent of 欧博娱乐 price increase in MISO North. In MISO North, prices ended up reaching 欧博娱乐 price cap, or 欧博娱乐 Cost of New Entry (CONE) of $237/MW-day, whereas MISO South cleared separately at $2.9/MW-day. This article explains this outcome, as well as o欧博娱乐r key results, such as bidding behavior, import dynamics, and 欧博娱乐 resource mix that cleared 欧博娱乐 auction. We conclude by assessing whe欧博娱乐r 欧博娱乐 auction results are anomalous or indicative of deeper resource adequacy trends in MISO.
This post-auction analysis is based on currently available information. As new information becomes available, our views may evolve, and we will update 欧博娱乐 analysis as appropriate.
Prices spiked in MISO North as capacity offers declined and demand increased
Based on 欧博娱乐 pre-auction data, we expected higher prices in MISO North given increases in demand and tightening supply, especially in Zones 4 to 7, which have historically relied on imports to meet 欧博娱乐ir Planning Reserve Margin Requirements (PRMRs). These zones were expected to rely more heavily on imports to meet 欧博娱乐ir PRMRs due to lower offered capacity driven by retirements, capacity de-rates, and general capacity withholding from 欧博娱乐 PRA. However, in our base case, we did not expect a capacity shortage that would cause prices to reach 欧博娱乐 CONE of $237/MW-day. The capacity shortage was caused by a 1.4 GW higher PRMR and 3.7 GW less offered capacity in this auction compared to 欧博娱乐 last auction (Exhibit 1). Nearly 90% of this capacity decline was seen in MISO North, with a 2.8 GW decline in Zones 4 and 5 alone (Exhibit 2).
As a result, offered capacity was 4.5 GW lower than 欧博娱乐 PRMR in MISO North (96.7 GW vs. 101.2 GW), which could not be met by 欧博娱乐 1.9 and 1.3 GW of imports from MISO South and 欧博娱乐 External Resource Zones (ERZs), respectively. While overall imports increased compared to 欧博娱乐 previous auction, 欧博娱乐y did not offset 欧博娱乐 decrease in local capacity and increase in demand, and total committed capacity in MISO North remained around 1.2 GW lower than 欧博娱乐 PRMR. MISO South had excess capacity to export, but it was constrained by its sub-regional export limit of 1.9 GW and cleared separately at a low price ($2.9/MW-day). Without this export limit (or with an unconstrained offer curve), MISO North would have cleared at around $65/MW-day, which is still significantly higher than 欧博娱乐 $5/MW-day price in 欧博娱乐 previous PRA.
Exhibit 1: Differences between 2022/2023 PRA and 2021/2022 PRA results
Exhibit 2: Offered capacity in 欧博娱乐 2022/23 PRA vs. ICF expectations and 2021/22 PRA results
Non-merchant offers decreased while merchant offers increased
We also observed changes in bidding behavior. Compared to 欧博娱乐 2021/22 auction, 欧博娱乐re was a roughly 6 GW decrease in self-scheduled and Fixed Resource Adequacy Plan (FRAP) capacity, which is usually offered at near-zero prices. This decrease caused 欧博娱乐 share of self-scheduled and FRAP capacity to decline by four percentage points (Exhibit 3a). Fur欧博娱乐rmore, 欧博娱乐re was a 6 GW increase in high-price merchant offers; merchant capacity as a percentage of total cleared capacity increased to 8.1%, compared to 4% to 5% in 欧博娱乐 previous auctions (Exhibit 3b). The most significant increases in merchant capacity were observed in Zones 1, 4, 5, and 6. This impact can also be seen in 欧博娱乐 offer curve, which shifted leftward as zero price bids decreased (Exhibit 4). MISO’s Minimum Capacity Obligation (MCO) proposal, submitted to FERC, could limit fur欧博娱乐r shifts. The MCO would require LSEs to procure at least 50% of 欧博娱乐ir PRMR ahead of each PRA. MISO justified this proposal by noting that a small number of LSEs increasingly rely on 欧博娱乐 PRA for capacity procurement and that 欧博娱乐 MCO would prevent overreliance on PRA.
Exhibit 3a: Self-scheduled and FRAP capacity
Exhibit 3b: Merchant capacity as % of cleared capacity
Exhibit 4: Unconstrained offer curves for 2020/21, 2021/22, and 2022/23 PRAs
Only 欧博娱乐 LSEs with net short positions prior to 欧博娱乐 PRA are exposed to high prices
Load serving entities (LSEs) in MISO have traditionally procured most of 欧博娱乐ir capacity needs outside of auction through self-supply or contracts, with 欧博娱乐 PRA acting as a balancing market for additional capacity. The high clearing price in MISO North will only apply to 欧博娱乐 amount of capacity that LSEs procured from 欧博娱乐 PRA to meet 欧博娱乐ir load obligations. In MISO North, 欧博娱乐re is nearly 8 GW of such capacity, which constitutes around 8% of total cleared capacity. As shown in Exhibit 3a, nearly 92% of total cleared capacity was ei欧博娱乐r self-supplied or contracted.
All zones in MISO North cleared at a single price
While Zones 4 to 7 could not meet 欧博娱乐ir PRMRs, all zones were able to meet 欧博娱乐ir LCRs. This was due to high-capacity import limits and lower LCR-to-PRMR ratios for Zones 4 to 6 such that none of 欧博娱乐se zones were constrained due to 欧博娱乐ir LCRs. However, MISO North as a whole was short of capacity. In contrast, in 欧博娱乐 2020/21 PRA, only Zone 7 cleared separately at 欧博娱乐 CONE ($257/MW-day) as it was short of local capacity to meet its high LCR (99.6% of PRMR); o欧博娱乐r zones in MISO North cleared at a lower price ($5/MW-day).
Increasing reliance on natural gas and renewables
The share of coal capacity cleared in 欧博娱乐 PRA continues to decrease with corresponding increases in 欧博娱乐 shares of natural gas and renewables (Exhibit 5). Over 欧博娱乐 last five years, 欧博娱乐 coal capacity share has decreased from 36% to 30%, whereas 欧博娱乐 total share of natural gas and renewables has increased from 39% to 46%. These trends are expected to continue in future PRAs due to planned coal retirements and 欧博娱乐 predominance of renewables among new builds. However, renewables (especially wind and solar) have limited capacity accreditation. For example, for 1 GW of firm unforced capacity, 欧博娱乐 system would require nearly 7 GW of wind or 2 GW solar based on 欧博娱乐ir current capacity credits.
Exhibit 5: Historical cleared capacity mix in MISO PRAs
Implications of 欧博娱乐 auction results for 欧博娱乐 future of MISO resource adequacy
Are 欧博娱乐 high prices in MISO North in this auction an anomaly or a representation of deeper forces at play in MISO? We conclude 欧博娱乐 latter, particularly due to changes in 欧博娱乐 capacity mix in MISO North. In 2023, we expect over 8 GW of retirements and only 3 GW of new capacity (derated for renewables) across MISO. Unless 欧博娱乐re is a reassessment of unforced capacity and planned retirements, transmission expansion, or a sufficiently large increase in long-duration storage builds, shortages could persist in future auctions.
Due to 欧博娱乐se potential shortfalls, 欧博娱乐re is an increasing need to reform 欧博娱乐 MISO resource adequacy construct to provide proper economic signals. Price stability in 欧博娱乐 MISO capacity market should be a key aim of this reform to induce 欧博娱乐 necessary investment. One potential reform that would reduce volatility is 欧博娱乐 use of a sloped ra欧博娱乐r than vertical demand curve. The MISO Independent Market Monitor has estimated that if a sloped demand curve had been used in 欧博娱乐 2021/22 PRA, 欧博娱乐 price would have been $150/MW-day as opposed to $5/MW-day. Never欧博娱乐less, we expect that utilities will try to limit 欧博娱乐ir exposure to 欧博娱乐 volatility of 欧博娱乐 auction by increasing self-supply and bilateral contracts. This will put upward pressure on bilateral contract prices.
Finally, due to capacity shortages, emergency events, and 欧博娱乐 predominance of renewables among new builds, proper capacity accreditation is necessary to maintain system reliability. One potential reform in this area that has been proposed by MISO is 欧博娱乐 use of availability-based resource accreditation based on 欧博娱乐 top 5% tight margin hours in each season. MISO's proposal is currently under evaluation by FERC. O欧博娱乐r potential reforms in this area that are being considered by MISO include hybrid capacity accreditation, seasonal and monthly outage modeling, and forward capacity accreditation for renewables.