Published to LuthINformed, Issue 3 (May 20, 2016)
Previously, we discussed the New York power market design in terms of regulations and policy. Additionally, we review the concept of transmission and delivery. To conclude our discussion of market design, we will discuss New York City Installed Capacity (ICAP) and ancillary services.
NYC ICAP Cost vs. Rest Of State
NYC customers must purchase 83.5% of their capacity from NYC. Therefore a 100 kW customer would pay 83.5 kW x $15.99 or $1,335. The rest of their capacity, 33.5 kW (i.e. to meet their 117% requirement) can be purchased in the Rest of State (ROS) market at $10.99 or $368. The total cost would be $1,703. An upstate customer that purchases all of their capacity at the ROS rate would purchase 117 kW at $10.99 for a capacity cost of $1,286. The NYC customer would pay 32% more to meet their capacity requirements – expensive – but also a good opportunity to be in a demand response program.
Other than energy, the second largest price component is Installed Generation Capacity, or ICAP. To ensure power reliability and availability, the NYISO requires that Con Edison and retail marketers have reserve sources of ICAP available as protection against generation outages. Each supplier must procure sufficient ICAP to equal 117% of its peak day load, purchasing 83.5% of peak load from in-city sources. As the example in the box above illustrates, NYC ICAP costs are significantly higher than the rest of the state.
What Are Ancillary Services?
It’s important to understand the various components that make up your supply price. The NYISO requires that various ancillary services be provided at either fixed rates or market prices. Ancillary services is a catch-all term that many don’t really understand – so here we go:
Voltage Support – These services must be purchased from the ISO and will be priced at a fixed rate. Voltage support services are closely coordinated with the individual Transmission Operators who are responsible for determining the means by which additional voltage support services will be provided when asked to do so by the NYISO.
Operating Reserve – There are three types of reserves: 10-minute spinning reserve, 10-minute non-spinning reserve, and 30-minute reserve. Operating reserves insure that there will be sufficient capacity in the event of the loss of the largest supply source on the system, and are auction priced. Recently, the NYISO has begun allowing demand side resource aggregations to provide operating reserves.
Regulation and Frequency Response – This is the real-time, second-to-second operation of the bulk power system. It includes balancing of load with generation and the maintenance of a constant system frequency of 60 Hz. This service must be paid for by all internal New York loads (exports and wheel-throughs are exempt) and cannot be self-provided. They are priced by auction.
Black Start – The NYISO purchases “black start” capability at fixed cost rates from those generators with the ability to start up without the benefit of an outside power source. These resources would be used in the event of a total or partial system collapse to bring the grid back up one piece at a time.
The latest inventory report (above) shows a net increase of 73 Bcf vs. the previous week. Stocks were 791 Bcf higher than last year at this time and 795 Bcf above the five-year average. Immediately following the release of the report, the futures curve moved lower. Traders considered the report bullish for short term prices and the 12 month strip rose 6.5 cents to close at $2.60.
12 month strip = $2.535
24 month strip = $2.709
Cal Year 2017 = $2.836
Cal Year 2018 = $2.884
(all prices NYMEX only; A/O 5/18/16)
Storage levels remain high – as is domestic production. Natural gas inventories continue to set year-over-year highs. Overall, market prices remain near recent lows with CY’17 and CY’18 back under $3. Against this backdrop, a long term fixed price supply agreement is certainly attractive. The following market charts illustrate trends.
For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.
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