A Forward Capacity Market (FCM) is a mechanism used by several electricity markets to ensure resource adequacy by guaranteeing enough generation, storage, and demand response capacity to meet future peak demand reliably. FCMs are forward-looking markets where resources are contracted several years in advance, providing financial incentives for existing capacity and signals for new capacity. One of the main FCM models is used by ISO New England (ISO-NE), which holds capacity auctions 3 years ahead of each delivery period. Through FCMs, electric system operators can ensure supply reliability in a competitive and transparent way.

How Forward Capacity Markets Work

In an FCM, grid operators hold forward capacity auctions where various resources, such as coal-fired generating assets, natural gas power plants, battery storage, solar, wind, and demand response, compete for capacity obligations. The goal of these auctions is to find resources that are willing to be available during peak periods so grid operators have enough resources to meet forecasted demand. Successful bidders get regular capacity payments, which provide revenue stability and incentivize their participation in the market. FCMs are designed with:

Capacity Auctions: Resource owners submit offers based on the minimum payment they would accept to commit their capacity. The auction clears at a price that balances supply and demand and sets the capacity payment rate for all winning participants.

Forward Period: The forward period (usually 3 years in advance) gives developers time to bring new resources online if needed. For example, if a new gas plant or solar farm is needed to meet forecasted demand, the forward period allows time for construction and permits.

Commitment Obligations: Resources that get capacity contracts are obligated to be available to meet demand during the contracted period, which is usually defined as the “delivery year”. If a resource fails to meet its commitment, it may incur penalties, so there is an incentive to be reliable.

FCM in ISO New England (ISO-NE)  

ISO-NE’s Forward Capacity Market is one of the most mature FCMs in the US, designed to ensure resource adequacy and new capacity development. Through an annual capacity auction, ISO-NE secures enough capacity 3 years ahead of peak demand. ISO-NE’s FCM considers not only generation but also demand response and energy storage resources, which can bid to provide flexible on-demand capacity. The inclusion of energy storage and demand response assets is part of ISO-NE’s strategy to build a more resilient and sustainable grid as the region increases its renewable energy penetration.

FCM for Battery Storage and Renewable Integration

FCMs have several benefits for battery storage and renewable energy integration, especially in markets with high renewable penetration. As more wind and solar power are connected to the grid, the variability of supply requires complementary resources like battery storage to provide reliability. FCMs recognize the unique characteristics of battery storage and allow these resources to get capacity payments and support grid stability.

Revenue Stability for Battery Storage: Battery storage assets can participate in FCMs to get capacity payments and create a stable revenue stream. Capacity payments are especially valuable for battery storage systems, which can respond immediately to peak demand. This fast response capability makes batteries an ideal solution for capacity obligations as they can discharge on demand and do peak shaving, helping the grid to meet its resource adequacy targets.

Renewable Integration: Renewable resources like solar and wind can also participate in FCMs and offer capacity based on their expected output. While renewables are variable, participation in FCMs makes the system operator think about how to integrate renewables and what support they need from flexible resources like battery storage. FCMs create a market structure that values different types of capacity, so it’s a step towards a more sustainable grid.

Capacity Market Participation for Demand Response Assets: Demand response assets that reduce or shift electricity usage during peak demand have a big role in FCMs. Through participation, large consumers can get paid to reduce consumption, take load off the grid, and enable renewable energy. Demand response complements battery storage by providing additional flexibility so the grid can meet resource adequacy without relying only on generation.

FCM Challenges and Considerations 

While FCMs have many benefits, they also come with challenges:

Capacity Accreditation for Renewables: One of the biggest challenges for renewables in FCMs is capacity accreditation, which determines how much of a resource is counted towards capacity obligations. Since renewables are intermittent, FCMs use specific accreditation methods like Effective Load Carrying Capability (ELCC) to determine a renewable asset’s capacity contribution based on its expected performance.

Risk of Penalties: Resources in FCMs get penalties if they don’t meet their capacity obligations. Battery storage and renewables require careful management and planning, especially during events like prolonged grid emergencies or extreme weather. Battery storage providers must monitor state-of-charge and usage patterns to ensure their resources are available when needed, avoid penalties, and meet FCM obligations.

Price Volatility in Capacity Auctions: FCM auction prices can be highly volatile based on supply and demand, regulatory changes, and regional energy needs. For storage and renewable asset owners, this price volatility can be a risk, especially if they are heavily dependent on capacity payments. However, grid operators usually implement mechanisms to stabilize prices and maintain a balanced market that encourages long-term investments in capacity.

How SYSO Can Help with FCM Participation

SYSO’s expertise in FCM structures can help battery storage and renewable developers. SYSO helps clients navigate capacity market auctions, maximize capacity payments, and meet FCM obligations. SYSO’s services include:

Revenue Forecasting and Capacity Bidding: SYSO provides revenue forecasting for battery storage and renewable assets so clients can understand their potential earnings from FCM participation. By analyzing market conditions and capacity requirements, SYSO ensures clients submit bids that maximize revenue and align with market dynamics.

State-of-Charge Optimization for Battery Storage: For battery storage assets, SYSO’s state of charge management expertise is key to ensuring availability during peak demand periods. SYSO’s real-time monitoring and optimization tools help storage assets balance charging and discharging needs so they are available when needed to meet capacity commitments.

Market Participation and Compliance Support: SYSO helps clients navigate FCM regulations, meet market rules, and avoid penalties. By managing the key aspects of FCM participation, SYSO enables storage and renewable owners to operate confidently in capacity markets and maximize returns.

Data-Driven Decision Making: SYSO’s data-driven approach helps clients make informed bidding decisions, optimize operational performance, and capture more value from FCMs. With SYSO’s guidance, clients can use auction trends, seasonal demand, and renewable output forecasts to make a comprehensive FCM strategy.

SYSO’s full-service approach helps storage and renewable energy assets to thrive in FCMs, increase grid reliability, and maximize returns for clients. With SYSO’s services, battery storage and renewable developers can provide resource adequacy and get paid for capacity.