New Yorkers Mitigate Market Uncertainty with Pass Through Pricing

By Lisbeth Guerrero, Director, Supply, GDF SUEZ Energy Resources NA

With potential generation resource shortfalls in New York City in 2010, customers need to understand and plan for possible increases in capacity costs and how to best capitalize on the uncertainty of the energy market.

The 2009 Load & Capacity Data Report – typically referred to as the “Gold Book” – published by the New York Independent System Operator (NYISO), has confirmed that New York Power Authority’s Charles A. Poletti generating facility is scheduled to be retired from use effective February 1, 2010.

The retirement of the Poletti generating facility, accounting for 885MW of capacity supply, could in fact create a significant shortage in resources, because recent market updates suggest that replacement capacity for the retired facility is not expected to be available until the summer of 2011.  Despite this anticipated replacement capacity, it is likely that New York City (Zone J) will still face a period where there will be significant capacity shortages.  And, as with all projects of this nature, the summer 2011 target date could very well change to an earlier or later date as the project completion approaches, leading to capacity price uncertainties.  

Due to these market conditions, some suppliers are preparing for potential capacity fluctuations by encouraging customers to pass through the price of capacity.  Under a pass-through price, customers will pay the actual cost of capacity at the “NYC Capacity Spot Market Clearing Price.” This price is free of risk premiums that a supplier would charge to cover risk associated with offering a fixed capacity price in such an uncertain market.

In light of anticipated capacity price fluctuations, it is important that customers are aware of energy solutions that make good financial sense today, and will make sense into the future.  Suppliers should help customers distinguish between what they “want” and what they “need.”  The only way to understand the trade-off between certainty and cost is through price signals.  As a general rule, the more pricing certainty wanted by a customer, the higher the cost.