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What You Need to Know About ISO-NE’s New Pay for Performance Capacity Market Rules

ISO-NE established its Forward Capacity Market (FCM) in 2008 to ensure long-term grid reliability by providing a market-based price signal and revenue stream for generators that commit to meet peak electricity demand in the future. In order to address reliability concerns highlighted by the Polar Vortex of 2014, ISO-NE implemented a Winter Reliability Program, December 2015 through February 2018, as a stopgap measure with the ultimate goal of redesigning the Forward Capacity Market. The post-Polar Vortex market redesign has taken the form of Pay-For-Performance (PFP), which will go into effect on June 1, 2018.

04 / 23 / 2018 Business Alan Southworth, Portfolio Manager

ISO-NE established its Forward Capacity Market (FCM) in 2008 to ensure long-term grid reliability by providing a market-based price signal and revenue stream for generators that commit to meet peak electricity demand in the future. In order to address reliability concerns highlighted by the Polar Vortex of 2014, ISO-NE implemented a Winter Reliability Program, December 2015 through February 2018, as a stopgap measure with the ultimate goal of redesigning the Forward Capacity Market. The post-Polar Vortex market redesign has taken the form of Pay-For-Performance (PFP), which will go into effect on June 1, 2018.

ISO-NE’s PFP project will increase financial incentives for resource owners to make investments to ensure reliability during Capacity Scarcity Conditions (CSC). In essence, the new rules will reward resources that outperform and penalize resources that underperformed relative to their Capacity Supply Obligations (CSO) during scarcity events. Notably, the PFP construct eliminates the many exceptions for certain types of resources that may underperform under the current Forward Capacity Market rules. Specifically, intermittent resources that cannot actively affect their generation may face additional risk (or upside) that they should analyze and understand when determining the price at which they would leave the auction, and whether or not they would want to take on a Capacity Supply Obligation at all.

So how do Capacity Scarcity Conditions come about? For any five-minute interval when ISO-NE can no longer meet the Ten-Minute Reserve Requirement, the Minimum Research Requirement, or the Zonal Reserve Requirement, the Reserve Constraint Penalty Factor (RCPF) is included in the energy price and Capacity Scarcity Conditions occur; in other words, when the ISO is running low on supply and needs resources to generate power to avoid blackouts or outages, the new Pay-For-Performance rules kick in as an additional financial incentive for resource owners.

In terms of settlement with the ISO, for any five-minute interval at Capacity Scarcity Conditions, a Performance Score and Capacity Performance Payment (CPP) are calculated for all resources, including those that do not have a Capacity Supply Obligation in the Forward Capacity Market. To understand how the payment/penalty dollar amounts are calculated, consider the following example*:

Scenario: ISO-NE experiences a single five-minute interval at Capacity Scarcity Conditions

  • Resource #1: Generates 5 MW with a CSO of 10 MW --> $583.33 penalty
  • Resource #2: Generates 5 MW with a CSO of 5 MW --> $125 payment
  • Resource #3: Generates 5 MW with no CSO --> $833.33 payment

* Assumed 85% Balancing Ratio** and $2000/MWh Performance Payment Rate

** Balancing Ratio = (Total Load + Reserve Requirements provided) / Total CSO for the ISO

Note that while all three resources generated the same amount during the five-minute interval, the net payment/penalty is based on how much the resource under- or over-performed relative to its Balancing Ratio-scaled CSO*. Also note that while Resource #3 received the highest payment for this shortage event, it would not receive a base capacity payment since it does not have a Capacity Supply Obligation. For more examples and details on the settlement calculations, refer to the ISO-NE FCM PFP page.

One additional feature of the Pay-For-Performance construct is the inclusion of stop-loss provisions to cap the downside risk generators face for underperforming during Capacity Scarcity Condition intervals. There are both monthly and annual stop-loss mechanisms in place to help protect resource owners from unreasonable financial risk. That said, resources that have a Capacity Supply Obligation and consistently underperform during Capacity Scarcity Conditions can incur a net payment to ISO-NE, even with the Base Capacity Revenue associated with clearing MWs in an FCM auction.

Understanding the intricacies of ISO-NE’s new Pay-For-Performance rules is crucial for generators planning to participate in the Forward Capacity Market. Notably, it is important to consider the tradeoffs associated with taking on a Capacity Supply Obligation in a Forward Capacity Market auction. On the one hand, clearing MWs in an auction provides a steady and predictable base capacity revenue stream. On the other hand, PFP could lead to significant penalties if there are many Capacity Scarcity Condition intervals during which a resource regularly underperforms relative to its Capacity Supply Obligation. This could be particularly important to consider for solar resources that may not be generating when Capacity Scarcity Conditions occur during the winter. For more information or a strategy consult on your generation resources in ISO-NE, contact info@gprenew.com

Please note that all reports, summaries and other work product relating to client portfolios provided by GP Energy Management LLC (whether previously, now or in the future) are based solely and exclusively on data provided by such client and that GP Energy Management LLC hereby disclaims any liability and makes no representation or warranty as to the accuracy, truth and correctness of the data contained therein.

GP Energy Management, a wholly-owned subsidiary of Genscape, Inc., is a registered commodity trading advisor (CTA) with the Commodity Futures Trading Commission and is a member of the National Futures Association. GP Energy Management provides a wide range of energy services, including energy management, consulting, and commodity risk and operations support, to its customers.