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Performance is What Counts
ISO New England’s capacity market proposal will bring reliability benefits to the region.
An article in the April issue of Public Utilities Fortnightly , entitled " Scare Tactics ," did a good job of describing the circumstances that led to ISO New England's "Pay for Performance" (PFP) proposal to fundamentally change its capacity market. The article also summarized well why some market participants oppose ISO New England's (ISO-NE) proposal. Unfortunately, the article leaned heavily on its own set of scare tactics when it did not present a balanced and accurate picture of the benefits of ISO-NE's PFP proposal and why a change in the overall market design is needed.
ISO New England's proposal has been designed to address the very real and escalating generator performance problems which, on numerous occasions, have threatened bulk power system reliability. As ISO New England's vice president of system operations, Peter Brandien, describes in his testimony in support of the ISO's PFP proposal, "nearly every category of generator has seen its rates of unplanned outages increase. Resources do not respond adequately to contingencies. Units are failing to staff their generators. Liquid fuel inventories are kept low, and units are mothballing their ability to switch fuels."
The issue is a broken linkage between capacity payments and actual performance. Under the current rules, the poorest-performing resources continue to be paid as much as the highest-performing resources. When a resource with a capacity supply obligation fails to deliver when called, not only is the reliable supply of power threatened, but New England's capacity buyers - and ultimately, its consumers - are paying "money for nothing." Both circumstances are untenable, and the incentives to make investments to improve performance through the current design are clearly lacking.
ISO New England already has made an array of changes in its operating procedures, and to its energy and ancillary services markets to improve the efficiency and incentives, but the PFP proposal is the cornerstone because it clearly defines the capacity product. While some stakeholders, including the New England Power Pool (NEPOOL), argue that reforms to the energy market would be a better alternative to sweeping changes to the Forward Capacity Market (FCM), their alternative proposal is inadequate and offers no analysis to demonstrate how it will address the region's serious reliability problems.
Current offer caps in the energy market, combined with a lack of demand-side participation, stifle the market's ability to reveal the true value of electricity during times in which the system is severely stressed. The capacity market is necessary because it provides a revenue stream for generators to recover this "missing money" from the energy market and for the region to meet its reliability targets. It is critical to firmly connect capacity payments to resource performance to ensure that resources provide reliability in exchange for getting paid.
ISO New England's PFP proposal offers a straightforward market mechanism. It is not a novel idea, as some have suggested, because it is the same system used in other forward