ISO-NE implements 'pay-for-performance' capacity market incentives

Dive Brief:

As of June 1 the ISO New England has integrated new "pay-for-performance" (PFP) incentives into its forward capacity market, designed to address rising generator outage rates which have left some power plants unavailable during critical times.
The grid operator will use a system of incentives and fees designed to force older resources that can’t reliably perform into retirement, rather than face increasing non-performance charges.
The new system will replace New England's stopgap winter reliability program, which required generators to keep stockpiles of oil or LNG onsite. The new PFP system uses a two-settlement mechanism based on performance.

Dive Insight:

The PFP model was introduced five years ago, but due to the forward nature of capacity markets it has taken some time to integrate. It is still not fully in place, say New England officials, and will be phased in during the next six years. But already, the grid operator indicated it has seen some improvements.

"As pay-for-performance is phased in over the next several years, the data will determine how well it achieves the reliability benefits we sought when the design was introduced five years ago," ISO chief economist Matthew White said in a blog post on the grid operator's site.

White added that the ISO has "seen some promising signs" since the new system was approved. A combination of the PFP concept and "other incentive programs" has brought more dual-fuel capability to the region, he said, adding that the response rate of the fast-start fleet has improved steadily.

"We’ve also heard, anecdotally, that many large power plants have accelerated major maintenance in order to be ready to meet their obligations," White said.

Since FERC approved the PFP model, the ISO has seen about 2,500 MW of dual-fuel capability added or proposed.

"These are all encouraging signs, but we won’t be able to fully evaluate it until we see how resources respond and the system operates through stressed, shortage event, conditions," White said. The full effect of PFP will not be seen until June 2024 because the charges are being phased in over the next six years.

Through May 2021, the charge will be set at $2,000/MWh, rising to more than $5,000 later in 2024.

Similarly, PJM Interconnection has instituted more stringent rules following outages during the Polar Vortex, which stressed the system. In that market, the grid operator instituted new capacity performance rules to ensure ample firm generation is available to meet demand.

ISO-NE has relied on dual-fuel generators at times of constrained gas supplies, but said the cost of adding that capability has risen and plant owners have not added as much new dual-fuel capability as the operator had initially hoped. Contracting for liquefied natural gas is another way generators can ensure sufficient fuel supplies without having to deal with the region's constrained pipeline system.

"So far, few generators have done that, but the ISO is watching to see if seasonal LNG contracting increases as the performance payment rates increase," the grid operator said.