Article by ISO-NE CEO on the benefits of ISO-NE’s Pay-for-Performance proposal featured in Public Utilities Fortnightly

The May issue of Public Utilities Fortnightly includes an article by Gordon van Welie, ISO New England’s president and CEO, that discusses how the ISO’s proposal to change the Forward Capacity Market (FCM) will improve resource performance and power system reliability. The article was in response to a column that ran in the April edition of Public Utilities Fortnightly, entitled, “Scare Tactics.”

In his article, van Welie outlines how the current FCM design is failing to incentivize resource performance during times of system stress; he makes several key points:

• ISO-NE is observing escalating incidents of poor generator performance that have threatened bulk power system reliability on numerous occasions
• A broken linkage exists between capacity payments and actual performance under the current rules; generators that fail to perform when called on continue to be paid capacity payments
• ISO’s “Pay-for-Performance” (PFP) proposal firmly connects capacity payments to resource performance and utilizes a two-settlement system that is used in other forward commodity markets
• Each resource that takes on a capacity obligation will have a second settlement based on its actual performance during scarcity conditions with under-performers compensating the over-performers
• The PFP proposal does not include exemptions for non-performance; however, stop-loss provisions are built in to limit the amount of money a resource could potentially lose
• These enhancements to the FCM protect consumers from paying for capacity resources that do not perform; consumers will continue to pay the base forward capacity price set by the competitive auction
• With PFP, the ISO is trying to appropriately define what it means for a resource to hold a capacity supply obligation; the proposed changes correct the flaw that exists today: generators getting paid simply for having “iron in the ground”

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For more information on the ISO’s PFP proposal, see the ISO Newswire article, SPI News: ISO-NE submits proposal to strengthen performance incentives in New England’s Forward Capacity Market