Transcript FCM Performance Incentives

O P S I 1 0 TH A N N U A L M E E T I N G | O C T O B E R 1 3 - 1 4 , 2 0 1 4
Pay For Performance:
New England’s Capacity Market
Enhancing Capacity Markets to Improve
Resource Performance and Investment
Matthew White
CHIEF ECONOMIST
New Challenges Require Enhancements
to Capacity Market Designs
1. New England faces significant reliability, investment, and
resource performance challenges over the coming decade
2. Solution: A two-settlement capacity market design
that addresses these challenges
3. Expected benefits: Improved system reliability;
cost-effective solutions to region’s investment needs;
and a simpler, resource-neutral capacity market design
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Investments for New England’s Future
• Up to 8,300 MW at risk for
retirement by 2020
(28 older oil & coal units)
• If all retire: ISO estimates a
need for 6,300 MW of new
or repowered capacity
• Existing and planned transmission projects provide
significant flexibility for
locating these new resources
• ISO-NE Retirements Study
At-Risk Capacity Resources in New England
Total At-Risk: 8,300 MW
Oil-fired Capacity: 6,000 MW
Coal-fired Capacity: 2,300 MW
850
MW
Coal-Fired
Resources
550
MW
400
MW
270 MW
Oil-Fired
Resources
600
MW
2300
MW
400
M
W
1200
MW
1700
MW
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Further Investment and Reliability Challenges
• ISO New England is increasingly reliant on resources with
uncertain performance and availability
– Gas units: “just-in-time” fuel
– Coal, oil-steam fleet: 50+ years old
– Intermittent resource growth with
inherently uncertain output
• New ‘systemic risk’ to reliability
when too many units cannot
perform simultaneously
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Challenges: Market Incentives for Investment
• Many investments could reduce performance risk
concerns, at new and existing facilities
– New pipelines and non-interruptible gas transport
– Dual-fuel, backup LNG, greater liquid fuel storage, and so on…
– New flexible generation capacity, more fast-responding DR, etc….
• Existing markets provide insufficient
incentives for these investments
– Many incremental investments
are needed only few hours per year
– Revenues are insufficient
to justify the capital investments
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Principles for NE’s Capacity Market Reforms
1. Reward outputs (power delivered), do not specify inputs
– Let suppliers identify least-cost solutions, bearing risks and rewards
2. Redefine performance measures for capacity resources
– Delivery of energy and reserves during (reserve) scarcity conditions
– Not peak period ‘availability,’ or EFOR-based measures
3. Better align resources’ financial incentives with the
value of reliable service during tight system conditions
– Mimic the performance incentives of an efficient energy market,
with the reduced volatility that a forward market provides
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Paying for Performance: Four Major Elements
• Capacity Obligations: A Standard Incentive Contract
– Base payment set in forward auction, and a performance payment
• Performance Payment:
– Delivery of energy & reserves during (reserve) shortage conditions
– May be positive or negative (on top of base payment)
– Not based on “availability,” or EFOR-type measures
• Resource Neutral, No Exemptions
– All resources have same base and performance payment rate
• Who pays what?
– Loads pay the base payment set by the forward clearing price
– Performance payments are transfers among suppliers
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Product Definition is The Key To Good Markets
• Traditional capacity ‘product definition’ is… hard to define
– One frequent view: Payment (subsidy) for “steel in the ground”
• Approach: Establish a new, simple, product definition,
modifying sellers’ financial obligations to incent performance
– Capacity is just a single product: A share of system’s requirements.
• Standard forward contract structure, based on two concepts:
– Two-settlement principle (e.g., like the DA forward energy market)
– Scarcity price premium: Real-time incentive in tight system conditions
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Capacity Becomes a Forward-Sold Good
Using a Simple, Two-Settlement System
Forward-Sold Goods
ISO’s Capacity Reforms
• Initial revenue on fwd sale
 Auction-based fwd sale (FCA)
• Specifies a forward financial
commitment (‘position’)
 Pro-rata share of system
requirements (load + reserves)
during RT reserve shortages
• 2nd Settlement based on
deviations at delivery …
 2nd settlement for delivery
(energy + reserves) deviation
from system share
• … at a contract rate, or at
replacement (floating) price
 At (high) tariff-specified rate
(analogous to scarcity pricing)
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Benefits of the Two-Settlement Capacity Market
• Greater operational-related investments at existing
resources to improve resource performance
– E.g., secure fuel arrangements and/or backup fuel supplies
• Efficient resource evolution. Strong incentives for
investment in new capacity that is either:
(1) Low-cost and highly reliable (nearly always operating); or
(2) Highly flexible and highly reliable (gets online quickly and reliably)
• A more reliable power system at lowest possible cost
– Market rewards suppliers that deliver the most cost-effective solutions
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Complementary Energy Market Changes Underway
• Energy Market Offer Flexibility (2014)
– Allows suppliers to update supply offer prices intra-day
– Improves generators’ flexibility to incorporate current fuel costs into
energy prices during volatile market conditions
– Improves incentives to procure fuel to honor ISO dispatch schedules
• Reserve Market Enhancements (2012/13)
– Send stronger, more frequent market price signals when system
conditions are likely to be tight
– Enhance incentives to procure fuel to honor ISO dispatch instructions
and reward resources that perform in stressed system conditions
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For More Information
Design and Key FERC Orders
• ISO White Paper: FCM Performance Incentives
• Stakeholder Process: 16-month process (thru Dec. 2013)
• FERC Approval:
May 30, 2014 and Oct. 2, 2014 Orders
• Implementation: 9th Annual Capacity Auction, Spring 2015
(Delivery year 2018/2019)
• For more information:
www.iso-ne.com > FCM Performance Incentives Key Project
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