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ISO New England: "Difficult" to Call Capacity Market a Success When Resources Fail to Perform, and NERC Violation Occurs (Solution is to Borrow from Energy-Only Market!)
"It is difficult to declare the [ISO New England] capacity market a success if a significant number of the resources that have been selected and compensated as capacity resources fail to perform as needed," Robert Ethier, Vice President of Market Development for ISO New England, said in comments at FERC.
"Even with an excess of resources, the performance of a variety of resources has been poor," Ethier said, speaking for the ISO.
"It is difficult to declare the capacity market a success if a significant number of the resources that have been selected and compensated as capacity resources fail to perform as needed," Ethier said
"Yet, the region has experienced a NERC violation, nearly 200 reported instances of fuel unavailability, and poor contingency response, with the ISO getting only about 60 percent of the requested megawatts in response to contingency reserve activations," Ethier said
Specifically, on September 2, 2010, when loads were extremely high, the system experienced a single contingency loss of roughly 1,500 megawatts. Dispatch instructions were sent to over 1,900 megawatts of resources. As the ties with neighboring regions were already fully loaded, New England could not share reserves from other regions. Because of poor unit performance, ISO-NE violated a NERC standard by not recovering reserves within fifteen minutes. There was not a dollar of penalty to a capacity resource.
"As a result, ISO-NE is extremely concerned that the current market design will not succeed in assuring long-term reliability. Put simply, the performance of many resources has been poor and there have not been any consequences in the capacity market for such poor performance," Ethier said.
For example, Ethier said that during this summer’s heat wave in New England which persisted from Monday, July 15 through Friday, July 19, ISO-NE’s operators were issuing forecasts that the system would be short of reserves and, in effect, let all resources know that availability was critical for the entire week. "Nonetheless, several troubling events occurred during that week," Ethier said, including:
• One oil-fired unit attempted to start each day and never became available until 5:00 P.M. on Friday, the last day of the heat wave.
• Another oil-fired unit’s owner on Wednesday informed the operators that its unit was running low on fuel. By Thursday, the operators were forced to reduce the output of the unit and ultimately shut it down to preserve fuel.
• On Friday, the system was short of reserves for roughly five hours despite having excess capacity as measured by "steel in the ground." That day, New England experienced the fourth highest demand on record (27,360 megawatts), and had forced outages and reductions that totaled over 4,600 megawatts. ISO-NE had sent start orders to all generation in advance, and out of the total 29,751 megawatts of supply having capacity supply obligations and 1,387 megawatts of supply without capacity supply obligations, nearly 15 percent was unavailable. As a consequence, there was a reserve deficiency across several hours, and in the peak hour the deficiency was 547 megawatts, nearly 25 percent of the reserve requirement of 2,374 megawatts.
"Despite all these events, no capacity resource lost any portion of its capacity payment for poor performance," Ethier said (emphasis added)
"This past winter, ISO-NE operators experienced difficulty meeting a winter peak load of approximately 21,000 megawatts with resources that have a combined capacity supply obligation of approximately 33,000 megawatts because of uncertainty about the fuel availability for both oil and gas plants, reduced availability of resources within the operating day due to long start-up times, and poor resource performance," Ethier said.
"During the first three capacity commitment periods, several large capacity resources have experienced extremely long outages during which they were not providing any service to the system, yet their capacity payments were never reduced. Fortunately, because of the surplus of capacity, this did not cause any direct reliability problems to the system. However, when the market is procuring only the amount of capacity required to meet the installed capacity requirement, such outages could cause significant risks to reliability," Ethier said.
"ISO-NE considers this resource performance problem to be a serious threat to reliability and one that must be addressed in the design of the capacity market," Ethier said (emphasis added)
"[S]imply counting megawatts is not enough. If the capacity is installed, but does not perform reliably when needed, then the reliability standards will not be met," Ethier said.
Ethier said that the ISO's solution is pay-for-performance in the capacity market, which, ironically, borrows from the energy-only market that certain stakeholders are seeking to jettison in Texas.
"This [pay for performance] approach mirrors the compensation that would be provided by an energy-only market. Resources earn money when providing a service, whether it is energy or reserves, and do not earn money when they are offline and unavailable. This compensation structure provides clear signals to resources about when their performance is valuable, and how valuable it is. And like an energy-only market, it does not matter why you did not perform when needed – if you perform you get paid, otherwise you get nothing," Ethier said.
However, the ISO's proxy for the incentives natural in the energy-only market fall short of achieving the superior results found when performance is the sole determinant of revenues, as happens in the energy-only market.
Specifically, the ISO's pay-for-performance design retains a base capacity payment, determined by the forward capacity auction result. It does add a performance payment, determined by a resource’s performance whenever scarcity conditions occur during the capacity commitment period, which may be a positive or negative adjustment to its base payment, reflecting superior or inferior performance during scarcity conditions.
Notably, however, the customer's capacity rate is not impacted by the performance payment; the performance payment only transfers revenues among capacity suppliers. While this does create an incentive for performance, it does not assure customers paying for capacity that units will perform when needed, just like the current capacity market.
While the energy-only market similarly cannot assure performance, customers don't pay fixed costs for the resources to be available, so if the resources don't perform, customers have not suffered an economic loss. The ISO's pay-for-performance design, while an improvement, still commits customers to capacity payments without any assurance of capacity availability, making the investment in capacity a waste, with reliability outcomes no different, from the customer's perspective, than an energy-only market.
Link to ISO-NE comments
Docket AD13-7
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September 20, 2013
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Reporting by Paul Ring • ring@energychoicematters.com
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