Effective June 1, ISO-NE implemented a number of changes to its market rules, systems, and procedures related to the operation of the regional wholesale electricity markets. The most significant of these changes include:
- the Forward Capacity Market Pay for Performance initiative (“PFP”); and
- the Price-Responsive Demand (PRD) structure.
The two programs, released simultaneously earlier this month, will affect both traditional generation resources and demand response resources alike.
- Pay for Performance
Through the PFP project, ISO-NE seeks “to increase financial incentives for resource owners to make investments to ensure their resource’s reliability during periods of scarcity.” PFP creates a two-tiered settlement process where a resource’s capacity revenue is calculated based on the forward capacity auction prices and an additional capacity performance adjustment, namely a payment or a penalty. While the formula for determining the ultimate amount of the payment or penalty is multi-stepped, the overall goal of PFP is to redistribute penalty payments from under-performing resources to over-performing resources during “shortage events” as that phrase is defined by ISO-NE. Importantly, a resource is not required to have a Capacity Supply Obligation in order to receive a performance incentive, if it performs during period of system deficiency. With very limited exceptions, all resource types obligated to perform are treated equally under PFP.
- Price-Responsive Demand
With the implementation of PRD procedures, ISO-NE becomes the first regional transmission organization to integrate fully active demand response resources into its regional wholesale electricity markets. In March 2011, the Federal Energy Regulatory Commission issued Order 745, which provided, among other things, that when a demand response resource is cost-effective, it must be fully compensated for the services it provides at market prices. While demand response resources have been authorized to participate the ISO-NE Forward Capacity Market since 2010, ISO-NE’s newly implemented PRD procedures now allow these resources to participate in the energy and real-time markets, and be dispatched economically based on their market offers alongside traditional generation resources.
Both the PFP and PRD initiatives resulted from years of work by ISO-NE and were developed with significant stakeholder input. These newly implemented systems should create more competition among a diverse set of resources, enhance grid reliability, and more fairly compensate performing resources in times of scarcity.