ISO-NE Pay for Performance starts June 2018

The operator of New England's electric grid and wholesale electricity markets has adopted a new design for its capacity market, called “Pay For Performance” or PFP, which will become effective on June 1, 2018. As of that date, capacity payments will reward power resources that make investments to successfully boost performance during periods of system stress, while resources that don’t perform will forfeit capacity payments. According to grid operator ISO New England, Inc., these capacity market reforms represent “a significant evolution of the Forward Capacity Market.”

Since 2008, ISO-NE has operated a wholesale market for electric capacity, in addition to markets for energy and ancillary services. According to the grid operator, its Forward Capacity Market (FCM) ensures that the New England power system will have sufficient resources to meet the future demand for electricity. The market design features annual Forward Capacity Auctions held three years in advance of the operating period, in which resources compete to obtain a commitment to supply capacity in exchange for a market-priced capacity payment.

ISO-NE first proposed a version of PFP in 2014 as a means to address what it characterized as "capacity resource performance issues in New England." According to an article by ISO-NE's chief executive officer, ISO-NE felt that the prevailing capacity market design increasingly failed to incentivize resource performance during times of system stress. The grid operator reported "escalating incidents of poor generator performance that have threatened bulk power system reliability," and identified a "broken linkage" between capacity payments and actual performance under the previous rules.

According to ISO-NE, its Pay for Performance reform "firmly connects capacity payments to resource performance." It is designed to increase financial incentives for resource owners to make investments to ensure their resource’s reliability during periods of scarcity.

The Pay for Performance market design is based on a “two-settlement approach” such as is used in forward markets for electricity and other commodities.

In a first stage, a market participant takes on a Capacity Supply Obligation – a forward obligation to provide a specified amount of capacity from its resource – in exchange for a Capacity Base Payment. That base payment is determined by multiplying the resource’s Capacity Supply Obligation (in megawatts) by the relevant clearing price – either the clearing price from a Forward Capacity Auction or reconfiguration auction, or a bilateral contract price. Once a market participant has taken on a Capacity Supply Obligation in exchange for the Capacity Base Payment, the participant has a physical, resource-specific obligation to cover a share of the system’s energy and reserve requirements during reserve deficiencies.

In a second stage, the participant is subject to a settlement for deviations from its committed share. Under PFP, this second payment, which can be positive or negative, is called the Capacity Performance Payment. If a resource delivers more than its share of the system’s requirements during a capacity scarcity condition, it will be paid an additional amount for that incremental production; if it delivers less than its share, it must “buy out” of its position by paying other resources that did deliver.

Tariff revisions were accepted by the FERC in 2014 and 2015, and ISO-NE has subsequently developed further changes to its tariff to implement the program. The revised tariff is scheduled to take effect on June 1, 2018.

Massachusetts nuclear power plant to close

The Pilgrim Nuclear Power Station, the sole nuclear power plant in Massachusetts, will close by June 2019, according to its owner Entergy Corp.

Entergy is an integrated energy company headquartered in New Orleans, Louisiana.  Entergy is one of the leading nuclear generators in the U.S., with nearly 10,000 megawatts in nuclear generating capacity as well as about 20,000 megawatts of other electric generating capacity, as well as serving retail utility customers in Arkansas, Louisiana, Mississippi and Texas.

The company's Entergy Wholesale Commodities business owns and operates five nuclear power units located in the northern United States, and sells electricity produced by those plants to wholesale customers.  Those units include Pilgrim Station's Unit 1, a boiling water reactor with a maximum dependable capacity of 688 megawatts.  The Pilgrim Station unit was installed in 1972, and is currently licensed through June 8, 2032.

Today Entergy announced plans to close Pilgrim Station by June 2019.  In its press release, Entergy cites "poor market conditions, reduced revenues and increased operational costs."  In Entergy's view, low current and forecast wholesale energy prices "brought about by record low natural gas prices, driven by shale gas production" hurt Pilgrim's revenues; wholesale energy market design flaws mean merchant nuclear power plants are inadequately compensated, while "unfavorable state energy proposals ... subsidize renewable energy resources at the expense of Pilgrim and other plants."  Entergy also cites "increased operational costs and enhanced Nuclear Regulatory Commission oversight" following a recent NRC decision to give Pilgrim a higher level of scrutiny.

The announcement resembles a 2013 decision by Entergy to close the Vermont Yankee Nuclear Power Station, a plant similar in vintage to Pilgrim Station.  Entergy announced Vermont Yankee's closure in 2013; that plant ceased commercial operation at the end of 2014, and Vermont Yankee's decommissioning is now underway.  In announcing the Vermont Yankee closure, Entergy pointed to financial factors including a "natural gas market that has undergone a transformational shift in supply due to the impacts of shale gas, resulting in sustained low natural gas prices and wholesale energy prices", high plant cost structures, and wholesale market design flaws.

According to Entergy, it has notified regional electric grid operator ISO New England Inc. of its intent to exit the region's capacity market.  Entergy said the exact timing of plant shutdown will be decided in the first half of 2016.