ISO New England: Labor Day Capacity Scarcity Highlights Energy Efficiency Issue

On September 3, 2018, a Capacity Scarcity Condition occurred in ISO New England (ISO-NE) during off-peak hours. Under current Forward Capacity Market (FCM) rules, energy efficiency (EE) resources are exempt from Pay-for-Performance (PfP) charges/credits during off-peak hours, which causes a settlement deficit because total payments are not equal to total penalties. It is important to note that:

• ISO-NE adjusts the settlement by assessing a pro-rated charge on all capacity suppliers to balance the equation.
• If EE had been subject to performance penalties, like all other capacity resources, they could have potentially incurred up to $8 million in performance charges (depending upon their actual performance).
• Instead, all other capacity suppliers incurred a pro-rata share of the $8 million in performance penalties.
• In the end, net performers were paid less, and net under-performers were penalized more than they would otherwise have been but for the avoidance and reallocation of EE performance penalties.

Proposed Solutions

At the recent ISO-NE Markets Committee Meeting (November 7-8, 2018), two proposals were presented to remedy the settlement shortfall caused by the Energy Efficiency Resource Exemption from PfP Penalties in off-peak hours. Highlights include:

• The Commission noted that EE resources are required to measure performance (qualified capacity) only during peak hours, and thus, there is presently no mechanism to appropriately measure (and compensate) performance in off-peak hours. A just, reasonable, and appropriate solution could be achieved under this mandate in one of two ways:

1. Allocate the costs of the EE Exemption on a cost-causation basis: Here, penalties otherwise incurred by the EE resources could, therefore, be allocated to the Capacity Load Obligation of New England states pro-rata based on the amount of EE capacity MWs in each state (with the majority of EE resources located in Massachusetts and Connecticut); or
2. Measure EE resource load reductions in off-peak hours:  This would require EE resources to produce off-peak hour load reduction values, either through actual measurements or through some other methodology.

• Per FERC order, “…ensure that Capacity Performance Payments for EE resources are calculated only for scarcity conditions that occur during hours in which demand reduction values are calculated for the applicable resource type pursuant to the Tariff.”
• During all on-peak and seasonal peak hours, include EE in all portions of the calculations for Actual Capacity Provided, Performance Score, and Balancing Ratio. Outside of these hours, EE would need to be excluded from the following calculations:
  • Actual Capacity Provided and Performance Score – need not be calculated for EE, as they are irrelevant since the resource cannot be granted payments or penalties
  • Balancing Ratio or (Load + Reserve Requirement) / Total Capacity Supply Obligation would require modification
  • Removal of CSO associated specifically with energy efficiency from the denominator (outside of EE performance hours)
  • The balancing ratio on Labor Day would change from ~0.72 to ~0.77 (on average across all 32 intervals). This would result in the normal situation of an over-collection of $1.6m.
    • Refund to all resources – excluding EE – of ~$50/MW
  • Payments or penalties for all relevant resources shared in the refund

The proposal will be further discussed and voted on in future Markets Committee sessions as stakeholders wrestle to correct this gap in PfP in the ISO-NE Capacity Market.

PCI Can Help

PCI GenManager Platform includes robust back office functionality with a Settlement Module that provides end-to-end workflow support for both ISO and non-ISO environments. It enables the calculation of settlement position or market instrument level (generator, load zone, virtual bids, internal/external transactions, FTRs, etc.) and performs independent shadow settlements for side-by-side comparison with ISO settlement statements for all ISO charge types. This functionality includes complex charge types to support the Forward Capacity Market in ISO-NE.

The PCI Market Intelligence Team will monitor the discussion at ISO-NE to implement any market change around Pay-for-Performance to provide clients with the most accurate shadow settlements along with the full range of back-office workflows.