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Make-whole payments are a critical mechanism in energy markets like MISO, designed to ensure fairness and financial stability for market participants. These payments compensate generators when their operating costs exceed the revenue they earn from market-clearing prices. In this blog post, we’ll explore how make-whole payments work in MISO, break down the calculation process, and compare MISO’s approach to similar mechanisms in other ISOs like PJM and CAISO.
You’ll learn about the purpose of make-whole payments, the key cost components involved, and how they’re calculated. We’ll also provide a simple example to illustrate the concept and highlight differences between MISO and other ISOs.
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Why make-whole payments matter
Imagine a generator in MISO that’s committed to run by the market operator to meet reliability needs. The generator incurs costs for fuel, labor, and maintenance, but the market-clearing price for electricity doesn’t cover these expenses. Without a make-whole payment, the generator would operate at a loss, potentially discouraging participation in future markets. That’s where make-whole payments come in—they bridge the gap between a generator’s costs and its market revenue, ensuring financial viability.
In MISO, make-whole payments are calculated based on the generator’s actual costs and the revenue it earns from the market. These payments are often referred to as “Revenue Sufficiency Guarantee” (RSG) payments in MISO, emphasizing their role in ensuring generators recover their costs.
How MISO calculates make-whole payments
MISO’s make-whole payment calculation involves comparing a generator’s total costs to its market revenue. If the costs exceed the revenue, the generator receives a payment to cover the shortfall. Here’s how it works:
Key components of the calculation:
- Total costs: This includes start-up costs, no-load costs (the cost of running the generator even when it’s not producing electricity), and incremental energy costs (fuel and variable costs for producing electricity).
- Market revenue: This is the revenue the generator earns from selling electricity at the market-clearing price.
The make-whole payment equals the difference between the total costs and the market revenue, ensuring the generator is “made whole.”
Example:
Let’s say a generator’s total costs for a day are $50,000, but its market revenue is only $45,000. The make-whole payment would be $5,000, covering the shortfall and ensuring the generator doesn’t operate at a loss.
Comparing MISO’s approach to PJM and CAISO
While the concept of make-whole payments exists across ISOs, the implementation varies. In PJM, these payments are known as “Operating Reserve Credits” and are calculated similarly, covering costs like start-up and no-load costs. However, PJM places a strong emphasis on ensuring these payments are allocated to the market participants who benefit from the generator’s operation.
CAISO, on the other hand, uses a slightly different approach. Make-whole payments in CAISO are tied to price corrections and intertie schedules. For example, if a generator’s bid price exceeds the Locational Marginal Price (LMP) due to unforeseen market conditions, CAISO calculates a make-whole payment to cover the difference. These payments are also allocated based on specific cost allocation rules, ensuring fairness across market participants.
Why make-whole payments are essential for market stability
Make-whole payments play a vital role in maintaining reliability and encouraging participation in energy markets. By ensuring generators recover their costs, these payments support a stable and efficient market. They also provide a safety net for generators, allowing them to operate even when market prices are volatile or insufficient to cover costs.
Understanding how make-whole payments work in MISO and other ISOs like PJM and CAISO highlights the importance of these mechanisms in fostering a fair and reliable energy market. Whether you’re a market participant or just curious about energy markets, knowing the purpose and calculation of make-whole payments offers valuable insights into how these complex systems operate.
The takeaway: bridging the gap for reliability
Make-whole payments are more than just financial transactions—they’re a cornerstone of reliability and fairness in energy markets. By compensating generators for their costs, these payments ensure the lights stay on, even during challenging market conditions. Whether you’re navigating MISO, PJM, or CAISO, understanding make-whole payments is key to grasping the intricacies of energy market operations.
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