ISO-NE has proposed to reduce its performance payment rate (PPR) by more than 60% in response to concerns that excessive penalties will have unintended consequences for the capacity market.
Capacity resources in New England have incurred significant performance penalties during scarcity events over the past two years. These penalties have been particularly consequential for slower-start fossil units. Over two events in 2024, net penalties for combined cycle gas and oil generators totaled $44.3 million, while penalties for steam turbine residual-oil units totaled $25.8 million.
Some participants have argued the risk of these penalties could drive up capacity prices in future auctions and push resources out of the market.
The performance rate determines penalties and credits during scarcity events. The RTO’s Pay-for-Performance (PFP) construct is designed to insulate ratepayers, with underperforming resources paying for the incentives for overperforming resources.
The RTO’s per-megawatt-hour performance rate has grown in recent years, increasing from $2,000 to $3,500 in 2021, to $5,455 in 2024, and to $9,337 in 2025.
ISO-NE announced at the NEPOOL Markets Committee meeting March 10 that it plans to cut the rate back to $3,500. It also plans to move forward on an expedited schedule to implement the changes as quickly as possible, targeting a technical committee vote in May.
“Some resources may find the increased PPR, and the volatility associated with it, makes the risks and potential costs of selling capacity too high,” said Chris Geissler, director of economic analysis at ISO-NE. “This could result in retirements from resources that can still make meaningful contributions to system reliability.”
He added that a high performance rate increases the risk that individual resources hit their stop-loss limits, which cap the total penalties each resource can accrue per month. When resources hit this limit, ISO-NE charges unrecovered penalties to all capacity resources that have not hit the stop-loss limit.
The reduced PPR still should provide adequate incentives for performance, Geissler said, estimating that incentives from PFP and elevated energy market prices likely would total around $6,000/MWh.
“History suggests that resources make investments and perform strongly at this rate,” he said.
Stakeholders generally reacted favorably to the proposal, while some expressed concern that a $3,500 rate may be too low to adequately incent performance during scarcity conditions.
Treatment of Exports
Also at the MC meeting, ISO-NE detailed its plans to subject certain exports to the performance rate.
This change, recommended by both of the RTO’s market monitors, is intended to prevent a market loophole that could allow participants to earn performance credits without sending any power.
Under the current rules, during a capacity scarcity event, if a participant schedules exports that equal imports scheduled by a different participant, the export would not be charged performance penalties, but the import would earn performance credits.
“These two transactions collectively result in no power flowing but do not net in settlement because they are submitted by different market participants,” said Enrico De Magistris, economist at ISO-NE. “The market participants could transact outside the ISO-NE system to share the PFP credits.”
He noted that ISO-NE is not aware of any instances in which a participant has exploited this loophole.
To fix the issue, the RTO proposes to charge the performance rate during scarcity conditions to all exports “not associated with a specific generator in the ISO-NE system.”
Unlike “system-backed exports,” exports associated with a specific generator would not be charged the performance rate. These exports would reduce the amount of performance revenues the associated generator could earn or subject it to performance penalties for not meeting its capacity supply obligation (CSO).
De Magistris said ISO-NE likely will remove system-backed exports from the calculation of its balancing ratio, which it uses to determine capacity resources’ obligations during scarcity events.
ISO-NE calculates the systemwide balancing ratio by dividing load and reserve requirements by total CSO. System-backed exports are currently included in the calculation as load, while generator-backed exports are excluded.
Balancing Ratio Cap
ISO-NE also discussed its proposal to cap the PPR balancing ratio in compliance with an order issued by FERC in January.
The ruling stemmed from a complaint by the New England Power Generators Association after the balancing ratio exceeded 1.0 for the first time ever during an event in June (EL25-106). (See FERC Directs ISO-NE to Cap Pay-for-Performance Balancing Ratio at 1.0.)
In designing the tariff changes, ISO-NE has tried to “keep the ‘effective’ payment rate for overperformance as close to the tariff-specified [PPR] as possible,” said Megan Sweitzer, lead analyst at ISO-NE.
Under the proposal, if the cap on the balancing ratio leads to the under-collection of performance charges, this deficit would cut into the performance credits allocated to overperforming resources.
“This change ensures resources performing at their CSO megawattage are not charged” and “lowers the ‘effective’ PPR for overperformance when a deficiency exists,” Sweitzer said.
Notably, the treatment of deficits caused by the balancing ratio cap would differ from the treatment of deficiencies caused by the stop-loss mechanism, which will still be charged to all capacity resources.
While NEPGA argued against ISO-NE’s allocation of stopped losses in its complaint, FERC sided with ISO-NE’s argument that the stop-loss mechanism benefits all capacity resources and therefore it is fair to charge capacity resources for the costs of its implementation.
