CAMBRIDGE, Mass. — Officials from PJM and ISO-NE were joined by consultants and market players in debating new performance incentives and the pros and cons of energy-only scarcity pricing at EUCI’s Capacity Market conference early this month. Several employees of MISO, which runs a voluntary capacity market to supplement state resource planning, were in attendance.

Below are some of the highlights.

PJM Senior Economic Policy Advisor Paul Sotkiewicz said he wishes consultant Roy Shanker had never invented the term “missing money” in describing the need for a capacity market.

“It makes it sound like it’s only about money when really this is about reliability,” he said. Capacity is less than 20% of wholesale cost, “yet we fight some of the biggest holy wars over it,” he added.

One of the benefits of PJM’s Reliability Pricing Model for capacity is that it is technology-, size- and age-neutral, he said. “I don’t care if you put a hamster on a wheel. As long as you feed it lettuce and it runs, [PJM is] good with it.”

Michael Borgatti, director of RTO Services for Gabel Associates, said PJM’s Capacity Performance rules are more risky for generators than ISO-NE’s Pay-for-Performance.

Borgatti said PJM officials have said that their limited force majeure rules would not have been declared in either the derecho or Hurricane Sandy in 2012.

“We can show you the material where they tell you you would have been penalized, even though the transmission lines are laying on the ground,” he said. “Now if the dispatcher calls you and says ‘the transmission lines are laying on the ground, take your machine offline or you’re going to blow a substation,’ you’re [absolved of] penalties. So this is the subjective nature of the PJM package. I would not count on simply the fact that the transmission system failed to excuse you from penalties.”

William Hogan, research director of the Harvard Electricity Policy Group, said the new capacity rules in ISO-NE and PJM have worsened the “disconnect” between the energy and capacity markets.

“I understand the problem and I think trying to make sure the generators perform is a good idea. But I think this is a Rube Goldberg system designed to avoid the obvious,” he said. “It does capture the marginal incentives for the generators … but it completely excludes load from this conversation.”

PJM Market Monitor Joe Bowring responded to Hogan’s criticism of PJM’s capacity construct, acknowledging that other markets have gone different routes in ensuring resource adequacy: Alberta allows limited market power; MISO uses cost-of-service regulation; California uses bilateral contracts; and ERCOT uses scarcity pricing.

“But all of these solutions have one element or another of administrative oversight,” Bowring said. “That is, none of them are some pure market solution.”

Sam Newell, principal for The Brattle Group, noted that his company has been involved in the calculations of the cost of new entry (CONE), which are used to set the ceiling on capacity offers. PJM allows bids up to 85% of net CONE without review.

“The thing that makes me nervous is that we’ve been involved many times in determining what is net CONE for use in the auction. I think we do a great job of it. But I know better than anybody there’s a lot of uncertainty in it. So, in effect, this very big administrative parameter, net CONE, now takes on a lot more weight. But I don’t know if it’s that’s the right level.”

Jeff Bentz, director of analysis for the New England States Committee on Electricity, said the joint solicitation for clean energy resources by Massachusetts, Rhode Island and Connecticut was a response to the lack of progress on proposals to bring new transmission into the region. (See New England States Combine on Clean Energy Procurement.)

“The concept here is we would hope maybe a wind provider and a solar provider and a hydro provider could maybe team up as one bidder and team up with a transmission developer and builder, and those three or four entities could put one bid into the RFP. And then when the wind’s blowing, the wind guy is providing the clean energy commitment. When the wind’s not blowing or the sun’s not out, the hydro guy can step in and fill the line. So we kind of wanted to leave this up to the market and let them prescribe how they best can meet the delivery commitment.

“[I have] no idea whether this is going to work or not. No idea whether the bids are going to be beneficial or not. But on the other hand we don’t see anything else really coming in to New England to solve this infrastructure issue.”

Andrew Gillespie, principal analyst for ISO-NE, said he hopes Pay-for-Performance will reduce the use of administrative pricing in future auctions. But he said they are unlikely to be eliminated because of political opposition to severe short-term price spikes.

“You could have price signals that in the long run provide the most efficient outcomes, but we don’t live in the long run,” he said. “The political reality is we live in the here and now. It is untenable to consumers for prices to go to $17, $18/kWh.”

Scott Harvey of FTI Consulting said that forward capacity markets such as PJM’s make procurement decisions based on often incorrect RTO load forecasts. “We’re consistently over-forecasting demand. So we’re constantly buying too much capacity. That’s one of the consequences of contracting forward like this.”

Todd Schatzki, vice president at the Analysis Group, said his company’s research has found wide disparities between the best- and worst-performing generators during reserve shortages. That, he said, will be reflected in their offers into the PJM and ISO-NE markets.

“If I’m a good resource, I actually want to be in this market. This is a good market for me because I’m going to make more money when I get to the compliance period. If I’m a poor resource, I’m probably going to lose money when I get to the compliance period, but I’m going to be able to anticipate that and include that in my offer.”

Debate over PJM Transition Auction

PJM’s 2016/17 transition auction results were released during the conference, sparking a debate between Sotkiewicz and James Wilson, a consultant to consumer advocates in the RTO. (See Timing of PJM Auction Announcement Sparks Real-Time Debate.)

— Rich Heidorn Jr.