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New England generators claim ISO-NE rebate caused capacity suppliers to take $100M hit

A group of New England generators recently complained toFERC that an ISO New England Inc.rebate intended to discourage economic withholding by generators and allow loadto hedge against price spikes is causing capacity suppliers serious harm.

The New England Power Generators Association thereforeasked FERC to actswiftly to amend the rebate provisions and require that generators bereimbursed for the money they lost after the so-called peak energy rent, orPER, adjustment was put into effect.

The PER adjustment is a part of the ISO-NE's forwardcapacity market. It reduces the monthly capacity payment generators receive byan amount that is supposed to approximate the peak energy rents a hypotheticalgenerator would earn from the real-time energy market.

Calculated on an hourly basis, the PER is roughly equivalentto the difference in the real-time clearing price and a pre-determined daily "strikeprice" that triggers the need for a PER adjustment. The hourly values areaveraged over a rolling 12-month period and the resulting figure is deductedfrom generators' monthly capacity payments in a process often referred to as arebate.

NEPGA's complaint was sparked by what it claimed was themore than $100 million in "penalties" suppliers incurred through thePER adjustment mechanism during just six hours on Aug. 11 while the total costof energy paid by load for those six hours was only about $18 million.

Really hot weather in New England that day drove powerdemand to its highest level in several years. When a lightning stormunexpectedly caused a large nuclear generator to go offline, available reservesplummeted, which triggered price spikes to entice generators to offeradditional power supplies and maintain system reliability.

The problem, according to NEPGA, is that although capacitysuppliers provided the critically needed energy and reserves, the PER adjustmentmechanism essentially required them to rebate a significant portion of theextra revenues they earned.

"If suppliers have to rebate a portion of revenuesearned when prices spike, the reasoning went, generators will be discouragedfrom creating price spikes through economic withholding, and load will beprotected from those price spikes when they do occur," NEPGA said. "Therebate does not serve either of these objectives, however, as … [it hasinstead] become an unjust and unreasonable penalty."

NEPGA pointed to a central design flaw that has rendered thePER adjustment unreasonable and at times "plainly absurd." That flaw,it said, is that the rebate is based on earnings by a hypothetical generator inthe real-time energy market even though the vast majority of generators subjectto the rebate earn their energy market revenue in the day-ahead market.

Reserve shortages that lead to price spikes are usuallycaused by unanticipated events so real-time prices are typically much higherthan day-ahead clearing prices, NEPGA explained. On Aug. 11, for instance, thehourly real-time clearing price surpassed $1,400/MWh at several locations whilethe corresponding day-ahead clearing price was only around $85/MWh.

"Therefore, in almost all cases capacity resources paythe rebate without actually realizing the higher energy prices that they aresupposed to be 'rebating' to load," NEPGA asserted. "Instead ofreducing a generator's capacity revenue by an amount that approximates what itreceived in 'peak energy rents' (and what load paid in peak energy rents) aswas intended, the rebate assesses an arbitrary penalty completely divorced fromresource earnings and load's exposure to real-time prices."

NEPGA therefore asked FERC to find by Nov. 29 that theprovisions of the ISO-NE's tariff governing the PER adjustment are unjust andunreasonable. It also asked FERC to direct the ISO-NE to revise its tariff toreturn the rebate to a just and reasonable level, set a refund effective dateof Sept. 30 and require the ISO-NE to file a refund report within 30 days ofthe issuance of an order.

While the complaint focuses on Aug. 11 as the "mostsevere recent PER event," NEPGA stressed that other events also harmedgenerators in the past 20 months. It asserted that 37 separate PER hours causedgenerators "to suffer an estimated $193 million in financial penaltiesthrough the PER adjustment mechanism, all while these resources providedcritical reliability during times of system stress."

Of note, FERC has already accepted an ISO-NE proposal thatwould eliminate the rebate starting June 1, 2019. (EL16-120)

Jasmin Melvin is areporter for S&P Global Platts, which, like S&P Global MarketIntelligence, is a division of S&P Global Inc.