North American capacity markets have until now set resource requirements based strictly on the amount of capacity needed to meet annual system peak demand reliably, which in most systems falls in the summer. Yet, customers expect these resources to perform reliably not just during peak demand, but also under other system stress conditions. This imperative was evident in the Northeast and Mid-Atlantic during the 2013-2014 polar vortex when reliability was placed at risk because a great deal of committed capacity failed to respond on the peak winter days, a failure that existing capacity markets largely do not address.

System operators affected by the polar vortex (PJM Interconnection, New York Independent System Operator (NYISO), and ISO New England (ISO-NE)) have each proposed market reforms to address resource performance. NYISO has concentrated on improved energy market pricing, while PJM and ISO-NE have proposed adding “pay-for-performance” mechanisms to their capacity markets that increase capacity payments for resources performing during all peak and emergency hours and penalize underperforming resources. RAP’s Michael Hogan, along with coauthors Sonia Aggarwal and Michael O’Boyle of America’s Power Plan, examine the pay-for-performance proposals in an article published by Greentech Media. Their analysis suggests that the pay-for-performance approach may improve availability during scarcity events, but will fail to deliver greater system flexibility, which is the more fundamental challenge facing the grid. Whereas, the NYISO approach of improving energy and ancillary service market pricing is more likely to accomplish both objectives at a lower cost to consumers.