Winter is back with a vengeance. And this year, New England is using a new method to ensure the electric grid can work reliably through cold, snow and ice. It’s called “Pay for Performance,” and it’s a competitive market system that rewards power generators for efficiency, and punishes them for poor execution.
“New England is really on the leading edge,” says Matthew White, chief economist with ISO New England, the regional grid operator. “Pay for Performance is the popular term for this accountability system.”
The electric grid has been called the most complex machine in the world, and ISO New England runs our $7-billion-a-year corner of it. They buy power from 350 generators — a mix of fossil fuel plants, nuclear reactors, hydroelectric, wind and solar generators; and dispatch electricity over 9,000 miles of high voltage transmission lines. ISO New England needs to run the grid with near 100 percent reliability, while managing the wholesale electricity market to ensure the lowest price possible.
“We serve effectively as a conductor in the orchestra,” says White, “making sure all of those different producers play music in a mellifluous way so that it flows to all the homes and businesses that use it.”
For the past few years, they’ve accomplished this by using a system called the Winter Reliability Program. It gave power generators a financial incentive to store backup supplies of oil and gas in case of an exceptionally harsh weather.
The Winter Reliability Program faced a tough test last winter, during the December-January cold snap that froze the region and strained the grid. Snow and ice storms knocked out power lines and blocked deliveries of diesel oil and liquid natural gas. The demand and price for natural gas soared.
Some power generators, like the Braintree Electric Light Department, have dual fuel generators, which can burn either gas or oil. And because of the Winter Reliability Program, they also had reserves of fuel oil on hand and could switch to oil when the cost of gas spiked.
“Most of the time we burn gas — when it’s real hot there’s a lot of natural gas around because no one is heating their homes,” said Braintree Electric General Manager Bill Bottiggi, during last year’s cold snap. “When we get extreme cold, we burn oil then, which is what we’ve done for the last 10 days.”
The Winter Reliability Program worked last winter: the grid kept running. But greenhouse gas emissions from burning fuel oil went sky high. During last year’s two-week cold snap the additional carbon dioxide from oil-burning generators erased 75 percent of the states’ annual benefits of solar power, according to Eversource.
And the ISO discovered another problem — some power producers didn’t want to spend money maintaining plants that would only be used for a few hours on just the coldest days of the year.
So this year, ISO New England switched to Pay for Performance.
All generators already sign a three-year contract in the Forward Capacity Market to produce a certain amount of energy when called upon. When ISO calls, they must fulfill their contractual obligation.
But under the old Winter Reliability Program, a generator that failed to produce power when called upon paid a only small penalty. Pay for Performance ups the ante a lot. It rewards efficient producers, and punishes broken promises.
“If you told us ‘I’ll be there and I’ll perform to this level,’ but you don’t, you have to make a refund — that’s the stick,” says ISO economist Mathew White. “The carrot is that the refund flows to someone else who performed, and essentially covered for your non-performance.”
All New England power companies now operate under Pay for Performance. If a generator fails to produce electricity when it says it will, it can cost a company millions. If companies want to compete in the competitive ISO wholesale market they have operate under P4P rules
“This is a dramatic change in the market that is now putting a lot more risk on the power plant owners and their ability to perform, regardless of any excuse,” says Dan Dolan, president of the New England Power Generators Association, which represents 90 percent of the region’s power companies. “So if their transmission line goes down, the power plant gets penalized despite the fact they don’t own the transmission line. If they can’t get fuel, the power plant gets penalized. And so what it does is put a tremendous onus for the power plants who made the investments to be able to run on the most critical periods of time.”
Pay for Performance faced its first test last Labor Day — which was far hotter and more humid than grid forecasters predicted. The new system worked, but Dolan says ISO New England was partially to blame for the problem that triggered the penalty.
“ISO New England dramatically underestimated how much demand was going to occur that day,” says Dolan. “They missed it by 15 percent, which meant they had 15 percent fewer plants up and running in time to meet demand that day. So the system had to scramble, which caused a shortage event, which triggered Pay for Performance.”
ISO assessed the first-ever penalty under Pay for Performance: against the Mystic Generating Station in Everett, for failing to produce on that unusually hot Labor Day. The plant — the second largest in New England — lost its connection to its supply of liquid natural gas (LNG). The plant owner complained that Mystic couldn’t compete in ISO’s competitive wholesale market, and threatened to shut down the power plant and its nearby LNG terminal.
ISO warned of rolling blackouts and convinced federal regulators to allow Mystic to operate outside of the market. This will allow them to charge $400 million more than the previously negotiated price over the next four years for its electricity.
David Ismay, senior staff attorney with the Conservation Law Foundation, says those big bucks would be better spent on renewable energy generators.
“It doesn’t make sense,” says Ismay. “We want to take that same money and build something we can use through 2050, not something we need to turn off or abandon in five or seven years.”
Today, New England relies on natural gas to generate about half its electricity. That’s nearly a threefold increase in just 15 years. But to combat a climate changing future, state law requires generators phase out fossil fuels by mid-century.
“We’re going to keep the lights on. We will find a way to do that,” says Dan Dolan of the New England Power Generators Association. “The question is at what price and at what risk to the consumer.”
Pay for Performance could face a trial by ice over the coming months. Meteorologists warn that the polar vortex is breaking up, and this could be shaping up as an especially harsh New England winter.