Tuesday, August 18, 2015

Pay For Performance Rewards Reliability and Nuclear

Recent Capacity Auction and Nuclear Energy

In a recent post at NEI Nuclear Notes, Matt Wald described recent changes in the Capacity Auction for the PJM area.  He explained why these changes will be good for nuclear energy.  I encourage you to read the post, and watch the two-minute video.  The PJM Capacity Auction and Nuclear Energy.

Note: PJM is the grid operator for Pennsylvania, New Jersey, Maryland and a large swatch of the Midwest, just as ISO-NE is the grid operator for New England

Capacity, PJM, and Pay-For-Performance

What was the main change in this recent auction?  Pay for Performance has been implemented.  Here is PJM's page of explanation, Capacity Performance at a Glance.

In my opinion, this is the crucial sentence from that page: Generators that exceed performance commitments will be entitled to funds collected from generators that under- perform. 

The sentence is crucial, but it takes some explanation.

How the Capacity Auction Works.

We have to start with the two auctions: Forward Capacity Auctions, and Real-Time Auctions. Real-Time Auctions are constantly on-going. They auction electricity as MWh.  These are the auctions that yielded the high MWh prices on the grid during the polar vortex, as in the figure below.

High MWh prices
during 2014 polar vortex
But once a year, the grid operators run a "Forward Capacity Auction."  Power plants bid into this auction, just as they do for the Real-Time Auctions.

 But this time, the plants aren't bidding in kilowatt-hours that they plan to produce, today or tomorrow.  In the Capacity Auction, they are bidding in their AVAILABILITY to product kilowatts, in the future. The units of the Capacity Auction are Megawatt-Day (for PJM) and Kilowatt-Month (for ISO-NE).

Megawatt-Day and Kilowatt-Month are not just weird variations on the term kWh. They are deeply different.  A megawatt day is the availability of a megawatt, if needed, for one day.  A kilowatt-month is the availability of a kilowatt, if needed, for one month.

  • The Real -Time auction bid is "Here's your energy, sir!" (and now…pay me for the electricity I produced.)
  • The Capacity auction bid is "Ready, willing, and able, sir!" (and now…pay me for my availability to go online when needed.)

Take the Money and Don't Run?

Capacity auctions take place once year. A plant may bid that it is available at 700 MW each month.  But then, when the grid operator actually calls upon the plant to produce power,  it may say: "So sorry. I can't get online.  I can't get gas, my coal pile froze, and my cat ate the homework."

Cat from Wikipedia
Looks like it would eat homework
Until Pay-For-Performance, this did not matter. It didn't matter to the capacity payment whether or not the plant went on-line when needed. So why not bid the plant into the capacity auction?  What's the downside for the generator, after all?  Go ahead and bid,  and then take the capacity payment money. Yeah,  sometimes you have to say: "oh, sorry, can't run." But take the capacity money and run. Or not-run, as the case may be ;)

BUT, with pay-for-performance, generators won't bid into the capacity market if they realize they may get hit with a fine.  If they don't go on-line when called to go on-line, it may cost them money.  If they don't go on-line, they may have to pay a generator who does go on-line.

(Note: Sometimes generators refuse to go on-line because the spot price of their fuel is too expensive.  This sort of thing can be very hard on grid operators.  It is the source  of my cynical comment about the cat and the homework.)

As Matt Wald (and the PJM capacity-performance page) point out, pay-for-performance will tend to raise the capacity auction price on the grid.  As Wald also points out, the performance-pay rewards reliable power plants, and therefore, rewards nuclear.

Nuclear is reliable, and capacity pay-for-performance tends to reward that. 

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