The New England Power Generators Association has filed a complaint at FERC to ultimately eliminate the Peak Energy Rent (PER) Adjustment in the ISO New England market, with adjustments to the mechanism for capacity periods for which auctions have already been run.

The PER Adjustment is essentially a clawback to load of excessive revenues in the energy market earned by resources receiving a capacity payment, and obligates capacity suppliers to rebate a portion of their capacity revenues based on real-time energy prices. The PER Adjustment is designed to approximate the additional revenues that a hypothetical proxy peaking unit (the PER Proxy Unit) would earn in the real-time energy market during the highest-priced hours reflecting scarcity

The generators claim that the PER Adjustment was intended to act as a "hedge" for load against price spikes in the energy market, and that it was intended to help mitigate incentives to create price spikes in the energy market through economic or physical withholding by removing any profits gained from the rise in energy prices above a designated level.

The generators said that capacity market changes, such as pay-for-performance, eliminate the need for the PER Adjustment to address withholding, and that the PER Adjustment does not act as a hedge because the PER Strike Price increases as fuel costs increase, and because the PER Adjustment uses a 12-month average.

However, while we cannot attest to whether this was the intent of the original PER Adjustment design (though it most certainly should have been), the PER Adjustment serves a more important function than the two listed by the generators -- equity.

Remember that generators only receive scarcity energy market revenues by being available in the energy market. In other words, generators need to "show up" to earn these energy market revenues.

However, we are consistently told (despite evidence in ERCOT to the contrary) that the potential for scarcity revenues alone is insufficient to assure that generators will "show up" during times of scarcity. In other words, generators will not take on the risk of paying the fixed costs of keeping power plants available for the rewards of potential scarcity revenues.

Hence why load is compelled to pay the going-forward fixed costs of generators in the ISO-NE capacity market.

However, this creates a patent inequity.

Load is bankrolling the generators' availability to be available in the energy market, but do not actually receive any energy from the generators under the capacity market. Instead, load simply pays the generators' fixed costs so the generator will be available.

But now that the generator is available, it gets to enjoy all of the fruits of energy market participation without worrying about going-forward fixed costs, which have been subsidized by load through compulsory participation in the capacity market.

But for the capacity market, the generator may not have "shown up" to earn scarcity revenues, because it did not want to risk under-recovery of its going forward fixed costs.

Yet when such costs are subsidized, generators expect to reap all of the rewards of energy market participation, even though they would not have earned one cent had their fixed costs not been subsidized (since they would not have "shown up").

Since load is bankrolling generators' energy market participation, it is only equitable that they receive a portion of the energy market revenues made possible through load's payments (indeed, we would argue that a truly equitable and "market-based" design would require the repayment of all of load's subsidization, plus a return on capital, with the generators left with any remaining revenues from the energy market, since load is essentially compelled to "invest" in capacity resources, and real-world investors demand returns, or they take their capital elsewhere)

Eliminating the Peak Energy Rent adjustment essentially means that generators get to gamble freely in the energy market, at the expense of load. Their fixed costs are covered by the capacity market, while variable costs will be reflected in their bid, and avoided if their bid does not clear. Load should receive compensation for giving generators this no-risk opportunity to make money.