Why the Performance Payment Rate Matters
ISO-NE’s Pay-for-Performance (PFP) system was designed to incentivize generators to be available during scarcity conditions. When a generator fails to deliver during a capacity scarcity condition, it faces financial penalties — and when it overperforms, it earns bonuses. The performance payment rate determines the $/MWh magnitude of these transfers.
The current rate was set high to send a strong investment signal after the 2014/2015 polar vortex. But after a decade of implementation, ISO-NE now acknowledges that the rate produces penalties that far exceed what is necessary to incentivize reliability, creating a risk premium that gets embedded in capacity auction bids and ultimately passed to ratepayers.
Impact on Commercial Electricity Rates
- Lower capacity auction clearing prices: A lower performance payment rate reduces the risk for generators bidding into the Forward Capacity Auction. Less risk = lower risk premiums = lower clearing prices = lower capacity charges on commercial bills.
- New England rate relief: Capacity costs represent 15-25% of most New England commercial electricity bills. Any reduction in the performance payment rate flows directly to the capacity component.
- Timing: The proposed change would take effect for future Forward Capacity Auctions. The most immediate auction affected would be FCA 19 or FCA 20, meaning commercial bill impacts would begin 3-4 years from the reform’s effective date.
Broader Capacity Market Reforms
This proposal is part of ISO-NE’s broader shift toward seasonal prompt auctions (replacing the current 3-year forward model) and new resource adequacy frameworks. Combined with the third annual reconfiguration auction (ARA3) that concluded March 4, 2026, the New England capacity market is undergoing its most significant structural overhaul since the PFP mechanism was introduced in 2018.
Source: RTO Insider; ISO New England; Forward Capacity Market filings.