Renewable State of Mind: New York Releases the Clean Energy Standard

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1 Q U I C K T A K E Renewable State of Mind: New York Releases the Clean Energy Standard By Aaron Geschiere, ICF International Shareables Clean Energy Standard (CES) targets would nearly quadruple New York renewable development, with an average increase of 2,100 GWh/year from CES also aims to preserve 27,618 GWh of nuclear generation and associated 3.37 GW of capacity, preventing dramatic short-term increase in state CO2 emissions. New RE projects benefit from higher demand and increased market certainty, while existing units are left to look for other opportunities after original PPAs expire. Preliminary analysis by ICF projects energy prices up to 10% to 20% lower by 2030 with full attainment of the CES. As finalized, the policy will bring challenges and opportunities across a range of areas, including regional renewables, wholesale markets, and operations. New Clean Energy Standard Makes New York 2nd Largest State for Renewable Energy (RE) Demand in U.S. Following months of discussion, policy proposals, and stakeholder comments, the successor to New York s Renewable Portfolio Standard (RPS), the New York Clean Energy Standard (CES), was approved by the New York Public Service Commission (PSC) on August 1st. In addition to subsidizing the state s nuclear power resources, New York plans to substantially increase renewable energy development in the New York Independent System Operator (NYISO) market. The PSC s Order adopting the CES finalizes and formalizes a number of important market and market-altering mechanisms that will have important implications for the NYISO market, while leaving other decisions for a later date. Figure 1. New York Incremental Renewable Generation Per Year, Historical and Final CES Targets Source: 2016 New York Annual RPS Annual Performance Report, New York PSC Order Adopting a CES Notes: [1] represents an average of renewable generation under the RPS Program. [2] The 2017 CES goal has been divided between 2016 and [3] represents average amount of generation added in each year to achieve the 2030 goal. 1 icfi.com 2016 ICF International, Inc.

2 New York s Clean Energy Future The New York CES is designed to accomplish two objectives. The primary objective is to generate 50% of New York s electricity from qualifying renewable energy resources, both new and existing, by This is often referred to as New York s 50 by 30 goal. The second objective is to ensure that the state s nuclear facilities, some of which are not competitive in today s market conditions, can stay operational until the 50 by 30 target is achieved, thus ensuring that the state s carbon emissions do not balloon due to increasing generation from natural gas-fired capacity. The CES accomplishes these objectives by establishing two new programs: the Renewable Energy Standard (RES), which creates a market for new renewable generation from qualifying facilities online on or after January 1, 2015, and a Zero Emission Credit (ZEC) program, which will provide additional payments to three of the state s nuclear facilities. In addition to the PSC s decision on existing renewable facilities in their final Order, the RES and ZEC programs will impact the majority of New York s electricity market, with implications for most market participants. Renewable Energy Standard (RES) Increases Opportunities for RE Development With current renewable generation equal to just under 26% of net energy for load, the RES is meant to increase New York s renewable generation by an additional 24% by Thus far, the CES targets have been finalized through 2021 (Figure 2); the targets for 2022 through 2030 will be finalized through a triennial review process beginning in Beginning in 2019 and in every year thereafter, incremental demand for new energy will significantly exceed recent historical trends under New York s RPS (Figure 1). Figure 2. Tier 1 Clean Energy Standard Goals and Estimated Demand for New Renewable Generation Percent of Estimated Demand for New Year Total Load (%) Renewable Generation (GWh) % % 1, % 3, % 5, % 7, % 29,200 Source: NY Public Service Commission Order Adopting a Clean Energy Standard The PSC s Order establishes a market construct for the RES that will be more in-line with other RPS programs around the country, but with a continued role for NYSERDA as well. Key features of the RES include: Unlike the previous New York RPS, New York s load-serving entities (LSEs) will be responsible for demonstrating compliance with the RES. Similar to nearby renewable markets in ISO-NE and PJM, LSEs will have to acquire enough RECs to meet their RES requirements or pay an alternative compliance payment if they fall short. However, unlike other markets, NYSERDA will continue to centrally procure RECs under long-term REC-only contracts (15-20 years). LSEs will be able to buy these RECs from NYSERDA at their weighted-average cost plus NYSERDA s administrative costs. In addition, LSEs will be able to procure their own RECs through direct purchases, and competitive electric service companies (ESCOs) will be able to develop and own renewable resources. Both of these developments are deviations from the previous New York RPS. 2 icfi.com 2016 ICF International, Inc.

3 Other important changes from the New York RPS include the opportunity for renewable resources from adjacent territories to participate in the RES and the removal of the 30 MW limit on hydro capacity. Out-of-state renewable generators may participate in the RES market as long as they deliver into New York with documentation of a contract path. These two changes will allow new Canadian hydro and wind to participate in the RES, including RE that would be delivered through the Champlain Hudson Power Express transmission project. These changes significantly increase the opportunities available to renewable developers in New York. And other changes provide greater certainty around those opportunities, including a commitment by NYSERDA to hold annual, regularly scheduled procurements, and a firm standard in place of the previous RPS. New York s electricity providers now holders of the compliance burden will have to determine the best means of acquiring RECs. They could rely on supply from NYSERDA s procurement, but there should be opportunities for organizations to procure their own RECs at lower cost because of the requirement that NYSERDA sign only long-term REC-only contracts, while a larger suite of options will be available to the LSEs. No Tier for Existing RE; Implications for New England Tier I REC Markets Despite recommendations by the New York Department of Public Service (DPS) to create a separate tier to support New York s existing renewable facilities, the PSC elected to forgo this option. Unless existing renewables facilities can prove financial hardship, they will not receive additional payments from NYSERDA beyond their current contracts. As a result, those existing New York generators will have an incentive to look elsewhere to sell their power. New England s Tier 1 Renewable Energy Credit (REC) market may be the destination, subject to significant transmission constraints. Recent RPS compliance reports for Massachusetts, Rhode Island, and Connecticut show approximately 900,000 RECs from New York have been meeting these state s RPS requirements in recent years. With the oldest New York RPS facility contracts expiring in the next few years, these trends should continue or increase. Any additional influx will put downward pressure on New England Tier 1 REC prices, partially offsetting increasing RPS goals and other drivers of higher prices. Zero Emission Credits (ZEC) to Keep Near-Term CO2 Emissions Down The Nuclear Tier is a first-of-its-kind program that will provide payments to New York s three upstate nuclear facilities: the Ginna, Fitzpatrick, and Nine Mile Point plants. 1 In addition, in their final Order, the PSC stated that they will consider a ZEC program for the Indian Point nuclear facility if the plant becomes uneconomic in the future. These payments will be furnished for 6 two-year periods (dubbed tranches ), each with a new payment level. Using the formula below, the subsidies will begin at $17.48/MWh and are expected to increase to $29.15/MWh, although future payments may vary. All of New York s LSEs will be obligated to buy a portion of the ZECs that corresponds to their annual retail sales. ZEC availability for the three units is set equal to their historical generation from June 2015 to July This equates to 27,618 GWh of ZECs, or an average capacity factor of about 93.5%. This ZEC availability is considered both an upper and lower bound, since the state will not offer additional allowances for the upstate nuclear facilities but the nuclear units are also obligated to perform (or to seemingly provide 1 The Ginna Plant is co-owned by Exelon (50.01%) and EDF (49.99%). The Fitzpatrick Plant is owned outright by Entergy, although the company is in discussions to sell the facility to Exelon. And the Nine Mile Point Plant is co-owned by Exelon (43.97%), EDF (43.95%), and the Long Island Power Authority (12.08%). 3 icfi.com 2016 ICF International, Inc.

4 sufficient explanation as to why they did not). If any of the three facilities retire, the number of ZECs will be reduced by 1/3. There is some notable opposition to the proposed nuclear tier. There were thirty-two comments filed in the two-week comments window on the DPS Staff s proposal for the ZEC program, and other parties stated that they would have filed additional comments with a longer comment period. Some of these comments focus on the implications that the nuclear tier may have on New York s competitive wholesale power markets. It is possible that some of these parties may file with the Federal Energy Regulatory Commission (FERC) or in the court system. Implications The New York CES will usher in significant change to New York s energy market while preserving the state s upstate nuclear facilities. The increased CES targets will provide additional opportunities for both in- and out-of-state renewable energy developers, and changes to the market design of the RES also introduce more market certainty. There are also important implications for other market participants, including conventional generators. Preliminary internal analysis by ICF of the proposed RES projects wholesale energy prices that are up to 10% to 20% lower with full attainment of the CES (qualifying renewable builds were built in, rather than allowing the renewables to be built economically). These cost impacts are especially acute in upstate New York, although price impacts are seen across the state. Changes to the state s wholesale energy prices would be first order impacts, but secondary impacts, such as changes in NYISO capacity prices and/or capacity retirements, will be possible as well. Finally, there may be opportunities to develop new intra- or interregional transmission upgrades. The State Resource Plan (SRP), which New York began to develop in 2014, will further characterize these opportunities in the coming years. With additional information on the CES set to be released in early December, market participants will want to keep a close eye on the SRP and CES proceedings. About the Author Aaron Geschiere is an Associate at ICF International, where he has five years of experience providing project and modeling leadership and support for the Commercial Energy Division. Mr. Geschiere s work at ICF focuses on renewable energy fundamentals and project evaluation, with previous experience forecasting Renewable Energy Credit prices in multiple U.S. markets, Power Purchase Agreement (PPA) evaluation and due diligence, and assessment of market opportunities for renewable project developers. Mr. Geschiere has B.S. degrees in Economics and Environmental Science from the University of Michigan. For questions, please contact: Aaron Geschiere aaron.geschiere@icfi.com 2016 ICF International, Inc. Any views or opinions expressed in this white paper are solely those of the author(s) and do not necessarily represent those of ICF International. This white paper is provided for informational purposes only and the contents are subject to change without notice. No contractual obligations are formed directly or indirectly by this document. ICF MAKES NO WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, AS TO THE INFORMATION IN THIS DOCUMENT. 4 icfi.com 2016 ICF International, Inc.

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