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N.Y. Staff Propose Imposing New Clean Energy, Nuclear Standard Obligation on ESCOs, But With Utilities Also Engaging In Long-Term Contracting

January 26, 2016

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Reporting by Karen Abbott • kabbott@energychoicematters.com

Staff of the New York PSC have proposed imposing compliance obligations for a new clean energy standard (CES) and nuclear standard on load serving entities, including ESCOs, with utilities also engaging in long-term contracting for certain resources.

Staff proposes that all electric retail load serving entities (LSEs) share the obligation of the CES mandate in proportion to their annual retail electricity sales. For each LSE, each tier's CES obligation would be determined by multiplying the LSEs load obligation by the percentage CES target for that year. Calculation of the load obligation would be measured at the wholesale level (i.e., retail metered load as grossed up to reflect aggregate delivery losses on the system, the energy obligation as measured by the New York State Independent System Operator) so as to be measured on a comparable basis to the quantities generated. Existing State-controlled renewable generation (i.e., New York Power Authority hydropower) will be included in the baseline and thereby will reduce the total obligation on all other LSEs.

Direct customers of the New York Independent System Operator (NYISO) purchase power directly from the NYISO and are customers of the distribution system, but generally not of an LSE. Because the CES obligation is primarily recovered through LSE commodity charges, and not delivery rates, direct NYISO customers will be treated as comparable to LSEs and must make compliance showing fulfillment of the REC obligation or the Alternative Compliance Mechanism (ACM).

Demonstration of compliance would occur through the use of tradable renewable energy credits (RECs) for renewable energy purchases, and zero emission credits (ZECs) for qualified nuclear generation purchases, both as created and tracked within a newly designed New York Generation Attribute Tracking System (NYGATS)

Use of an alternative compliance payment mechanism would be permitted for each CES tier to cap REC and ZEC prices and provide for a flexible alternative means of compliance.

The ACP levels will be established by the Commission based on forecasted REC prices, system needs, and other relevant factors. Changes to the ACP schedule should be reviewed periodically, but not more than once every 3-5 years, and changes should be moderate in magnitude and graduated over time, to provide stability and investor confidence, Staff said

However, while imposing the compliance obligation on individual LSEs, Staff propose long-term contracting by utilities as well

"A principal challenge of the LSE approach is that long-term contracts will be needed to facilitate the financing of new renewable construction, while LSEs lack the certainty of long-term load commitments in New York's competitive retail markets. Exposure to customer migration risk is a strong disincentive for LSEs to enter long-term commitments. This will be particularly challenging for many ESCOs who will be reluctant or unable to enter into long-term contracts. Staff recognizes that long-term contracting will be necessary to enable a sufficient level of development of certain new renewable generation; for that reason, program options are presented below that will allow long-term contracts for generation developers to be converted into shorter- term offerings for non-utility LSEs, thus enabling all LSEs to comply with the mandate," Staff said

"In order to achieve the State's renewable development and cost minimization goals, the Commission should ensure that EDCs procure an appropriate portion of the REC target obligations via long-term contracts including energy and/or capacity. To further improve the opportunity for cost containment, Staff also recommends a central procurement that is accomplished by the utilities, as a group, with clear financial responsibility under a long-term PPA to third parties," Staff said

"[U]tilities should be required to purchase an appropriate portion of the REC target via long-term PPAs but should further be allowed to resell the procured RECs and/or energy to third parties, for shorter terms, when the utility can receive a higher value than it paid to the renewable generator. To provide an incentive to the utility to maximize such opportunities and minimize costs to ratepayers, utility shareholders should be allowed to keep an appropriate portion of the profits from such transactions," Staff said.

Most notably regarding long-term contracting, Staff said, "Utilities will perform this function in their capacity as EDCs and not in their capacity as commodity providers of last resort. When there are procurement costs (including RECs, energy, and capacity) that are not recovered through sales as described above, RECs can be subtracted from the REC obligations of all LSEs with cost recovery through the delivery charge."

While Staff discussed disposition on unsold RECs from long-term contracts, Staff did not discuss disposition of energy and/or capacity from the long-term contracts that is not resold to third parties, leaving open the possibility such products could be applied to utilities' default service obligation, raising cross-subsidization issues

Staff said the level of required EDC procurement of PPAs should be set at an amount that serves the objective of reducing compliance costs while leaving room for the development of a self-initiated market. Staff sought comments on the percentage of the REC obligation that should be purchased via utility PPAs and the specific incentive mechanisms for the utilities to minimize ratepayer costs

Staff said that in the interest of encouraging competitive entry into New York markets, Staff recommends that the Commission adhere to the principles articulated in the REV framework order wherein utility ownership of generation is only permitted in exceptional circumstances where there are demonstrable consumer benefits that could not otherwise be achieved. At the same time, Staff agrees with the utilities that an absolute prohibition of utility participation in the ownership structure may not be in the interests of consumers. "Utility-owned generation can serve as a correction to a potential failure of the market to develop sufficient levels of instate resources," Staff said

Staff proposes three tiers to the clean energy standard compliance obligation as follows:

• Tier 1: New renewable resources

• Tier 2A: "Competitive" existing renewable resources which qualify for neighboring states' "growth tier" RPS

• Tier 2B: "Non-competitive" existing renewable resources which do not qualify for neighboring states' "growth tier" RPS (such as small hydro)

• Tier 3: Nuclear

Staff proposes aggregate statewide procurement mandates as follows:

Tier 1
                         Mandate as a %
Year    GWh Target    of Forecasted Load
2017     1,536              0.9%
2018     2,446              1.5%
2019     3,465              2.1%
2020     5,465              3.4%


Tier 2A
                         Mandate as a %
Year    GWh Target    of Forecasted Load
2017     1,931              1.2%
2018     2,472              1.5%
2019     3,198              2.0%
2020     3,198              2.0%


Tier 2B
                         Mandate as a %
Year    GWh Target    of Forecasted Load
2017     15,330              9.5%
2018     15,374              9.6%
2019     15,423              9.7%
2020     15,423              9.7%


Tier 3
                         Mandate as a %
Year    GWh Target    of Forecasted Load
2017     7,500               4.6%
2018     10,000              6.2%
2019     15,000              9.4%
2020     25,000             15.7%

The PSC has scheduled a technical conference for February 25 and February 26 on Staff's paper

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