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White Paper Prepared For NRG Proposes Placing New, Forward Clean Energy Obligation On Competitive Retail Suppliers

Three-Year Forward Obligation, Cleared Through Centralized Auction, Similar To Capacity Obligation

September 16, 2019

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Copyright 2010-19
Reporting by Paul Ring •

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A white paper prepared for NRG has proposed a new forward, centrally cleared clean energy obligation that would be imposed on competitive retail electric suppliers and other LSEs

The mechanism in large part mirrors the centralized capacity auctions used in numerous RTOs, whose forward nature (and shifting load scaling factors) have created problems for retail suppliers in accurately pricing contracts and passing on costs to customers, especially when competing against default service suppliers

The white paper calls the design a "forward clean energy market" (FCEM) but since there would be no willing buyers in the "market," only compulsory purchases, we will not use this term except where quoted.

The white paper has been presented to the U.S. House Energy & Commerce Committee and has also been used as the basis for draft legislation proposed by NRG in Illinois.

In short, under the white paper's proposed forward clean energy auction design, states’ policy goals will be translated into a clean energy standard imposed on load serving entities (LSEs) and represented in an auction as a downward sloping demand curve. "On the supply side, generators who own or are developing resources that produce carbon-free electricity would offer to sell CEACs in the delivery year at a price they choose," the white paper says

The forward auction would occur three years in advance of a one-year delivery period. For generators, an up to seven-year commitment period would be available to new resources, over which time the price is locked-in

"[A]ll load serving entities must demonstrate compliance with the clean energy standard," the white paper provides

"In states with retail choice, the CEAC [clean energy attribute credit] is implemented as an obligation on retail providers to meet a certain fraction of their delivered load through clean energy, e.g. 50% by 2030," the white paper states

"Retailers can comply either by making their own CEAC supply arrangements (with self-supply volumes netted out of auction settlements), or by relying on the centralized auctions (passing the costs on to customers)," the white paper states

"Much like with current renewable portfolio standards, states or other policymakers will establish clean energy mandates and require LSEs to fulfill this requirement. In states with retail choice, this means that competitive retail providers will take on the obligation of fulfilling the clean energy mandate. For example in a state that has a 50% clean electricity requirement, retail providers will need to procure approximately 0.5 CEACs for every MWh of retail load the provider serves (plus or minus any adjustment associated with demand curve clearing). Retail suppliers can actively manage their CEAC portfolio on a forward basis or passively accept the outcomes of the centralized FCEM. This approach is analogous to the forward obligations placed on retail providers by centralized forward capacity markets," the white paper states

"On a forward basis, the state will submit demand in the FCEM that represents all energy consumption in the state. The quantity cleared in the FCEM determines the final quantity as a percentage of consumption that all LSEs and competitive retailers must procure on behalf of their customers. For example, if the state target is 50%, but the FCEM clears at a lower price and 52% of the demand curve quantity, then the final obligation on retail providers is 52%. This percent quantity requirement will be held constant through the delivery period. For retailers with a passive approach to fulfilling the clean energy mandate, they will not actively participate in the forward auction (instead allowing the state-developed demand curve to act on their behalf)," the white paper states

"During the delivery year, each month a specific quantity and cost obligation from the forward market will be transferred to retail providers, consistent with the clearing outcome from the three-year forward FCEM auction. Because many states have retail choice policies, the quantity of CEACs and obligations applied to each retailer will be adjusted to be consistent with customers that switch providers during the year. This approach reflects the current practice in most capacity markets, where a centralized single buyer allocates costs to retailers or LSEs in a manner that reflects their overall contribution to the need for capacity at the system level. In the same way and using the same daily customer switching data as is used for capacity markets purposes, the FCEM procurement costs will be allocated to individual retail providers and LSEs consistent with their share of customer demand realized in the delivery year," the white paper states

The white paper said that, for retailers who choose to actively participate in the forward centralized auction, there are several options for the retailer to manage their positions and value proposition to customers:

• "Prior to the three-year forward auction, retailers can choose to engage in a forward contract or self-supply of CEACs. Secured clean energy supply can be pre-scheduled into the FCEM auction and netted out of the retailer’s settlement obligations. For example, assume a retailer anticipates 100 MWh of retail load, decides to self-supply 30 CEACs prior to the FCEM, and the FCEM clears with a 52% compliance obligation on retailers. The 30 CEACs of retailer self-supply will be accounted for and netted out of the FCEM cleared quantity; assuming realized retail load in the delivery year remains at 100 MWh, this retailer will be allocated 22 CEACs and the associated costs in the delivery year (the 52 CEACs that would have been procured via the demand curve, minus the 30 CEACs that were self-supplied)."

• "After the forward auction, during the delivery year, and before the compliance deadline, retailers can trade CEAC obligations bilaterally either via short-term contract or through a trading exchange in advance of delivery. The required quantity of CEACs that each retailer is obligated to procure can change up until the end of the delivery year, due to adjustments in customer base (from retail switching), and due to deviations in realized customer demand compared to the three-year forward forecast. However, the percentage of retail load obligated under the clean energy mandate would remain at the same percentage that cleared the forward auction."

• "After the delivery year, a voluntary spot auction will be conducted to allow retailers and clean energy suppliers to efficiently trade CEACs ... Retailers can participate on a voluntary basis to offer any excess CEACs held in account for sale into the spot auction, or can hold them to be used in future years. The outcome of the spot auction will not change the retailer’s obligated quantity of CEACs."

"At the compliance deadline following the spot auction, retail providers and LSEs will need to make a submission to the state demonstrating compliance with the CEAC obligation quantity (possibly via the auction administrator, to simplify the tracking requirements). This deadline will serve the same role as the compliance deadlines applicable under current renewable portfolio standards. The retailer’s compliance filing will report total MWh of electricity served, applicable percentage clean energy mandate as established in the forward auction, resulting CEACs submitted for retirement under the mandate, and any additional CEACs submitted for retirement under incremental voluntary green energy offerings. If a retailer submits insufficient CEACs to fulfill its mandate, the remaining shortfall of CEACs will be subject to a penalty defined by the alternative compliance payment (ACP). Unlike in current programs, the ACP will not be defined by a specific predetermined price. Instead it will be set individually for each retailer or LSE as a function of the size of its shortfall based on the pricing in the demand curve. For example, consider a retailer that is obligated to deliver CEACs to cover 52% of its realized customer demand but only surrenders enough CEACs to cover 48%; the ACP on the retailer’s 4% quantity shortfall would be defined by the demand curve price in $/CEAC that would have prevailed if the entire market had cleared at a 48%. This ACP creates a penalty that encourages retailers to fulfill their obligations, with increasingly high penalties (up to the FCEM auction price cap) for anyone that would fall short of their obligation. This mechanism will also support pricing stability in the bilateral and spot markets, and avoid 'end price effects' that can sometimes produce price spikes or fallout as the compliance deadline approaches," the white paper states

As noted above, under the proposal, a final spot auction will be conducted after the end of each delivery period after the final quantity of CEACs created is known, and before the LSE compliance deadline. "This spot auction will provide a centralized market for buyers and sellers to transact CEACs after the delivery period. It will help stabilize CEAC prices and provide an opportunity for market participants to meet obligations and manage holdings as needed before the compliance deadline applicable to LSEs," the white paper states

Link to white paper

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