New York Utilities Offer Two Proposals To Change Resource Adequacy Construct, Align With State Policy Goals

Several Stakeholders Warn Against Long-Term Contracts

November 11, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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The joint New York utilities (Joint Utilities) have proposed at the New York PSC two capacity market redesign approaches that, "both address the NYPSC’s goals within the framework of the NYISO’s markets and may satisfy several key objectives and criteria for market design changes."

The Joint Utilities' proposals were filed in a recently opened PSC inquiry in resource adequacy mechanism and the "compatibility" of the NYISO ICAP market with state policy goals. As previously reported, as part of such inquiry, the PSC has asked if the state should oversee LSE (ESCO) resource adequacy portfolios, similar to California (see our prior story here for details)

The Joint Utilities include: Central Hudson Gas & Electric Corp.; Consolidated Edison Company of New York, Inc.; Niagara Mohawk Power Corporation d/b/a National Grid; New York State Electric & Gas Corp.; Orange & Rockland Utilities; and Rochester Gas and Electric Corporation.

The Joint Utilities' first approach, the Multiple Value Pricing model, would develop different demand curves for different resource classes based on their characteristics. While resources that satisfy the state's Climate Leadership and Community Protection Act (CLCPA) and other State Policy Resources would not be subject to mitigation, they would clear separately from other resources. This structure recognizes that not all capacity resources have the same value and characteristics.

The Joint Utilities' second approach, the Future Clean Capacity Requirement, would eliminate Buyer-Side Mitigation (BSM) for all State Policy Resources, but would increase the installed reserve margin used to establish the demand curves by a perfect capacity shortfall calculation associated with the cumulative scheduled State Policy Resource amount

Multiple Value Pricing

More specifically, the Multiple Value Pricing (MVP) approach would produce locational and market-wide capacity prices differentiated based on identified characteristics of the required resources. Today’s use of locational demand curves for capacity in certain zones would continue for the current base capacity product unless and until any zones are eliminated. To the extent there are State-wide requirements for offshore wind, renewables generally, solar and storage, such as those contained in the CLCPA, the NYISO could develop State-wide demand curves for each such resource class.

For each new class of capacity, the demand curve would reflect the Net CONE of a class proxy unit for that class, the amount of that type of capacity which is required based on a schedule of entry needed to meet NYSRC- and NYISO-determined reliability requirements and NYPSC-determined State policy requirements. Each resource that clears the capacity auction would receive a price based on the classes of capacity which it is eligible to offer. For example, if there were a premium for capacity in a Locality and also a premium for renewable capacity, a renewable resource in a Locality would receive a capacity price that reflects both the difference between (1) the marginal value of additional capacity in the Locality relative to the marginal value of additional capacity in the State as a whole and (2) the marginal value of additional renewable capacity compared to the marginal value of non-renewable capacity.

This is similar to the way in which the NYISO’s current operating reserve demand curves determine the prices for various operating reserve products, which reflect both the location of the resource (since the marginal cost of additional operating reserves to meet locational operating reserve requirements may exceed the marginal cost of additional operating reserve to meet Statewide requirements) and the quality of reserve that the resource is providing (since the marginal cost of additional operating reserves to meet requirements for higher-quality operating reserve may exceed the marginal cost of additional operating reserve to meet 30-minute reserve requirements), the Joint Utilities said

MVP could be adapted to provide price signals for different products (offshore wind is different from flexible capacity) and different zones, and in this way can accommodate locational renewable requirements were they to exist in the future, the Joint Utilities said

"MVP addresses price suppression concerns because the demand curve for a particular class would allow the market to solve for supply to meet appropriate levels of demand for that resource class. This design also incentivizes investment in needed resource types and may serve to discourage investment in less valuable or unneeded resource types, while still allowing State policymakers and regulators to provide inputs on the amount of State Policy Resource capacity required for varying classes of resources and the schedule for deployment to meet State objectives or CLCPA requirements. This design also can be adapted to increasing flexible resource requirements to transition the system to accommodate increasing intermittency and can accommodate the potential shift in margins from capacity to ancillary services, a NYISO project under development," the Joint Utilities said

Future Clean Capacity Approach

Under the proposed Future Clean Capacity Approach (FCCR), the NYISO would recognize that the BSM rules cannot and should not attempt to deter the development of State Policy Resources needed to meet defined State climate policy objectives by exempting those resources from BSM.

"At the same time, it would also recognize that while these resources make contributions to meeting capacity requirements that must be recognized in the market, there may still be differences between the contributions that State Policy Resources and conventional dispatchable resources would make with respect to meeting transmission security or other local reliability requirements, given intermittency and duration limitations, that are not reflected in the UCAP calculations. The capacity market must provide sufficient incentives for conventional resources that are needed for this purpose to remain in service as well," the Joint Utilities said

Two aspects of the FCCR proposal are intended to provide such incentives, the Joint Utilities said.

"First, this proposal would modify the UCAP requirement for each region to account for the difference between the amount of UCAP that a given portfolio of State Policy Resources can provide, and the amount of UCAP that would be provided by 'perfect capacity' that could be displaced by the entering renewable resources. If resource adequacy were the sole objective, a portfolio of State Policy Resources that qualifies to provide a given amount of UCAP should be able to displace roughly the same amount of perfect capacity. This is because UCAP is a mechanism for quantifying each resource’s contribution to resource adequacy requirements relative to the contribution that would be made by perfect capacity. Thus, there would not be any need to modify ICAP requirements to account for any difference between the two. But when factors in addition to resource adequacy are considered, there may be a significant difference between the amount of UCAP that a portfolio of State Policy Resources qualifies to provide and the amount of perfect capacity that could be displaced by those resources. If so, the FCCR proposal would increase UCAP requirement to cover the difference, thereby making it possible to acquire capacity from resources that will be sufficient to meet both resource adequacy and other requirements," the Joint Utilities said

"For the purposes of this determination, the relevant portfolio of State Policy Resources would not necessarily be the same as the portfolio of such resources that have entered service. Instead, the NYISO, NYPSC or another responsible entity would determine a schedule, which would reflect the amount, type and location of State Policy Resources that should enter each year in order to remain on track to meet the State’s climate policy objectives, including the CLCPA. The increase in the UCAP requirement for each year would reflect the difference between the amount of UCAP that would be provided by the portfolio in that schedule for that year and the amount of perfect capacity that could be displaced by resources in that portfolio. Therefore, if the development of new State Policy Resources lags behind the schedule, the adjustment to the UCAP requirement for a given year would continue to be based on the difference between the total amount of UCAP that could have been provided by new State Policy Resources if they had been developed to adhere to the schedule, and the amount of perfect capacity that such a portfolio would have displaced. Thus, this would lead to a larger increase in UCAP requirements than would have occurred if the adjustment in those requirements had been based on the portfolio of new policy resources that have actually entered service. That would cause the price to be higher than it otherwise would have been, providing an incentive for developers to expedite the development of State Policy Resources," the Joint Utilities said

"Second, to foster capacity prices sufficient for needed conventional resources to remain in service, FCCR includes a capacity price floor so the ICAP price in each location will remain sufficient to retain existing resources that are needed for reliability. The NYISO would identify resources in each region that are needed for reliability, and the minimum price of ICAP in a region would then be set at the highest going-forward cost for such a resource. This would enable such resources to remain in service," the Joint Utilities said

"While the FCCR design may have long-term application to the market, it may also serve as a transitional tool as New York implements the CLCPA by increasing the required amounts of capacity and not merely recognizing the UCAP of all State Policy Resources. The capacity prices would go up if renewable entry lags the schedule necessary to meet CLCPA requirements. Capacity prices will go down more slowly with the new entry of State Policy Resources as a result of FCCR compared to simply exempting the State Policy Resources from BSM. To the extent the FCCR increases capacity prices so that low value, inflexible and inefficient resources remain in the market longer, the increased capacity prices will also signal for new entry which may help to rationalize the market," the Joint Utilities said

Long-Term Contracts

In separately filed comments, the Joint Utilities and other stakeholders expressed concern with any use of long-term contracts for resource adequacy, as several stakeholders urged caution on any changes generally.

The Joint Utilities said, "The Joint Utilities oppose measures that would result in mandatory utility-based Power Purchase Agreements ('PPAs') to procure resources. The Joint Utilities highlight ... significant concerns with California’s bilateral approach, as well as with applying the market mechanisms developed by ISO New England, Inc. ('ISO-NE') and PJM Interconnection, L.L.C. ('PJM') in the context of New York’s market design and CLCPA goals."

The Joint Utilities recounted the prior experience of New York utilities with mandated long-term PPAs in the 1980s and 1990s, which had prices well-above market

Separately, the New York ISO said, "the NYISO is concerned that the California model, which relies principally on regulated long-term PPAs, appears to shift the risks of capacity procurement from private investors to consumers. If adopted in New York, this would reverse a basic tenet of the NYISO’s wholesale electricity market design. In considering any contract-based alternative to capacity procurement, the Commission must seek to avoid a recurrence of New York’s experience with grossly above-market PURPA PPAs in the 1980s and 1990s. Concerns with the costs and risks to ratepayers associated with that model is what led to the competitive market-based approach to procurement that remains in place today."

The City of New York, while not advocating for or against any specific mechanism at this time, said, "In reviewing and potentially selecting a new mechanism, care must be taken to avoid repeating conditions seen in New York in the 1980s and 1990s, when the State forced utilities to enter into long-term contracts based on very inaccurate future price assumptions. Consumers substantially overpaid for electricity under those contracts when the assumptions and forecasts upon which their pricing was based never materialized."

Case 19-E-0530

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