Report Prepared For New York DPS Offers Novel Co‐optimized Capacity & Clean Energy Procurement Obligation On ESCOs, LSEs To Address Buyer-Side Mitigation

Report Says Existing ICAP Buyer-Side Mitigation Rules To Cost Nearly $1 Billion Per Year, Double Under Expansion

May 20, 2020

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Reporting by Paul Ring • ring@energychoicematters.com

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Reports from The Brattle Group addressing quantitative and qualitative analyses of resource adequacy, structures prepared for the New York Department of Public Service and NYSERDA, include a novel Co‐optimized Capacity & Clean Energy Procurement mechanism for LSEs such as ESCOs to meet various capacity and clean energy requirements.

The quantitative analysis examined several alternative resource adequacy constructs that differ primarily in who administers them and how Buyer‐Side Mitigation (BSM) is applied; this deck presents estimates of the differences in customer costs.

The alternatives were

• ICAP Market with Status Quo BSM

• ICAP Market with Expanded BSM

• Centralized Market for Resource Adequacy Credits (RACs), without BSM (similar to current ICAP market but run with state rules, except as applied by PSC to prevent the intentional introduction of uneconomic capacity to profitably suppress capacity prices

• LSE Contracting for RACs (bilateral, no centralized auction)

• Co‐optimized Capacity and Clean Energy Procurement (State entity would procure RACs and RECs for LSEs in a joint, co‐optimized auction)

The report said that, by 2030 relative to a No‐BSM scenario, estimated customer costs increase by:

• $0.6‐0.8 billion/year under Status Quo BSM (~17% of capacity costs), with range depending on load growth

• $1.7‐2.0 billion/year under Expanded BSM (~47% of capacity costs), or $1.3 billion/year if nuclear plants are retired (~34% of capacity costs)

The qualitative analysis examined the same scenarios and discussed advantages and disadvantages

Regarding a Co‐optimized Capacity and Clean Energy Procurement, the qualitative analysis further explored the potential construct, in which all system clean energy requirements would be achieved through a centralized, co-optimized RAC and REC procurement market.

Under this design option, the state would largely replace its current long-term procurements for clean energy resources with a RAC+clean auction as primary vehicle for meeting most resource adequacy and clean energy needs. To provide more revenue certainty to suppliers, the auction could offer new resources a term of 7-20 years for RECs (the specifics of term and products under that multi-year term would be a major design question), the report said

The mechanics for meeting resource adequacy and clean energy needs would be as follows:

• The State would establish RAC needs consistent with the 1-in-10 Standard as described under Structures 1-3 above, with the compliance obligation to meet system and local RAC requirements imposed on retail providers.

• In addition, the State would establish clean energy requirements consistent with the CLCPA that would also be imposed on retail providers. For example, these requirements in 2030 could be expressed as:

       – A 70% total REC obligation where RECs can be sourced from any combination of OSW, Tier 1 renewables, Tier 2 renewables, existing hydro, distributed solar, etc., and of which a specified subset or carve-out must come from: (a) distributed solar RECs (DSRECs), and (b) offshore wind RECs (OSW-RECs). Together, these requirements would ensure compliance with the OSW, distributed solar, and total 70% renewables state mandates.

       – A total clean energy obligation that would exceed the 70% renewables obligation by the year 2030 and rise to 100% of all energy needs by the year 2040. RECs would be eligible to contribute to this obligation as would nuclear ZECs.

       – A storage obligation load-share-based requirement for storage credits in RAC MW units, the product could be referred to as Storage-Credits.

• The State would significantly reduce (though likely not eliminate) the current contract solicitation and procurement approaches used to meet these State-mandated resource procurement targets. For example, the state may decide to cease future contract procurements for Tier 1 renewables (relying instead on a centralized auction), but continue current practice to engage in separate OSW procurements.

• For any State-contracted resources, the REC and RAC value of the associated resources would be earned through the co-optimized clean+capacity market, but then subtracted from the awarded contract price.

• New renewable resources would likely be offered a multi-year commitment in the quantity of RECs sold, for example with a 7-20 year delivery period. The specifics of the term and whether a multi-year commitment would also be offered on new resources’ RAC value would be one of the primary design choices to consider (see below).

• Retailers would have the option (but no obligation) to engage in forward contracting to meet their customers’ REC, storage, and RAC obligations through short- or long-term contracts or through bilateral exchange markets. Any remaining requirements would be procured through a co-optimized RAC+clean energy auction

"The State-run co-optimized RAC+clean energy auction would be designed to procure the least-cost combination of all resource adequacy and clean energy needs. LSEs would participate by submitting all of their self-supply RECs, Storage-Credits, and RACs into the auction, which would be deducted from the quantities procured on their behalf. LSEs holding excess supply of any one product would earn net revenues from selling that excess at the auction clearing price. Resource owners would participate by submitting any unsold REC, Storage-Credits, and RAC volumes into the auction at a price of their choosing, subject to monitoring and mitigation rules. For RAC-only resources such as demand response, the offer format would be in $/kW-month units and tied to a specific resource adequacy zone, similar to the current ICAP market. For a clean-energy-only resource (such as a wind plant that has no capacity injection rights), the offer format would be in $/REC units. For resources that provide meaningful quantities of both RAC and clean energy value such as hydropower, the offer could be submitted as a total revenue requirement in units of $/year units but tied to a specific quantity of RECs and locational RACs. A RAC+clean resource would clear the market only if the prices across multiple products were high enough for it to recover its total $/year revenue requirement. Similarly, storage would earn revenue through both Storage- Credit value and RAC sales, with the total offer price denominated on a $/year basis. Resources would be assumed to be indifferent as to what fraction of revenues would be earned through the sale of RECs versus RACs," the report said

"A downward-sloping administrative demand curve would be used to represent total system-wide demand for each product to be procured. There would be as many different demand curves as there are individual LSE requirements, including: (a) a system-wide resource adequacy demand curve, with sub-requirement demand curves expressing the fraction of total resource adequacy need that must be met within each resource adequacy zone; (b) a demand curve for the total New York renewable energy, with sub-requirement demand curves for the fraction of total demand to be met through OSW and distributed solar; (c) a demand curve for the storage resource requirement; and (d) if relevant, a total clean energy resource requirement that exceeds the renewables requirement and that could be met through either ZECs or RECs. The downward-sloping shape of the curves would help to introduce price stability for each product and could be used to express the incremental reliability value for RACs and policy value of RECs as a function of quantity," the report said

"The auction would be cleared using an optimized clearing engine. The auction would procure the least-cost combination of offers to meet each of the demand curves, with prices set based on the demand curve price consistent with the clearing quantity for each product. Price formation would respect the multi-value nature of certain products. For example, OSW-RECs could clear at or above the REC price (but OSW-RECs would never be priced below RECs); Zone J RACs could clear at or above the system-wide RAC price (but never below). Each resource would earn a value-stack of revenues, calculated as the sum of cleared quantity times cleared price across all products sold. The optimized clearing approach would ensure each seller’s satisfaction with the final clearing results: sellers earning equal or more than their offer price would clear the auction, while sellers that would earn less than their offer price would not clear. The “lumpiness” of resource entry and exit would be accounted for in offer structures, with the seller stipulating whether the resource can be accepted in part (a rationable offer) or whether it must be accepted in full (a lumpy offer)," the report said

In discussing the advantages of the Co-Optimized RAC and Clean Energy Procurements, the report said that this mechanism includes, "An enhanced role for retail choice and competitive retailers as compared to all other structures (as retailers can engage in self-supply for all capacity and clean energy needs)."

The report noted disadvantages of -Optimized RAC and Clean Energy Procurements as:

• New design concept that is untested and complicated to implement. With the new design introducing implementation costs and the risk of design flaws.

• If new resources are eligible for only short-term commitments, then this approach would forfeit some of the financing cost advantages associated with long-term contracts (though most of the benefits can be maintained if the commitment term for new resources remains at 20 years).

• Forfeit some of the short-term customer benefits that might be achieved under Structure 4: LSE Contracting for RACs through price discrimination (i.e., lower payments to existing resources).

See the reports here:

Quantitative

Qualitative

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