NY Can Reimagine Resource Adequacy with New, State-led Model

New York’s ambitious clean energy agenda is running into a buzz saw in the form of an increasingly discriminatory NYISO capacity market that produces excessive customer costs and significant health impacts; worse yet, those impacts disproportionately harm Black and Brown communities.

The state is now facing an existential choice: either let NYISO’s capacity market continue to perniciously undermine the landmark clean energy and carbon reduction goals in the Climate Leadership and Community Protection Act (CLCPA), or assert greater control over resource adequacy to enhance in-state reliability and facilitate a sustainable and equitable energy transition.

NRDC, along with the Sustainable FERC Project, Sierra Club, and Vote Solar, recently filed comments in New York’s ongoing resource adequacy proceeding, advocating for the New York Public Service Commission (PSC) to do the latter. PSC could do so by establishing a new state-led model for how clean sources of electricity like solar, wind, storage, and demand-side resources can contribute to resource adequacy and enhance reliability for all New Yorkers.

What is resource adequacy and how does it relate to New York’s clean energy goals?

As our previous blogs explain (here and here), last year the PSC launched a proceeding to explore whether the state should play a larger role in ensuring “resource adequacy,” which means ensuring that there is enough electricity to meet overall demand under all but the most extreme conditions.

Resource adequacy was historically addressed by the PSC through its regulation of vertically integrated utilities. However, the state decided to restructure its power sector about two decades ago to capture greater efficiencies through centralized markets.  Since then, resource adequacy has been overseen by the federally-regulated New York Independent System Operator (NYISO) through operation of a capacity market, as well as by the state through a variety of clean energy programs.

As New York charts a rapid course toward a zero-carbon energy future, structures to ensure resource adequacy should work together to facilitate—rather than frustrate—the CLCPA’s goals.

NYISO’s current capacity market discriminates against clean energy, props up polluters, and makes it harder for the state to achieve CLCPA goals

NYISO’s capacity market unfairly discriminates against clean energy resources by applying “buyer-side mitigation” (BSM) rules that effectively deny them of capacity revenues and ignore their contribution to resource adequacy.  

The Federal Energy Regulatory Commission (FERC) and NYISO have morphed BSM rules into a regime expressly designed to negate the effects of New York’s energy policies and hinder its clean energy transition. Their attack on New York’s authority to forge its energy future is an unlawful federal overreach that threatens to reshape the entire electricity sector in order to protect old, polluting power plants.

That’s why NRDC and other organizations are also suing FERC and asking the federal courts to overturn discriminatory BSM rules that intrude on New York’s jurisdiction and right to chart a cleaner and more equitable energy future.    

BSM rules impose unacceptable financial and health costs on New Yorkers

As our comments explain, the financial and health harms of BSM are simply unacceptable.

First, BSM will unnecessarily impose hundreds of millions of dollars annually on consumers. As an analysis by the Brattle Group shows, BSM rules will cost consumers between $400-$900 million each year by 2030, largely because they force New Yorkers to pay for the same capacity twice: consumers pay once for clean resources through state programs for clean energy, and they will pay a second time for duplicative and unnecessary capacity because BSM rules block these clean resources from being selected in capacity market auctions. In fact, these unnecessary costs are likely to be even higher because Brattle makes several conservative assumptions in its analysis.

Second, these rules disproportionately impact Black and Brown communities in and around New York City because they will delay the retirement of old, dirty fossil-fuel “peaking” plants sited in these communities, which receive most of their revenues from the capacity market. Although these plants don’t run very often (they typically run during “peak” periods of energy demand, hence their nickname), the emissions from these plants contain as much as 20 times the amount of NOx as a typical power plant and contribute to ground level ozone.

The impacts of this pollution are significant—exposure to ozone causes an estimated 400 deaths, more than 800 hospital admissions, and more than 4,000 emergency department visits in New York every year, and long-term exposure to the types of air pollutants associated with peaker plants has been linked to the disproportionate impacts of Covid-19 among Black and Brown communities in New York.

New York can reimagine resource adequacy

The problems of the capacity market are bigger than BSM. The current capacity market, which is designed to meet peak system needs, is not well-suited to address resource adequacy in a clean energy future.

What does that future look like? Imagine a grid that mainly consists of wind, solar, storage, and demand response resources. Ensuring that the lights stay on means focusing not on peak demand, but on meeting overall demand at any given time using the most efficient and cost-effective combination of resources available—i.e. a flexible, dynamic grid. Advancing this grid requires fundamentally rethinking resource adequacy and the types of grid services that each resource provides.

Increased state involvement in resource adequacy also means that less money needs to be spent on duplicative capacity and more money can be spent on the “distribution” grid, which are the poles and wires that distribute electricity directly to consumers. Recent events like Tropical Storm Isaias and Superstorm Sandy show that power outages occur far more frequently because of problems with the distribution grid (i.e. downed poles and wires) rather than because there are not enough power plants to meet demand. Yet New York spends billions of dollars every year in unnecessary capacity that could be better spent on measures that will enhance reliability.

Alternative state-led structures can enhance reliability and facilitate CLCPA goals

Our comments address several resource adequacy structures outlined by Brattle for how a new system might work:

• Centralized market for Resource Adequacy Credits (RACs) - the state would establish a similar capacity market for RACs (without BSM rules) and NYISO could remain the market administer. This scenario offers several advantages, including retaining the current market construct while enabling “load serving entities” or LSEs (i.e. market actors that supply electricity to consumers) to enter long-term contracts directly with clean energy providers, which would create a hybrid market. Such contracts facilitate renewable energy development because they provide more revenue certainly (and thus lower financing costs) for renewable energy developers than only participating in wholesale markets, where prices frequently fluctuate.    
• Our take - This option could provide for a relatively uncomplicated transition from NYISO to State control, especially if NYISO and its market participants work together to reform NYISO’s tariffs and governance agreements. To realize the full benefits of such a structure, however, NYISO needs to fix its current capacity market structure to reduce over-procurement, avoid overpaying for capacity resources, and ensure that renewables, storage, and demand-side resources are accurately valued to reflect their contributions to a more customer-centric measure of reliability.

• Fully bilateral system with no centralized market – this structure would eliminate the centralized capacity market and require LSEs to enter into contracts directly with suppliers to meet their resource adequacy obligations. A purely bilateral system might have some disadvantages, like reduced price transparency and the risk that large energy providers might exert market power. A hybrid market that includes both bilateral contracts and a centralized market for LSEs to choose from could eliminate these issues. Yet there are also important advantages to a bilateral-only market, including price certainty for clean energy resources, the ability to bundle multiple products to create efficiencies, and the ability to consider factors relevant to CLCPA goals and the public interest, such as a particular project’s effect on disadvantaged communities.  
• Our take – a fully bilateral system provides the ability to leverage long-term contracts that enable the cheapest financing of renewable resources, account for multi-product efficiencies, and can be individually tailored to specific projects and the needs of the communities they are located in. These contract advantages, however, are largely available under a hybrid model without some of the disadvantages of a bilateral-only approach.

• Co-optimized Capacity and Clean Energy Procurement – this structure would incorporate the centralized RAC market run by the state and include renewable energy credit procurement (i.e., a credit for the beneficial environmental attributes of renewable energy). It would reward resources that advance multiple requirements (such as meeting the state’s clean energy goals as outlined in the CLCPA) and could lead to potentially significant cost efficiencies. However, this is a new design concept that is untested, complicated to implement, and would require extensive changes to existing mechanisms.
• Our take – this is an intriguing option, but one that only makes sense to consider after a successful transition to a centralized market run by the state. A quicker transition could fundamentally disrupt the tremendous process already being made under the current Clean Energy Standard and jeopardize timely achievement of the CLCPA’s clean energy goals.

New York should reclaim greater authority over resource adequacy and clean energy

New York’s continued participation in NYISO’s capacity market is not in the public interest, and now is the time for the state to pursue other options for ensuring reliable electric service and meeting its climate and clean energy goals.

Transitioning to a new system will require significant changes to both NYISO and New York rules. While the state cannot unilaterally change the NYISO rules, it can create incentives for transmission owners (who wield significant power at NYISO) to seek these changes. Equally important, by improving the rules that are within its authority to change, the state can strengthen its leverage with NYISO while doing its part to facilitate timely, affordable, and equitable compliance with the state’s current and future clean energy goals.