NY PSC Approves Measure to Lower Costs for Clean Energy

On January 16th, the Public Service Commission issued an order that allows the New York State Energy Research and Development Authority (NYSERDA) to offer a new contracting mechanism for the Clean Energy Standard (CES) RFP for 2020. The Commission took this action in response to a petition filed in Case 15-E-0302 by ACE-NY and AWEA last year that requested the use of “Index REC” contracts for Tier 1 resources (which include large wind and solar facilities) in the CES. This new pricing structure is expected to reduce price volatility (and hence risks) for developers and should result in lower financing costs for renewable energy projects. The takeaway is that this change will make it cheaper and easier for NY to meet its clean energy goals.   

Background

On August 1, 2016, the Commission established the CES, which requires that 50% of New York’s electricity be generated by renewable energy resources by 2030 (this has since been raised to 70% by 2030 in the Climate Leadership and Community Protection Act). To achieve this goal, the CES Framework Order established a Renewable Energy Standard (RES) that requires utilities to procure renewable energy certificates (RECs) associated with new renewable energy facilities—known as Tier 1—for their customers. This Order also directed NYSERDA to undertake Tier 1 procurements by employing “fixed-price” REC contracts, whereby winning bidders receive a “fixed” (i.e. constant) price throughout the term of the contract for the environmental attributes associated with every megawatt hour produced by the renewable energy facility.

Renewable energy developers receive revenue from the state’s energy and capacity markets as well as from the RECs that a project generates. In essence, RECs provide the “missing money” for projects that would otherwise not earn enough revenue from selling their energy into the state’s wholesale markets. However, because “fixed” REC prices do not vary, developers bear the risk as energy prices fluctuate, and this risk typically results in higher financing costs.   

In 2018, the Commission adopted a different contract structure for offshore wind REC solicitations (which are referred to as ORECs), due to their higher capital costs and risks associated with installing wind turbines offshore. This Order directed NYSERDA to require bidders to offer both a fixed-price OREC and an “Index” OREC bid.

Unlike a fixed-price OREC, an Index OREC is based on the developer’s estimated revenue requirement for the project (which is referred to as the “strike price”) and varies over the life of the contract based on the difference between the strike price and a “reference price” expressed in a market index. When wholesale energy prices rise, an Index REC price falls by a commiserate amount. This process allows a developer to better predict its revenue requirement for a project, which in turn lowers the risk and cost of capital. Because RECs are ultimately paid by ratepayers, Index RECs reduce the amount of public dollars needed to fully fund these projects.

Last March, AWEA and ACE-NY filed a petition requesting that the Commission direct NYSERDA to implement an Index REC procurement mechanism similar to the OREC model for future Tier 1 RES solicitations (NRDC, along with several other parties, filed comments in support of the petition and signed on to reply comments with AWEA and ACE-NY).

The Commission granted the petition, directing NYSERDA to offer developers that submit bids an Index REC option in future RES solicitations, beginning in 2020. According to the Order, providing this option should reduce the risk premiums that developers account for in their bids to accommodate for uncertain power market revenues.

The projected savings from using Index RECs is significant. According to the Commission, this change is projected to save approximately $233 million per year through 2030, and $4.6 billion over the life of the contracts. The Commission arrived at this number by estimating that 29,200 GWh of new renewable energy output a year is needed to meet the state’s 50 by 30 mandate and used a per REC savings value of $8 per MWh.  According to NYSERDA, this expected savings is in part due to the fact that using an Index REC is likely to expand the pool of bidders in future procurements, increasing competition which should lead to lower bids.

Index RECs also avoid a potential double payment to renewable generation projects in the event that NYISO’s carbon pricing plan is implemented in the wholesale energy market, because REC prices would drop by a commiserate amount if a carbon price was incorporated into the NYISO-administered wholesale energy markets.

This decision, combined with the Commission’s order released on the same day concerning energy efficiency which my colleague Sam Wilt discusses here, is further proof that New York continues to be a national leader on reducing greenhouse gas emissions and transforming the state to a clean energy economy.    

About the Authors

Cullen Howe

Senior Renewable Energy Advocate, Climate & Clean Energy Program

Join Us

When you sign up you'll become a member of NRDC's Activist Network. We will keep you informed with the latest alerts and progress reports.