Independent power producers don’t want New York utilities back as competitors

The Independent Power Producers of New York (IPPNY) said in a May 13 brief that the New York State Public Service Commission should not reverse nearly two decades of utility deregulation policy by letting regulated transmission utilities back into the power plant ownership business.

The May 13 brief consisted of reply comments to certain initial comments that were made in response to the Department of Public Service Staff’s White Paper on the Clean Energy Standard (CES) filed on Jan. 25, 2016. IPPNY submitted its initial comments on the White Paper on April 22, with the May 13 filing made to address comments submitted by the “Indicated Joint Utilities.”

The Indicated Joint Utilities are Consolidated Edison Co. of New York (Con Edison), Niagara Mohawk Power d/b/a National Grid and Orange and Rockland Utilities.

The White Paper addresses how to meet New York Gov. Andrew Cuomo’s aggressive new renewable energy development goals, which call for 50% renewables by 2030 (the “50 by 30” plan).

Those utilities in their comments advocated that electric distribution companies (EDCs) should be allowed to re-enter the generation business and own large-scale renewable resources (LSRs), and proposed a model allowing for utility-owned generation (UOG).

In another area of comment, IPPNY said in the May 13 brief that it supports the New York Independent System Operator (NYISO) and other commenters that cautioned against the use of, and identified major issues with, bundled power purchase agreements (PPAs) as a mechanism to develop the lowest-cost LSRs.

Third, IPPNY urged the commission to deny the request made by H.Q. Energy Services (U.S.) Inc. (HQUS) and Transmission Developers Inc. (TDI) to expand the definition of renewable facilities so that large, imported hydropower owned by the Canadian government will become eligible for New York State LSR incentives given the subsidized nature of this resource and its concomitant adverse impact on the structure of this program.

Independent power producers say competition from utilities would be unfair

The Indicated Joint Utilities proposed what they call the “Universal Renewables” model, under which new LSRs “would be developed and constructed by renewable developers and then transferred to customers, using utilities as the vehicle for financing and long-term ownership.”

Said IPPNY: “The Indicated Joint Utilities erroneously argue that, if the Commission were to reverse its long-held policies and allow for UOG, they could achieve ‘significant customer benefits’ in the form of fully realized tax benefits and’unique’ benefits such as capacity relief ‘that can best be relied upon when the utility owns the generation asset.’ As IPPNY addressed in its initial comments, a regulatory landscape in which utilities own generation assets is inherently anti-competitive and will invariably skew the playing field against merchant developers in both direct and indirect ways.

“Whereas merchant projects allocate the risks associated with development to investors, allowing UOG would shift many of those risks to captive ratepayers. Under the Universal Renewables model, a private developer would only shoulder the risks of constructing a particular asset. That asset would then be transferred to a utility, where ratepayers would also inherit the myriad other risks associated with ownership—including, but not limited to, environmental, regulatory, and operational risks. UOG projects may, therefore, have a lower initial cost estimate, but will ultimately lead to higher rates for ratepayers because, unlike a private investor, the utility owner would likely seek uncapped recovery of all its costs.

“If the Commission were to adopt the Indicated Joint Utilities’ proposal, it would create a perverse incentive for utility owners to underbid their projects and recover any cost overruns through rates after those projects have already been selected. Whereas merchant developers must fully assess all potential risks and live with the bids they have made, utility-owned projects can always fall back on ratepayers. The Commission should not burden New York’s consumers with the added risks concomitant to UOG.

“Moreover, allowing UOG would be a major reversal of nearly two decades of Commission policy. The Commission has long held that: (i) private investors have a greater incentive to lower costs than utilities under cost-of-service regulation; (ii) private investors and their shareholders should bear the risks of generation ownership; and (iii) transmission and distribution (‘T&D’) should be separated from generation to eliminate the potential that utilities that own generation could exercise vertical market power (‘VMP’) to the detriment of wholesale competitive electricity markets and consumers. The Indicated Joint Utilities’ Universal Renewables proposal calls on the Commission to discard these long-standing policies and the sound reasoning that has led the Commission to consistently deny UOG as an anti-competitive practice.”

IPPNY says bundled PPAs mask true costs of individual projects

IPPNY noted that it raised its opposition to mandating long-term, bundled PPAs as a component of the CES program in its initial comments, demonstrating that such agreements “could insulate LSRs from conducting their operations consistent with competitive market price signals and harm the wholesale competitive electricity market.” IPPNY said it respectfully suggested that the commission should, instead, continue to call for renewable energy credits (RECs) on a fixed price per kWh basis.

It added: “Other commenters, including the NYISO, the entity charged with reliably operating the system and administering the markets, the Joint Utilities and the New York Power Authority (‘NYPA’), offered similar comments. The NYISO noted, for example, that bundled PPAs ‘obscure additional consumer funded payments to renewable resources and impede the market’s ability to procure the most efficient resources that minimize costs to consumers.’ Moreover, the NYISO averred that long-term, bundled PPAs ‘mute the market signals that should be driving generation resource development.’

“Bundled PPAs prevent markets from receiving accurate signals about a particular resource’s economic viability,” IPPNY added. “In the absence of such signals, markets cannot respond efficiently. Deprived of efficient markets, consumers ultimately bear the risk and, over the long term, higher costs that will result when a given resource is not be economically viable.

“NYPA’s comments also recognized the danger that PPAs pose to properly functioning markets. NYPA, the owner and the operator of the two large, baseloaded, hydropower projects that produce a substantial portion of New York’s zero-emission energy each year, cautioned that, “[i]f the CES allows eligible resources to generate RECs when market prices for its energy are negative, those resources may replace existing resources that receive lower or no REC value.’ NYPA further noted that the risk of distortion in the energy market and grid operations is ‘especially acute if the CES pursues bundled [PPA] structures, as PPAs give generators no incentive to seek high-demand times and locations.’

“NYPA, in fact, tied its concerns to the real world impact bundled PPAs would have on existing zero-emission resources, noting that negative pricing could lead to hydropower projects ‘spilling’ water to avoid losing money during negative pricing periods.

“As discussed at length in its initial comments and in the UOG section above, IPPNY believes that the risks associated with developing energy resources must properly rest with private investors who are able to compete in a fair and efficient market and are thereby incented to provide the lowest-cost alternative. And, as the NYISO accurately pointed out, artificial ‘incentive constructs’—like long-term, bundled PPAs—do not eliminate the risks associated with LSR development, but rather shift that risk from developers to consumers. Bundled PPAs leave consumers on the hook for higher costs even if prices in the energy market decrease or if the resource’s market performance is not competitive with other lower-cost alternatives.”

IPPNY says government-subsidized hydro from Canada not a fair competitor

Both HQUS, the U.S. subsidiary of the Canadian province-owned Hydro-Québec (HQ), and TDI, the developer of the proposed Champlain Hudson Power Express (CHPE) transmission project running from Canada to New York City, argued in their comments for the explicit eligibility of large-scale hydro for New York’s CES.

Said IPPNY: “Such eligibility would require the expansion of the existing definition of eligible renewable facilities which Staff proposed to be used for the CES program to include ‘all environmentally sound resources; not limited to low-impact run-of-river facilities and upgrades to existing resources with no new storage impoundments.’ NYPA and the NYISO also favored the expansion of eligibility for Canadian hydro resources, arguing that ‘[b]oth new and existing hydroelectric facilities should be eligible under the CES without regard to size or type of facility.’ NYPA also expressed its support for expanding eligibility to include new impoundment facilities.”

IPPNY added: “The Commission should reject this expansion of New York’s CES eligibility and maintain the scope of existing definition for ‘hydroelectric’ adopted for the RPS in 2004. Allowing the expansion for which HQUS and TDI argue would subvert Staff’s efforts to achieve the policy goals that underlie the 50 by 30 mandate. For example, such an expansion would fail to account for the significant environmental impact of new impoundment, the considerable carbon footprint of large-scale projects, or the substantial environmental impacts associated with the construction of transmission lines running down from Canada through New York’s major water bodies (e.g., Lake Champlain and the Hudson River).

“As noted in the Draft Supplemental Environmental Impact Statement, ‘conventional store-and-release hydropower projects have prominent environmental impacts on river systems and the plants and animals that are connected to and rely on river systems,’ and ‘[h]ydropower today is more focused on opportunities to develop new sources of energy that do not require the construction of new dams or projects that result in significant alteration of rivers and streams.’ Staff has crafted the definitions and categories of eligible resources with both deliberation and care. The Commission should not discard the results of those deliberations, particularly to accommodate subsidized Canadian government-owned hydropower and the costly new transmission facilities necessary to deliver that power to statewide load centers.

“IPPNY has consistently opposed the Commission adopting policies that would force New York State ratepayers to subsidize the Canadian government’s construction of hydroelectric plants or that would result in ‘socialized’ facilities impacting New York’s markets. IPPNY maintains that, overall, markets only work effectively when participants in those markets operate on an equal footing. The introduction of a socialized, government-owned resource into an administrative, tier-based program significantly skews the playing field, disadvantages private, competitive merchant projects, and adversely affects the underlying competitive markets.”

Utilities offer their own reply comments

The Indicated Joint Utilities said in their own May 13 reply brief: “The Commission should not order utilities to enter long-term PPAs with renewable power developers. Recent research demonstrates that renewable energy is becoming cost-competitive in open, generation-agnostic power procurement processes in more areas of the United States, drawing into question whether such contracts remain necessary to support what has become a well-established industry.

“The Utilities agree with the many commenters who criticized long-term bundled PPAs for their inherent risks to customers. As noted in Comments of the Indicated Joint Utilities on the Department of Public Service Staff White Paper on Clean Energy Standard (‘Indicated Joint Utilities Comments’), similar contracts signed before the full transition to wholesale energy markets cost Con Edison customers more than $4 billion in out-of-market payments and nearly bankrupted Niagara Mohawk. Customers of Con Edison and National Grid are still paying the price for this costly policy today. The Commission should reject a new application of this flawed policy decision, particularly when other available options will facilitate achieving the State’s policy goals in a less risky manner to customers.

“Relying on a single procurement pathway to support the development of the new renewable resources needed to meet the 50×30 goal presents unnecessary risks. For example, the apparent demise of the ‘Yieldco’ financing model, which was highlighted less than one year ago in the Large-Scale Renewable Energy Development in New York: Options and Assessment Final Report (‘NYSERDA LSR Options Paper’) as a way to reduce program costs, highlights the vulnerability of individual business models to changing financial markets and economic conditions. To address these issues, the Utilities have proposed a portfolio approach to renewable energy development that will open doors to a wide range of market participants and foster competition among multiple business models, ultimately for the benefit of New York customers.”

They said the portfolio would include:

  • the voluntary market, structured in such a way that end-use customers could use voluntarily procured New York Renewable Energy Credits (REC) to offset their REC obligation;
  • a continuation of and improvement to NYSERDA’s REC-only contracting model which would allow the majority of the third-party developers participating in this case to compete in response to Requests for Proposals; and
  • the “Universal Renewables” model criticized by IPPNY, which would give all customers access to the long-term benefits of renewable energy by having renewable energy developers bid to develop and build new resources, then transferring those assets to utilities for long-term ownership.

Three other transmission utilities also back utility-owned generation

Central Hudson Gas & Electric (CH), New York State Electric & Gas (NYSEG) and Rochester Gas and Electric (RG) filed their own May 13 reply coments. They said the continue to adamantly oppose utilities as PPA counterparties and fully and solely support the New York Power Authority as the counterparty for all PPAs.

They also said they disagree with IPPNY’s position that utility affiliates should be prohibited from owning generation in their affiliated utility’s footprint. “Under the central procurement model, under the utilities’ codes of conduct, under the close scrutiny of the Commission, and additionally (in the case of LSRs) governed by the rules and requirements of FERC, EDCs are prevented from favoring their affiliates, making such a constraint effectively unnecessary and counter-productive to achieve the ambitious 50×30 goal,” they argued.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.