1. Bundled Power Purchase Agreements Could Adversely Affect Energy Market Efficiency and System Reliability
The NYISO respectfully submits that “bundled” power purchase agreements (“PPAs”) are not the most efficient mechanism to develop the lowest cost renewable resources. 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. Such PPAs unnecessarily transfer the risk that certain resources may not be economically viable from private investors and developers to those that are unable to manage and mitigate such risk – consumers. Significantly, the DPS Staff White Paper does not address the reliability concerns that arise when resources are insulated from the financial consequences of their operation.
The DPS Staff White Paper discusses various development options to achieve the target of 50% renewable generation with long-term bundled PPAs as the primary compliance tool. The options presented have different levels of compatibility with the competitive wholesale markets. Long-term bundled PPAs, however, mute the market signals that should be driving generation resource development, including renewable resources. While long-term bundled PPAs may be available as an option in states such as Massachusetts, Connecticut, and Rhode Island, they are only one option among many mechanisms, and renewable energy credit (“REC”) tracking and trading remain as significant approaches to renewable portfolio standard (“RPS”) compliance. According to the National Renewable Energy Lab (“NREL”) and the Lawrence Berkeley National Lab (“LBNL”), in restructured markets with competitive retail markets, RPS compliance obligations are:
generally placed on LSEs, and compliance is achieved through the purchase and retirement of RECs. Retail suppliers in these markets typically do not have long-term certainty regarding their load obligations, and therefore typically purchase RECs through short-term transactions for unbundled RECs.
The NYISO agrees with NREL and LBNL that RECs are the appropriate incentive for renewable resources in areas with competitive energy markets such as New York. By extension, NREL and LBNL point out that bundled PPAs are typically not used in competitive market states but are more commonly used in fully regulated states to satisfy RPS obligations.
Long-term bundled PPAs may result in adverse market and reliability impacts because they effectively insulate renewable resources from temporal and location-based wholesale market price signals. These arrangements essentially guarantee that renewable resources receive a certain level of revenue for each MWh of output. This market insulation distorts the incentive for renewable resources to properly locate their facilities in areas of highest value and respond to dispatch instructions. Because a fixed revenue guarantee is tied to production, long-term bundled PPAs may provide a perverse incentive for renewable resources to generate regardless of system conditions in order to maximize their revenues.
Specifically, renewable resources may submit large negative offers to ensure their dispatch regardless of market prices, system conditions, or their actual marginal cost of generation. This behavior exacerbates the potential for very low and even negative energy prices, which in the long run increases the cost to consumers. Reduced energy prices resulting from resources that are not responsive to price signals may place additional financial strain on other existing conventional, clean and renewable resources. If reduced market prices cause or accelerate the retirement or mothballing of other generation facilities, or stall the development of new generation, the lack of diverse generation resources could adversely affect reliability. The insulated renewable resources, however, remain unaffected because the level of revenue received is fixed regardless of market outcomes. This is a significant concern where conventional generation must remain available to backstop intermittent renewable resources to maintain system reliability.
Insulating renewable resources from price signals and reducing incentives to follow dispatch instructions may also undermine the efficiencies gained by fully integrating wind resources into the NYISO’s economic commitment and dispatch software. If renewable resources that receive market insulating incentives submit offers that seek to maximize their dispatch, the NYISO dispatch software may be unable to distinguish which units should be redispatched to maintain reliability based on the economics of all submitted offers. This may require system operators to manually redispatch wind resources to ensure continued system reliability. Manual actions often result in the removal of larger amounts of renewable capacity for longer periods of time than could otherwise be accomplished through the real-time dispatch and commitment software. This outcome runs counter to the State’s renewable goals.
2. Bundled Power Purchase Agreements Shift Financial Risk to Consumers
Incentive constructs such as long-term, bundled PPAs, alter the allocation of risk that is fundamental to competitive markets. Bundled PPAs do not eliminate the risk associated with renewable resource development. Rather, these mechanisms shift risk from developers to consumers. The entities best suited to manage and mitigate the risks are investors, not consumers. Consumers could be forced to pay the bundled PPA price regardless of the resources’ performance in the electric market, e.g., how frequently the resource is selected to operate. Consumers could also be subject to higher costs even if energy market prices decrease in the future, due to the insulated bundled PPA contract price.
Competitive markets transfer investment and performance risk away from consumers to the entities best positioned to manage such risk – investors and facility owners. In competitive markets, investors and facility owners evaluate alternatives, make investment decisions, place their capital at risk and have access to various instruments to hedge risk. Market prices provide the incentives to build new infrastructure and free consumers from the obligation to fund such investments. Poor investment decisions, even if reasonable at the time they were initially made, result in losses for investors and facility owners rather than consumers. This risk allocation fosters the continued pursuit of innovation and investments to improve operational efficiency and availability and reduce production costs. Similarly, the Clean Energy Standard should not predetermine winners and losers. The Clean Energy Standard should continue to rely on clean energy incentives to facilitate renewable resource development with accurate market signals while maintaining the appropriate allocation of financial risk.
3. Bundled Power Purchase Agreements Should Only be Utilized as a Last Resort
Due to potentially adverse impacts on system efficiency, reliability, and consumer costs, the Commission should avoid any material reliance on bundled PPAs to achieve the Clean Energy Standard goals. Instead, the Commission should continue to administer RECs to incentivize renewable resource development, thereby leveraging the competitive markets to the fullest extent possible.
As noted above, the NYISO’s concerns revolve around the potential consequences of “price insulation” arising from bundled PPAs which are the focal point of the DPS White Paper.
The NYISO recently raised essentially the same concerns about bundled PPAs, as well as contracts for differences (“CFDs”) and utility-owned generation (“UOG”), in comments on Large Scale Renewables (“LSR”) procurement options in this docket.