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FERC Order May Undermine Renewables, Energy Storage in New York’s Capacity Markets

September 11, 2020


Another setback for clean energy resources heightens tension in states considering alternatives to federally regulated markets.

The Federal Energy Regulatory Commission has rejected the latest proposal from New York’s grid operator to allow renewable energy and batteries to compete against fossil fuels in its wholesale capacity market. That may give the state’s regulators and policymakers more reason to consider alternatives to federally regulated energy markets.

In a Friday order, FERC’s Republican majority denied grid operator NYISO’s proposal to restructure what it terms its “buyer-side market power mitigation rules” to allow wind, solar, batteries and other carbon-free resources to compete against fossil-fueled power plants in its Installed Capacity Market.

NYISO’s latest proposal came after FERC’s February decision to deny its first plan to alter those buyer-side mitigation (BSM) rules in ways that would free those state-supported clean resources from being forced to use administratively determined minimum bids that are likely to be too high to allow them to clear the market.

NYISO said the new rules are needed to reform its capacity market structure to align with New York’s Climate Leadership and Community Protection Act. The CLCPA demands that New York get 70 percent of its electricity from renewables by 2030 and reach 100 percent zero-carbon emissions by 2040.

To reach those goals, the state is mandating 6 gigawatts of distributed solar by 2025 and 9 gigawatts of offshore wind by 2035, as well as 3 gigawatts of energy storage by 2030. Most of that is needed in New York City and its surrounding downstate population centers — the same regions where NYISO’s existing BSM rules could effectively bar them from participating in its capacity market.

That’s a problem for New York’s clean energy goals for two reasons. First, it will deprive renewable and storage projects of the ability to earn capacity revenue and undermine their cost-effectiveness and ability to raise financing. Second, it could prevent downstate New York from accessing the relatively lower-cost capacity those resources could provide, forcing it to rely on existing fossil-fueled generators and increasing capacity costs passed on to utilities and their customers.

It’s also unclear why BSM rules, created to prevent companies that both own generators and buy capacity from entering uneconomically low bids from those generators to artificially drive down their own capacity costs, should apply to new zero-carbon resources.

FERC’s rejection

NYISO’s proposal pointed out that the Climate Leadership and Community Protection Act and other state laws and regulations are likely to prevent new fossil-fueled capacity resources from entering the market, while also clearing the way for carbon-free resources to be built. It also pointed out that its downstate region is expected to need large amounts of new capacity and that its proposed two-part test for assessing state-supported resources was not expected to lead to the kind of market price suppression that the BSM rules are meant to prevent.

But FERC’s three-Republican majority rejected NYISO’s plan without addressing its merits to avoid price suppression. Instead, it simply stated that the proposal was “unduly discriminatory because it does not provide sufficient justification for prioritizing the evaluation of Public Policy Resources [i.e., clean energy resources] before non-Public Policy Resources [i.e., fossil fuels] independent of cost.”

In a dissenting opinion, Richard Glick, FERC’s sole Democratic member, blasted the decision, along with its February decision, as presenting NYISO with “a mind-boggling series of unnecessary and unreasoned obstacles aimed at stalling New York’s efforts to transition the state toward its clean energy future.”

He also warned that FERC’s decisions for NYISO, along with its much-maligned imposition of a similar administratively determined minimum offer price rule for state-subsidized resources in the capacity market operated by mid-Atlantic grid operator PJM, threatened to force states with clean energy goals to consider abandoning their participation in federally regulated interstate capacity markets altogether.

“The Commission’s approach is both deeply misguided and will ultimately doom NYISO’s current capacity market construct by forcing New York to choose between the Commission’s constant meddling and the state’s commitment to addressing the existential threat posed by climate change,” he wrote.

That view is echoed by Jeff Dennis, managing director and general counsel of trade group Advanced Energy Economy, who noted in a Wednesday email that FERC’s latest decision “goes a troubling step beyond its earlier [minimum offer price rule] rulings; rather than pointing to supposed price suppression caused by state policies, it now flatly says that market operators can’t even acknowledge the reality of lawful state policies.”

“In its quest to override the states and their clean energy and environmental objectives, this FERC seems willing to risk the collapse of competitive wholesale markets altogether,” Dennis wrote.

States caught between FERC rulings and going it alone

The federally regulated capacity market structures that allow regional sharing of resources needed to maintain grid stability and reliability have provided capacity more efficiently and cheaply than would be possible if states and utilities were forced to do so individually, most industry observers agree.

But FERC’s decisions on NYISO and PJM have led many states with clean-energy and carbon-reduction goals to examine options to exit those grid operators’ capacity markets.

The challenge for these states is to weigh the pros and cons of alternatives to participating in markets that may bar preferred clean resources, while also pursuing legal challenges to FERC — or awaiting a November election that could put Democrat Joe Biden in the White House and lead to the appointment of new FERC commissioners that could reverse its existing policies.

PJM states New Jersey, Maryland and Illinois are exploring ways to exit PJM’s capacity market to varying degrees. One method could be to use a PJM rule known as a fixed resource requirement alternative to create state-specific capacity constructs. But the fixed resource requirement alternative carries many risks with it, including the potential to increase capacity costs by reducing the scope of resources individual utilities could draw upon to meet their grid reliability needs.

The New York Public Service Commission has also started a process to examine the pros and cons of remaining under a FERC-regulated capacity market versus several alternative constructs. Those could include a state-operated market for bilateral contracts between load servers and capacity sellers, or a system similar to California’s resource adequacy construct in which utilities procure their own capacity on their own.

FERC Chairman Neil Chatterjee has defended the agency’s rulings on PJM’s and NYISO’s capacity markets. In a Wednesday conversation at the REFF-Wall Street conference, Chatterjee reiterated his view that FERC is acting to “ensure that market rules are resource-neutral and create a level playing field for all resources that are technically capable to participate.”

“It really does frustrate me when people look at our actions to preserve markets as being hostile to any particular fuel source,” he said. “I remain confident that the actions we are taking to promote competitive markets will not hurt renewables.”

But Greg Wetstone, CEO of American Council on Renewable Energy, disputes Chatterjee’s view. “Renewables have to be able to take advantage of their cost-effectiveness to compete directly,” he said, highlighting the fact that FERC’s denial of NYISO’s proposal essentially forces clean energy resources to artificially increase their bidding price, thus driving up capacity costs passed on to utility customers.

He also questioned FERC’s approach to defining state-subsidized resources, noting that “renewables are not the only resource to receive government support.”

It’s unclear what New York regulators and NYISO may do to challenge FERC’s latest order on legal grounds. In a prepared statement, NYISO CEO Rich Dewey noted that its proposal was supported by most market participants and a wide array of stakeholders, with the aim of balancing “FERC’s jurisdictional obligations and New York’s right to implement renewable energy policies.”

“We’re reviewing the order to assess next steps and remain confident we can find a regulatory solution acceptable to all parties that supports the changing grid,” Dewey wrote.

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