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NYISO: Long-term 'bundled' contracts for renewables harm the grid, consumers

New York'sgrid operator warned state regulators that using "bundled" power purchaseagreements to boost renewables under Gov. Andrew Cuomo's proposed clean energy standardcould harm energy markets, grid reliability and consumers.

The cautioned the New YorkPublic Service Commission in commentssubmitted April 22 against using bundled power purchase agreements to achieve theclean energy standard's target of generating 50% of New York's electricity fromrenewables by 2030. NYISO said the "bundled" power contracts will impedethe market's ability to procure the most cost-efficient resources. The ISO insteadrecommended renewable energy credits as a market-based incentive to achieve therenewable growth and, consequently, a 40% reduction in carbon dioxide emissionsby 2030 from 1990 levels.

The Departmentof Public Service staff's April 8 cost-analysisreport of the clean energy standard chose bundled power purchase agreementsas its primary method of achieving the targets. The DPS staff report estimated thatthe renewable and nuclear subsidies under the clean energy standard could cost NewYorkers $3.62 billion by 2030 but deliver $4.39 billion in net benefits after accountingfor the impact of reduced carbon emissions. According to the report, the subsidieswould have less than a 1% impact on electricity bills or the equivalent of lessthan $1 per month for the average residential customer but reap a net positive benefitof $1.8 billion by 2023.

NYISOcriticized the DPS staff report for failing to address reliability risks of energyresources becoming "insulated from the financial consequences of their operation"as a result of the bundled power purchase agreements. The operator said those agreementsunnecessarily transfer risks that certain energy resources may not be economicallyviable from private investors and developers to consumers who are unable to manageand mitigate such risks.

"Thesearrangements essentially guarantee that renewable resources receive a certain levelof revenue for each MWh of output," explained NYISO. "This market insulationdistorts the incentive for renewable resources to properly locate their facilitiesin areas of highest value and respond to dispatch instructions. Because a fixedrevenue guarantee is tied to production, long-term bundled PPAs may provide a perverseincentive for renewable resources to generate regardless of system conditions inorder to maximize their revenues."

"Renewableresources may submit large negative offers to ensure their dispatch regardless ofmarket prices, system conditions, or their actual marginal cost of generation,"continued NYISO. As a result, the ISO said, this behavior in the long run increasescosts to consumers, who could be forced to pay the bundled price regardless of theresources' performance. The insulated bundled contract prices could also raise pricesfor consumers even if energy market prices decrease in the future, said NYISO.

Accordingto the operator, the reduced energy prices resulting from "insulated"energy resources could also place financial strain on conventional resources, suchas nuclear or natural gas, which are needed to maintain grid reliability by backingup intermittent renewables. "If reduced market prices cause or accelerate theretirement or mothballing of other generation facilities, or stall the developmentof new generation, the lack of diverse generation resources could adversely affectreliability. The insulated renewable resources, however, remain unaffected becausethe level of revenue received is fixed regardless of market outcomes."

In additionto praising nuclear generation as a reliable, around-the-clock, source of energy,NYISO urged regulators to make emission-free hydropower resources eligible for compensationunder the clean energy standard. The proposal's multitier, above-market creditscurrently only apply to renewables and existing upstate nuclear generation.

"Controllablehydroelectric resources in Canada, which currently deliver power to New York witha near 100% capacity factor, have the potential to balance variable wind and solaroutput by serving as a baseload resource that can also quickly ramp up and down,"said NYISO. "In order to fully utilize controllable Canadian hydroelectricresources, it may be necessary to construct additional transmission infrastructurethroughout New York State to allow for delivery of hydroelectric power from theCanadian border to the load centers of New York State."