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FERC Excludes Clean Energy From NY’s Capacity Market

image credit: ID 31003488 © Christos Georghiou | Dreamstime

Today’s decision applying buyer-side mitigation (BSM) to state-supported resources that participate in New York’s wholesale capacity market is the latest attempt by a hyper-politicized Trump FERC to try and pose barriers to states deploying clean energy resources. FERC’s order, which is similar to an order it issued last December in PJM, effectively excludes clean sources of energy like wind and solar from participating in the state’s capacity market. These resources are quickly becoming the most affordable, and the New York’s landmark Climate Leadership and Community Protection Act (CLCPA) requires that they make up a increasingly large share of the state’s energy mix. FERC’s ruling will drive up costs for consumers, undermine the state’s clean energy mandates, and prop up fossil power. In short, today’s decision creates a strong argument in favor of the state exiting NYISO’s discriminatory capacity market. Thankfully, New York has already commenced a proceeding to consider whether it should do so. It should move forward without delay. 

Capacity Markets Ensure that the Lights Stay On   

Under New York’s current system for regulating electricity, the New York Independent System Operator (NYISO) is responsible for ensuring that there is adequate energy supply, otherwise known as resource adequacy. To carry out this duty, NYISO operates a capacity market. Unlike NYISO’s energy market where actual electric energy is bought and sold, capacity is simply a promise to be available to provide energy if needed at a future time when the grid is under stress (for example, when air conditioning usage spikes on a hot summer day). Suppliers can bid into the capacity market, and if selected, receive payment for being available during these time periods. NYISO determines the rules for what types of resources can sell in the capacity market, as well as how much capacity credit to give each type of resource.

NYISO requires the state’s utilities, like Con Ed, and other electricity suppliers to buy enough capacity each summer and winter to exceed projected electricity demand by a certain amount to provide a buffer in cases of peak demand. That amount, called the “installed reserve margin,” is designed to meet a standard that grid failures won’t occur more than once every ten years on average. For example, an installed reserve margin of 17 percent means that New York’s utilities must buy enough capacity to exceed their projected peak demand by 17 percent.

Buyer Side Mitigation Explained

In regulating the capacity market, NYISO enforces rules to prevent participants from engaging in manipulative conduct to artificially suppress prices. Because adding a relatively small amount of cheap supply can significantly reduce market prices, and because utilities and other companies may act as both buyers and sellers in capacity markets, a company that buys more capacity than it sells could seek to manipulate prices by submitting artificially low sales bids. This uneconomic behavior could yield a profit by reducing market prices and thereby saving the utility more money in its purchases of capacity than the amount lost through artificially low sales bids.

To prevent this, NYISO and other regional grid operators created buyer-side mitigation rules in areas of the grid where the risk of price suppression is highest. The rules subject certain supply bids to an offer floor. By forcing suppliers to bid no lower than the floor, NYISO weeds out artificially low bids and ensures that prices accurately reflect demand and the actual costs of supply.

While these rules were initially designed to prevent gaming, they now apply to bids that are lower than they otherwise would have been because the supplier receives revenue from state-administered programs. For example, wind and solar generators receive revenues outside of FERC’s regulated markets, often selling renewable energy credits (RECs) pursuant to state laws and regulations. These RECs are part of the state’s Clean Energy Standard and are the primary mechanism for the state to reach its 70 by 30 goal. Because these resources receive out-of-market revenues, they are effectively excluded from the state’s capacity market. NRDC, along with other environmental and industry organizations, have filed comments in various FERC proceedings arguing that these rules were designed to address instances where large buyers of capacity can use their market power to artificially reduce capacity prices. They were never intended to, nor should they, apply to resources receiving state support given that the purpose of these out-of-market payments is to promote renewable energy, not to lower prices or otherwise manipulate the market.    

What FERC’s Decision Means for New York’s Clean Energy Goals

FERC’s decision on BSM is strictly at odds with New York’s clean energy goals. To see how bad this is, let’s fast forward to 2030, when the CLCPA requires that 70% of the state’s electricity come from renewable resources. New York, like many states, provides renewable resources with RECs to pay them for the positive benefits of carbon-free generation. According to FERC, because renewables receive these “subsidies”, if they are in a “constrained” zone (i.e. areas of the state where capacity prices are high, like NYC and Long Island), they are required to bid into NYISO’s capacity market at a price that pretends that these subsidies don’t exist, and as a result these resources will bid in at a price that is too high to be accepted (i.e. they won’t clear the market).     

Instead, fossil fuel plants clear. And not just a few: enough fossil fuel plants clear to replace all renewable resources that received RECs in constrained zones. These fossil plants won't be regularly used, if ever, in producing energy day-to-day. Instead, these fossil fuel plants are paid high capacity prices by consumers purely for the gift of existing and not being renewable. New York may still be able to meet its clean energy goals, but the price will be much higher as consumers pay for capacity that will rarely if ever be used.

NYISO is currently evaluating exemptions to BSM that would allow more renewables to participate in its capacity market. However, any changes NYISO makes must be approved by FERC, and FERC’s order today makes it unlikely that any of these changes will ultimately be approved.

The PSC Has Commenced a Proceeding to Address Problems with the Capacity Market

Given that the current structure of New York’s capacity market poses a direct barrier to achieving the state’s clean energy policies, the Public Service Commission (PSC) decided last fall to revisit the current regulatory regime and consider whether alternatives should be considered. It issued an order commencing a proceeding that poses a series of questions to stakeholders focusing on whether NYISO’s capacity market is compatible with the state’s clean energy policies and what next steps the PSC should take with respect to this issue. NRDC has participated in this proceeding and has filed comments and reply comments urging the state to take a greater role in ensuring resource adequacy. In particular, NRDC and several other clean energy groups recommend that the PSC insist upon changing the current capacity market construct from a mandatory to a residual market. By doing so, electric utilities and other power purchasers would be able to satisfy their capacity requirements by entering into contracts with producers, and this process would be overseen by the state rather than NYISO. The capacity market could be used to purchase additional required capacity, but utilities and other wholesale purchasers would not be required to do so. By doing this, the state avoids the situation that currently exists where these resources are excluded from the capacity market and consumers must pay twice for capacity.   

What’s Next

FERC’s actions clearly stand in the way of New York’s right to determine its clean energy future. NRDC, along with other stakeholders, will file a motion for rehearing to make clear that treating resources required under New York law as out-of-market subsidies that must be mitigated is a misguided application of BSM.  However, this argument may fall on deaf ears given FERC’s current makeup. 

It’s time for New York to take ownership of resource adequacy. The state has already taken the first steps toward doing so by launching a proceeding to examine this issue. A key issue in this proceeding is the potential for NYISO to exclude renewable resources from the capacity market. FERC’s order now makes this a reality. As dissenting Commissioner Glick put it, FERC has created “one big mess” for the northeast. The PSC should move quickly to find a way out. 

NRDC Expert Blog by Cullen Howe & Rebecca Behrens

 

Republished with permission from the Natural Resources Defense Council's expert blogs.

Pat Remick's picture

Thank Pat for the Post!

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Discussions

Bob Meinetz's picture
Bob Meinetz on Feb 21, 2020 1:54 am GMT

Pat, your article might be retitled "FERC Excludes Unreliable Energy From NY’s Reliability Market." Makes a lot more sense.

Great news, either way. NYISO ratepayers, whether they knew it or not, have been paying wind and solar farms for resource adequacy - the assurance generation would be available, at specific days and times - up to three years in advance.

"But how could any solar farm owner, especially in New York, know the sun will be shining on February 20, 2023? How could a wind farm developer know the wind will be blowing?", you might ask. Good questions, they wouldn't! But they were more than happy to take electricity customers' money by saying they could.

Just another of the endless scams associated with renewable energy, justified by people who don't realize how insignificant their contribution will be in the fight against climate change. Maybe the next domino to fall will be Renewable Energy Credits (RECs)...

Enough is enough.

Richard Brooks's picture
Richard Brooks on Feb 20, 2020 10:43 pm GMT

Could this decision by FERC nudge NY to consider exiting the wholesale markets? That's what Connecticut is discussing.

Roger Arnold's picture
Roger Arnold on Feb 21, 2020 4:38 am GMT

Pat, your post implicitly assumes that variable renewables can deliver power whenever there is a need for it. But they can't. And that's the crux of the whole issue.

.. enough fossil fuel plants clear to replace all renewable resources that received RECs in constrained zones. These fossil plants won't be regularly used, if ever, in producing energy day-to-day. Instead, these fossil fuel plants are paid high capacity prices by consumers purely for the gift of existing and not being renewable. New York may still be able to meet its clean energy goals, but the price will be much higher as consumers pay for capacity that will rarely if ever be used.

Exactly so. Although it isn't actually the fact that they received RECs that matters. That's just the rationale that the FERC is forced to employ. They're trying to make a system that still works while conforming to the demands of ideologically imposed market structures. What actually matters is that the resources in question are by nature incapable of delivering power on demand. As Bob points out, it makes perfect sense that they be excluded from the capacity market.

The fact that consumers must pay for capacity that will rarely be used is not due to an unfair bias against variable renewables. It's just physics. There will be times when production from renewables is inadequate to meet demand. What will happen then? If those little used fossil plants aren't available, then you're looking at blackouts. 

Does the fact that consumers must pay for capacity that will rarely be used increase utility rates? Absolutely! But you can't make the problem go away be pretending that as-available energy resources can deliver reliable energy on demand. 

Bob Meinetz's picture
Bob Meinetz on Feb 22, 2020 7:13 pm GMT

Roger, explained much better than I could. And reassuring that someone else recognizes this expense for what it is: a handout to "ideologically imposed market structures", i.e. special interests, and of no value to consumers.

Stephen Leftly's picture
Stephen Leftly on Feb 25, 2020 1:30 pm GMT

Bob : The biggest problem with your position is that it completely ignores the bigger picture: i.e. currently we are creating a massive problem for all of humanity ( and the rest of the biosphere for that matter)  as we dump all these waste products of fossil fuel burning into the atmosphere.

The "ideologically imposed market structure" ideology is one about saving the planet.

If we imposed a rational carbon tax, that properly accounts for the damage that dumping carbon and other GHGs (like methane etc.) into the atmosphere does, it is most likely most of these “ideologically imposed market structure” work around issues would disappear.

Some people who read this thread would I am sure propose nuclear as a solution but that comes with its own very significant issues too.  For myself I would be very worried living in a world where there are literally 10,000+ nuclear reactors producing fissile materials many being in politically unstable countries.  Also currently we (basically the world) do not seem to be able to build cost effective reactors.                 

So if we are not going to have a very, very sizable renewable generating base what is your solution?  It is trivially easy to criticize what is currently happening but so very difficult to come up with a solution that works and is implementable (both technically and politically).  

 

Bob Meinetz's picture
Bob Meinetz on Feb 28, 2020 6:17 am GMT

Stephen, I am pro-nuclear all the way. No one has been killed or injured in the U.S. by an accident at a nuclear plant, a record in which nuclear engineers here take considerable pride, and it's the only zero-carbon source of energy that isn't dependent on weather or time of day.

Nuclear fuel is typically about 5% fissile uranium; a bomb requires >95%. To make a bomb out of nuclear fuel, you'd need to first have access to the equipment and know-how to enrich it, then engineer the bomb itself  - that's the hard part. Anyone with access to those tools who wanted to build a bomb could find inexpensive uranium ore on the open market.

In general, the dangers of nuclear energy and radiation have been vastly exaggerated by those who aren't familiar with the subject. The dangers of climate change, and even coal plants, dwarf any of those presented by nuclear plants or spent fuel.

Stephen Leftly's picture
Stephen Leftly on Mar 10, 2020 3:47 am GMT

Bob:  Only addressing uranium enrichment pathway to nuclear devices sadly rather misses the point that for every ton of heavy metal waste there are the following approximate amounts of  fissile materials:   93.4% uranium (~0.8% U-235), 5.2% fission products, 1.2% plutonium (12 kg or 1.5 weapon equivalents per ton of fuel), and 0.2% minor transuranic elements (neptunium, americium, and curium).   A 1GW Light Water reactor will produce approximately 20 tons of spent fuel a year.

 
Of these fissile materials clearly the most concern is the 1.2% of plutonium which is much easier to separate than enriching U235 content as it is chemically different than uranium (unlike U235 vs U238).  Once the plutonium is separated it can be used to make a nuclear device.  While clearly plutonium devices are harder to engineer than a U235 device, with modern technology and knowledge (compared to the US in 1945) such engineering is now much easier and as time goes on will become easier still.  It also needs to be noted that the engineering and testing (prior to obtaining a plutonium “pit”) of such a device can be easily hidden compared to vast banks of uranium centrifuges.     

At one point it was thought that reprocessing spent nuclear fuel would be a viable method of “incinerating” plutonium but that has not been successful and has apparently created more problems than it solved  (for example look up the sad history of the THORP plant in the UK).  The net result of “reprocessing” nuclear waste is that the UK is currently sitting on about 130 tons of plutonium with absolutely no idea what they are going to do with it and have no means of disposal plus it has a huge plant decommissioning problem to deal with.  The US government for many years has strongly opposed the reprocessing of nuclear waste to extract plutonium due to proliferation concerns and “recommends” geological internment.    

However…… the US is sitting with something like 61,000 tons of spent heavy metal fuel and after nearly 60 years and billions of dollars spent also does not have a disposal plan that is actually realistic…or even close to being realistic. 

This heavy metal waste has to be protected not for decades, nor centuries, but for thousands of years, a time period longer than any human civilization.

For these reasons (and others), as much as I would like to, I just do not see nuclear as a viable solution.

 

Michael Keller's picture
Michael Keller on Feb 25, 2020 9:15 pm GMT

Classic Natural Resources Defense Counsel twisted logic that is truly painful to examine. 

The fossil plants are on standby to cover unreliable green energy. The fossil plants have fixed costs that need to be paid for by the consumer, otherwise the assets are abandoned.  Utilities are not the government and cannot print money to cover costs. If lower costs are desired, then run reliable assets with low costs. 

If the corrupt New York "greens" actually cared about the consumer, they would allow fracking to run natural gas plants that have the lowest production costs of any machine that supplies electrical energy. New York has vast supplies of untapped natural gas

The "greens" and the Narural Resourse Defense Consel have a leftest political agenda and are hell-bent on destroying the poor and middle class as well as our republic. Without question, the "greens" and the elitist financial community buddies are lining their own pockets at the expense the average Americans.
 

Bob Meinetz's picture
Bob Meinetz on Feb 28, 2020 6:25 am GMT

Michael, I don't know that NRDC's politics swing left or right, but it's not hard to find out what drives its "green" agenda: follow the money.

http://environmentalprogress.org/nrdc

Stephen Leftly's picture
Stephen Leftly on Mar 10, 2020 4:13 am GMT

So what is your solution to climate change, or do you believe, against all scientific evidence, we can pretend it is not real and will not have a devastating effect on everybody?

It is all too easy to hurl names etc. at people but putting out an actual WORKABLE solution to the issue is much, much tougher. Calling people names is so kindergarten level and frankly doesn’t do anything to deal with the problem at hand.   

If you look at the green new deal what they are proposing is to "buffer" those communities that will be hardest hit as we transition from fossil fuels to renewables.  Name calling it a "leftist agenda" may make for good propaganda in right wing circles but it seems to me a matter of moral fairness – i.e. those who will be hardest hit, with the least resources to fall back on, should not be left to bear the brunt of the change.   

As regards to methane yes when it is burnt it produces less CO2 than coal however it is also probably true that given the effects of methane itself as a greenhouse gas (~80 times as damaging as CO2 in the first 20 or so years  – something of the order of 23 times over 100 years) the net result of switching to methane may at best be a break even solution over coal and is certainly NOT a long term solution.  We are hugely overdrawn on our GHG account and we need to rapidly change what we are doing.
   

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