NYSERDA’s Proposed Modification of Index REC Price Formula due to Capacity Accreditation Reforms
Written by: Eric Pinsker-Smith, Sr. Analyst; and Raghu Palavadi Naga, Director
Publish Date: July 27, 2022
Estimated Reading Time: 6 Minutes
Since its first solicitation in 2017 (RESRFP 17-1), the New York State Energy Research and Development Authority (NYSERDA) has continued to evolve its annual RES solicitations for RECs from Tier 1 large-scale renewables (LSR) to adapt to changing project development environment, advance existing policy objectives and address new ones, and improve the contracted project success rate to achieve the state’s Climate Leadership and Community Protection Act (CLCPA) goals.
Ahead of its sixth RES solicitation in 2022 (RESRFP22-1), on July 7 NYSERDA issued two Requests for Information (RFI) on key topics and proposed major solicitation modifications in response to continued LSR development observations and new market issues and trends. This blog post focuses on the RFI related to the proposed changes to the Index REC/OREC pricing structure that are designed to accommodate the upcoming NYISO capacity accreditation rule changes. The response deadline to this RFI has been extended to August 4th, 2022. Our blog 5 Key Takeaways from New York’s 2022 RES Solicitation RFI sheds light on the key details of the main RFI (RESRFI22-1) covering a broad range of changes and updates being considered for the upcoming solicitation. The response deadline to the main RFI is July 28th, 2022.
On July 7, NYSERDA issued a request for information (RFI), seeking feedback on a proposed modification to the formula used for Index REC and Index OREC pricing to accommodate recent capacity market changes. In particular, as we covered in our blog, Relevance of Capacity Revenues and Updates from the Northeast, the NYISO has been working with its stakeholders to develop and implement a revised capacity accreditation scheme. The resulting changes to the capacity value of renewable resources could have a considerable impact on the revenues and risks to the Index REC/ OREC contract holders, absent the proposed changes to the Index REC formula.
In this blog post, we discuss:
- Index REC/OREC Contract Structure and Background
- Current Formula for Reference Capacity Price
- NYSERDA’s Proposed Changes
- Illustrative Example of the Impact of the Updated RCP
- Takeaways and Next Steps
Index REC/OREC Contract Structure and Background
Under the Index REC/ OREC pricing structure, the Monthly REC price is determined as the Index REC Strike Price less the Reference Energy Price and the $/MWh equivalent Reference Capacity Price (RCP).
The Reference Energy Price and RCP are intended to approximate the market revenues generators realize in the energy and capacity markets, respectively. Under this mechanism, the REC revenues would increase if the energy and capacity market revenues decline, thus providing renewable developers a hedge against market volatility.
NYSERDA is now proposing to modify the formula for calculating the capacity component (i.e., the RCP) of the Index REC/OREC mechanism, in response to the NYISO’s proposed modifications to capacity accreditation rules. NYSERDA’s proposed modification does not impact the calculation of the Reference Energy Price. As illustrated in Relevance of Capacity Revenues and Updates from the Northeast, the capacity revenues generally constitute a relatively small portion of the overall revenue mix (less than 15 percent of total revenue across resources/ locations in 2021, see 2021 State of the Market Report) for renewable resources. Nonetheless, they can affect the overall returns to the project considerably, particularly as the competitive pressures on bidders in NYSERDA solicitations increase. Hence, it is still important to align the project’s capacity market compensation with its proxy (i.e., the RCP) to continue providing Index REC/OREC contract holders with an effective hedge.
Current Formula for Reference Capacity Price
Under the current Index REC/ OREC mechanism, the RCP component is calculated using the following formula:
The RCP calculation includes a UCAP Production Factor (UPF) component that is selected by the seller as a part of the bid and is fixed for the term of the contract. Under the current rules, the UPF represents the weighted average of the project’s capacity factor over the Peak Load Window (PLW) hours, and is used to estimate the amount of capacity a project is qualified to sell in the capacity market. Under the NYISO’s current rules, the UCAP is generally not expected to vary greatly over a project’s life, and the primary source of volatility in capacity revenues to any resource stems from price volatility in the NYISO-run auctions. However, once the proposed capacity accreditation rules take effect, capacity suppliers are likely to encounter variation in their qualified capacity as well.
This is particularly true under the NYISO’s marginal capacity accreditation approach, where the UCAP values for renewable resources could decrease substantially over time as their penetration increases. A fixed UPF over the contract term of an Index REC contract holder would not reflect this decline in the project’s capacity value. Therefore, absent an adjustment to the RCP, renewable projects would realize reduced capacity revenue in the capacity market, without the loss being offset by higher REC revenues in the Index REC/OREC price settlement.
NYSERDA’s Proposed Changes
To mitigate generators’ risk exposure to declining capacity values, NYSERDA proposed to modify its RCP formula to include a multiplier based on two new components: (a) a resource’s annual assigned Capacity Accreditation Factor (CAF), and (b) a representative resource’s average capacity factor over the PLW.
Rearranging the terms of the above equation would result in:
When the equation is structured as such, the UPF/(Avg PLW Capacity Factor of Rep Unit) term represents the discount that would be applied to a project’s capacity value to reflect its performance during a PLW relative to a representative project of that class. CAF represents the marginal contribution of a representative project of that class to the system reliability. The CAF and the average capacity factor of the representative unit during the PLW will be determined by the NYISO on seasonal or annual basis, and may not be easy to predict at the time of the bid submission. As with current formula for RCP, the bidders submit the UPF for their project. See Takeaways below for additional discussion of the effectiveness of the formula and considerations when developing bids under the new formula.
NYSERDA intends to implement the adjusted RCP formula for both the price evaluation of Index REC and Index OREC Proposals and monthly REC settlement for these contracts, and indicated that its evaluation will be based on NYISO’s forecasts of CAFs and Representative Unit PLW capacity factors. NYSERDA further noted that it may submit a petition to the New York Public Service Commission regarding the proposed modification to existing/ongoing Index REC and Index OREC Agreements. NYSERDA also stated that it intends to work with project owners to apply a standardized adjustment to pricing contracts and agreements incorporating the change described in the RFI, prior to the implementation of the NYISO’s capacity accreditation rules in May 2024.
The following example illustrates how the proposed changes to the RCP formula would affect a sample project under the current and updated formula under several scenarios.