New York’s Index Storage Credits: Panacea or Pipedream?

Written by: Raghu Palavadi Naga, Director

Publish Date: July 6, 2023

Estimated Reading Time: 10 Minutes

In December 2022, the New York State Energy Research and Development Authority (NYSERDA) and the Department of Public Service (DPS) filed the 2022 Storage Roadmap for approval by the New York Public Service Commission (PSC). The 2022 Storage Roadmap proposed to double the State’s storage deployment target for 2030, from 3 GW to 6 GW. Energy storage resources (ESRs) are a critical component of a zero-carbon grid and expanding the State’s 2030 storage deployment goal to 6 GW is a priority for Governor Hochul. We detailed the 2022 Storage Roadmap in our Eyes & Ears Flash Update 23-1

The NYSERDA/DPS filing noted that over 4.7 GW of new projects will have to be deployed to achieve this goal, and recommended new programs for supporting development of various types of ESRs. In particular, based on a review and analysis of several options, the filing recommended that 3 GW of bulk storage resources be procured by the State through a new Index Storage Credit (ISC) mechanism. The proposed ISC mechanism was modeled on the Index Renewable Energy Credit contracts that have been extended to large-scale renewable generators in New York. The filing noted that the key benefits of the ISC construct is that it would “provide long-term certainty to projects” which would lower financing costs while maximizing value to ratepayers and directing investments to locations of higher value based on market prices.

If implemented, the ISC would be the primary incentive available to bulk storage projects in NY, and in conjunction with the federal ITC, it could play a pivotal role in shaping the development of the resources required to decarbonize NY’s grid. The ISC structure is nuanced and has significant implications for the risks and revenues for storage projects in NY. Naturally, SEA has been thinking deeply about it on behalf of our clients, many of whom are interested in providing bids on NYSERDA solicitations.

This is the first of our blogs analyzing the ISC construct. In this blog post, we discuss:

  1. The structure of the ISC;
  2. Revenue streams available to uncontracted bulk storage resources in NY;
  3. Effectiveness of the ISC as a hedge, and;
  4. Takeaways for developers and investors.

Index Storage Credit Structure

Under the filed proposal:

  • ESR projects participating in annual competitive solicitations would bid a Strike Price, which is a key evaluation criterion for NYSERDA selecting projects. The Strike Price is intended to represent the revenue requirement for the project.
  • Selected projects would receive revenues that are estimated as the difference between the Strike Price and a Reference Price. The Reference Price is intended to be a proxy for the expected market value of a ESR’s services, and is calculated as the sum of the Reference Energy Arbitrage Price (REAP) and the Reference Capacity Price (RCP)

Mathematically, the above can be summarized as[1]:

ISC = Strike Price – REAP – RCP


REAP is the difference between the top four and bottom four priced hours (also referred to as TB4) of the day-ahead zonal locational based marginal prices (LBMPs).

RCP is the ICAP spot auction price adjusted for the Capacity Accreditation Factor.[2]

The NYSERDA/ DPS filing proposes that if the Strike Price exceeds the sum of the REAP and RCP, the selected projects would be paid the difference by NYSERDA, and if the sum of the REAP and RCP exceeds the Strike price, the project would pay NYSERDA. Hence, if the ISC structure functions as intended, the variability in the revenues for storage projects would be reduced relative to an uncontracted project, thus reducing the project risk and consequently their cost of capital (and their total revenue requirement).

However, the effectiveness of the ISC mechanism in providing a hedge against market volatility would depend on the extent to which the REAP and RCP represent the market revenues to the project. For instance, after a project secures a contract from the NYSERDA, if the REAP comes in systematically higher than its market revenues, all else being equal, the project’s revenues will fall short of its Strike Price. Similarly, if the REAP is systematically lower than a project’s NYISO market revenues, its total revenues could exceed its Strike Price. 

Given its critical importance to developers and investors, we explore below how the Reference Price could differ from a project’s revenues. Generally, we believe that the index can fall short of market revenues to ESRs considerably due to several different factors that we explore and illustrate in this blog. But first, we enumerate the various revenue streams of an uncontracted bulk storage project operating in the NYISO footprint.

Takeaways on Index Storage Credits

Overall, the ISC framework represents a concrete and novel step towards incentivizing the entry of bulk ESRs consistent with the state’s goals. From the state’s perspective, like the Index REC construct, it aims to enhance the finance-ability of storage resources while preserving the locational price signals and competition, to the ultimate benefit of ratepayers.

From a developer’s perspective:

  • Under the ISC framework, while a portion of the revenue stack is fully “de-risked”, developers are still likely to face substantial market risk. This is because there could be a significant mismatch between the stipulated REAP and the revenues earned by a resource in the energy and ancillary services markets operated by the NYISO. This mismatch occurs because certain revenue streams are not being considered or being represented in an imperfect manner in the REAP calculation.
  • Notably, there is substantial variation in the extent to which REAP offers a hedge for potential market revenues, depending on where the resource is located and how it is operated. This variation can be considerably greater than what developers may be used to in the context of IRECs, under current market conditions. As such, it is critically important to understand the underlying drivers of revenues in prioritizing locations for project development, particularly in light of the forthcoming changes to resource mix and network topology.
  • The drivers of various market-based revenue streams (e.g., price volatility, reserve prices) could be difficult to forecast using traditional modeling frameworks (e.g., production cost models), particularly over a long period of time. Hence, it may be difficult to determine the extent to which the energy and ancillary service revenues are hedged over the long term. This is particularly so for early entrants–as specific locations get saturated with batteries, revenues to existing ones will decline.
  • Given the State’s emphasis on batteries in its decarbonization plans, and the large volume in the NYISO interconnection queue (over 7 GW that have completed their SRIS/ SIS study), demand for ISC might be significant. While the competitive pressure may be high in a potential ISC solicitation, it is important to be judicious in developing one’s bids, as bidding too aggressively might reduce the hedge value of the ISC and could increase the performance risk. 
  • Lastly, we note several design elements of the ISC could change in the future, which could affect a battery’ bidding strategy and ultimately revenues. Needless to say, it is critically important to track the developments in this regard.

SEA is closely following the regulatory developments, NYISO market rules and is developing various analytical tools to help developers prioritize their sites and craft their bids. In the meantime, should you require any assistance with tracking the evolution of the related proceedings, analyzing the revenues at your sites and/or implications of these developments to your portfolio, please reach out!

The full version of this blog is only accessible to subscribers to SEA’s New York Renewable Energy Market Outlook (NY-REMO) market fundamentals analysis service and Eyes & Ears renewable energy regulatory, policy, legislative and wholesale market tracking and analysis subscription service. Learn more about these services and how you can receive our deep analysis and market insights. Not (yet!) a subscriber but interested in our additional analysis? Reach out to Raghu Palavadi Naga for more information.

[1] The filing proposes that the settlement of the ISC be done on monthly basis.  The proposed ISC structure implicitly assumes that a 4-hour ESR will charge and discharge fully once every day on all days of a month.

[2] 2022 Storage Roadmap, Page 54  Also see Figure 15 of the 2022 Storage Roadmap for example of ISC calculation on page 55.