NYSERDA’s Potential Game-Changing Petition Seeks to Switch Tier 1 Fixed-Price REC Contracts to Index REC Structure

On August 10, 2020, the New York State Energy Research and Development Authority (NYSERDA) filed a Petition with the Public Service Commission (PSC) in Case 15-E-0302. NYSERDA requested that the PSC authorize NYSERDA to offer previous Tier 1 REC award recipients the opportunity to convert their contracts from a Fixed price REC structure to an Index REC price structure.

As a reminder, on January 16, the PSC issued an Order Modifying Tier 1 Renewable Procurements to authorize NYSERDA to offer an Index REC structure to bidders in its Tier 1 Renewable Energy Standard (RES) solicitations. An Index REC would provide REC payments to contracted projects based on the net difference between a contracted “strike price” and reference prices for energy and capacity, thereby providing a substantial hedge on commodity market energy and capacity revenues (see our past blog post on Index REC). 

NYSERDA argues that allowing currently contracted projects to convert to an Index REC price structure could lower financing costs, which would reduce ratepayer costs and increase the likelihood of projects reaching commercial operation.

While a conversion to an Index REC may not be sufficient to change the outlook of projects with significant financial barriers, it could be enough to provide a life line to certain projects that would otherwise be unable to secure the next development milestone or financing in the face of falling commodity electricity future trends, shift in temporal LBMP profile, and carbon pricing uncertainty. 

Earlier this week, SEA released our latest “market fundamentals analysis” on the Clean Energy Standard (CES) progress and highlighted the potential for NYSERDA-contracted supply shortfall in the absence of actions like what NYSERDA has just proposed.

In the coming week, we will be releasing a sensitivity on that analysis to show the market implications if this proposal is adopted for our NY Renewable Energy Market Outlook (NY-REMO) subscribers. If you are interested in benefiting from our analysis, please contact Po-Yu Yuen to learn more about becoming a NY-REMO subscriber.

Details of NYSERDA’s Petition

  • Eligibility: Any project in development that has a Fixed REC contract from NYSERDA would be eligible to switch from a Fixed REC to an Index REC price structure. Projects where NYSERDA has terminated an agreement or has “an active right to suspend or terminate its performance” may not be eligible (we suspect this applies to projects that have already extended their Commercial Operation Milestone date multiple times).
  • Proposed Index REC Pricing: NYSERDA proposed to make a one-time, non-negotiable Index REC strike price offer to each eligible project owner. NYSERDA’s offer would use a standard, technology-specific unforced capacity (UCAP) production factor but allow project developers to propose their own UCAP production factors if desired. The contracted strike price would remain constant over the contract term, without any price escalators. NYSERDA would set the Index REC strike price “at a level intended to achieve a 20% reduction in the expected REC procurement costs from the project relative to the cost of the existing Fixed REC agreement,” as calculated in the equation below. All other contract terms would remain the same:

    Index REC Strike Price Offer = (Levelized Forecast of Reference Energy Price + Levelized Forecast of Reference Capacity Price) + (Discount Factor (80%) * Fixed REC Price)
  • Adjustments to Standard Form Contract to insulate from Buyer-Side Mitigation: In an attachment that shows the necessary changes to the standard form agreement, NYSERDA included a clause that would insulate sellers from buyer-side mitigation, by adjusting a project’s applicable Reference Capacity Price by a “Mitigation Factor.” This same clause was included in the RESRFP 20-1 standard form agreement.
  • In addition to its main proposal for Index REC conversion, NYSERDA offered two alternative approaches:
    • Alternative Bid-Based Pricing: NYSERDA proposed that it could request bids from Fixed REC contract recipients, with NYSERDA either limiting the nameplate capacity of Index REC conversions allowed or using a price ceiling or demand curve to create a scarcity of Index REC awards. NYSERDA would not disclose the price ceilings or demand curves to bidders.
    • Hybrid Alternative Pricing: NYSERDA proposed another pricing alternative in which it would offer each bidder an Index REC contract at NYSERDA’s administratively determined Index REC strike price. Bidders would then have the option to accept the offer or reject it and counteroffer with a higher strike price. If the bidder’s counteroffer than NYSERDA’s price limit, then NYSERDA would reject the bid and the bidder would forfeit its right to accept the initial Index REC strike price that NYSERDA offered, resulting in the project maintaining a Fixed REC price structure.
  • Negative Energy Considerations: NYSERDA proposed that any changes to the way in which the PSC considers negative energy prices for Index REC projects in response to NYSERDA and Department of Public Service Staff’s White Paper on Clean Energy Standard Procurements to Implement New York’s Climate Leadership and Community Protection Act (see our recent blog post on the “CES 2.0 Whitepaper” ) also apply to any projects that convert from Fixed REC to Index REC price structures

This summary comes from SEA’s Eyes and Ears Flash update. For more timely and cutting-edge insights, please contact Kate Daniel for more information on our Eyes & Ears regulation, policy and legislation tracking service.