New York State Capacity Market Review

Transcription

1 New York State Capacity Market Review prepared for American Public Power Association National Rural Electric Cooperative Association New York Association of Public Power prepared by Laurence D. Kirsch Mathew J. Morey Christensen Associates Energy Consulting LLC September 19, 2012 Christensen Associates Energy Consulting, LLC 800 University Bay Drive, Suite 400 Madison, WI Voice Fax

2 TABLE OF CONTENTS Executive Summary...ii I. Introduction... 1 II. Background... 3 A. Institutional Framework for Assuring Resource Adequacy... 3 B. Evolution of Institutional Responsibility for Resource Adequacy... 5 III. New York Generation Investment History... 6 A. Generation Investment, 2000 to B. Generation Investment, 2000 to C. Generation Investment, 2006 to D. Planned Generation Additions E. Fuel Diversity F. Geographic Dispersion: Where It s Needed Most G. Reliability IV. Drivers of Generation Investment in New York A. Non-Market Standards Obligations to Serve Reliability Standards Renewable Portfolio Standards Environmental Regulations B. Market Incentives Short-Term Markets Long-Term Markets Short-Term vs. Long-Term Markets Capacity Markets V. Conclusions Attachment A. New York Generation Brought In-Service, Christensen Associates Energy Consulting, LLC i 9/19/12

3 EXECUTIVE SUMMARY New York State s electricity sector restructuring of the late 1990s included divestiture by the State s electric utilities of their generating assets, establishment of the New York Independent System Operator (NYISO), and creation of competitive retail markets. Under these new circumstances, New York State has engaged the question of how best to ensure that investment in new generating capacity is sufficient to: 1) maintain reliability as demand grows and as older, uneconomic generating units are retired and 2) support workably competitive retail and wholesale electricity markets. The debate has focused on the value of replacing the existing voluntary short-term forward capacity market with a mandatory longterm forward capacity market that would be similar to those in PJM and ISO-New England. 1 Generation investment in New York is driven by both non-market standards and by market incentives. The non-market standards, many of which are set by non-nyiso institutions, include obligations to serve, reliability standards, renewable portfolio standards, and environmental regulations. Market incentives are provided by the revenues that can be gained or the costs that can be avoided: a) in NYISO-administered short-term markets for energy, ancillary services, and capacity; b) through long-term bilateral transactions; and c) through self-supply or ownership of generation. Thus, the NYISO-administered markets are only one part of the overall framework for providing generation capacity and assuring reliability. The history behind each of the generating units placed in service in New York since 1999 indicates the following: A mixture of bilateral PPAs, merchant plant investments, utility-owned supply, and renewable resources, including those encouraged by federal tax incentives and the New York State Energy Research and Development Authority (NYSERDA) has provided adequate generation resources to satisfy growing electricity demand, provide reliable electric power service, and meet environmental public policy goals. The voluntary centralized capacity market administered by NYISO has provided a workable complement to the bilateral market, utility-owned supply, and NYSERDAand federal tax-supported renewable resources. The historical evidence of capacity investments over the past twelve years and the proposed capacity investments over the next four years indicate that New York State s present capacity market structure has provided sufficient generation capacity and promises to continue to do so for the foreseeable future. 1 The New York State capacity market in this paper refers to utility-owned supply, bilateral contracts between utilities and merchant plant developers, merchant plants that rely on the New York ISO s capacity and its other centrally administered markets for revenues, and renewable resources that may enter bilateral contracts or operate as pure merchant plants, but are also funded in part by New York State and federal incentives, such as the federal Production Tax Credit. Christensen Associates Energy Consulting, LLC ii 9/19/12

4 Consequently, there is no need to fix what is not broken. The existing capacity market structure has provided generation capacity where it is most highly valued, using diverse fuels and meeting a variety of renewable resources and environmental policy goals. This success has been achieved without resorting to a mandatory forward market such as those used by PJM and ISO-New England. The current design does not require replacement by a mandatory forward centralized capacity market. Christensen Associates Energy Consulting, LLC iii 9/19/12

5 New York State Capacity Market Review I. INTRODUCTION Beginning in the mid-1990s, New York State s electricity industry underwent dramatic changes in the institutional structure of its retail and wholesale markets. Precipitated by the New York Public Service Commission s (NYPSC) restructuring order of 1996, 2 these changes included divestiture by the State s electric utilities of their generating assets, establishment of the New York Independent System Operator (NYISO) as successor to the New York Power Pool, and creation of competitive retail markets. 3 As a consequence, New York State has engaged in a long-standing debate about how best to ensure that investment in new generating capacity is sufficient to: 1) maintain reliability as demand grows and as older, uneconomic generating units are retired and 2) support workably competitive retail and wholesale electricity markets. The resource adequacy debate in New York State, which parallels the debate held in other regions of the country where restructuring of retail and wholesale markets has taken place, centers on the question of what changes, if any, need to be made to institutional and market arrangements to induce investments in new generating capacity to ensure resource adequacy. On the institutional side of the question, suggestions in the mid-2000s that the State once again play a larger role in resource planning, 4 a function it had performed through the New York State Energy Office prior to restructuring, were implemented in 2009 in the form of the State Energy Planning Board. 5 As it stands now, long-term resource planning is a combination of planning efforts by the State s public power utilities with obligations to serve, the NYISO, which manages the Comprehensive System Planning Process (CSPP), and as part of that conducts the Reliability Needs Assessment (RNA). 6 2 New York Public Service Commission, Competitive Opportunities Regarding Electric Service, No. 94-E-0952, March 6, The NYPSC s stated objective was to identify regulatory and ratemaking practices that will assist in the transition to a more competitive electric industry designed to increase efficiency in the provision of electricity while maintaining safety, environmental, affordability, and service quality goals. Id. p Committee on Energy, The Association Of The Bar Of The City Of New York, Electric Regulation In The State Of New York, February 9, 2007, pp , ( Committee on Energy Report ). 5 In 2009, the New York legislature passed Article 6 of the New York State Energy Law (Section 6-108) that statutorily established the State Energy Planning Board (Board) and requires the Board complete a State Energy Plan on or before March 15, As NYISO states: The Reliability Needs Assessment (RNA) is developed as its first step in the Comprehensive System Planning Process (CSPP). The RNA is performed to evaluate electric system reliability, for both transmission security and resource adequacy, over a ten-year study period. If the RNA identifies any violation of Reliability Criteria for Bulk Power Transmission Facilities (BPTF) the NYISO will report a Reliability Need, quantified by an amount of compensatory megawatts (MW) and/or megavars (MVAr). In addition, after approval of the RNA, the NYISO will request market-based and alternative regulated proposals from interested parties to address the identified Reliability Needs, and designate one or more Responsible Transmission Owners to develop a Regulated Backstop Solution to address each identified need. Christensen Associates Energy Consulting, LLC 1 9/19/12

6 On the market side of the question, the debate has focused on the value of replacing the existing voluntary short-term forward capacity market with a mandatory long-term forward capacity market that would be similar to those administered by PJM and ISO New England. 7 Proponents of this approach believe that investment in merchant plants has been limited by investors reluctance to finance new plants without long-term power purchase agreements (PPAs) with load-serving entities (LSEs). 8 On this view, the introduction of a mandatory longterm forward capacity market would help to bridge the gap between a short-term spot capacity market and the long-term bilateral capacity market. The debate s intensity has varied over time according to the results of the most recent projections of resource adequacy. Such projections have varied significantly over time going from critical impending shortages to long-term sufficiency. For example, the NYISO s initial RNA in December 2005 suggested that the State s transmission and generation resources would be adequate only through The NYISO quickly revised this estimate the very next year in its Comprehensive Reliability Plan, which projected a reliability need emerging by In contrast, Con Edison, in a November 2005 assessment, projected a system reliability need by The NYISO s most recent assessment projects a reliability-related resource adequacy need no sooner than The inevitable cyclicality associated with generation investment engenders a boom-bust outcome in reliability needs assessment studies that, on the one hand, leads to calls for institutional and market reforms to incent generation investment, and, on the other hand, suggests that the existing processes and structures have delivered new generation resources when and where they were needed. Consequently, the question arises as to just how well New York State s existing capacity market structure has performed over the past decade in providing needed new capacity. To shed light on the success of the existing structure, this report examines the types and quantities of investment in generation capacity in New York State since 1999, with a focus on the motivations for that investment. In particular, it examines the relative extent to which the market for bilateral contracts and the role of self-owned generation, as supplemented by the 7 The New York State capacity market in this paper refers to utility-owned supply, bilateral contracts between utilities and merchant plant developers, merchant plants that rely on the New York ISO s capacity and its other centrally administered markets for revenues, and renewable resources that may enter bilateral contracts or operate as pure merchant plants, but are also funded in part by New York State and federal incentives, such as the federal Production Tax Credit. 8 Committee on Energy Report, p New York ISO, Comprehensive Reliability Planning Process Draft Reliability Needs Assessment, November 22, New York ISO, The Comprehensive Reliability Plan for 2005: A Long-term Reliability Assessment of New York s Power System, August 22, Consolidated Edison Company of New York, System Reliability Assurance Study, December 30, New York ISO, 2012 Reliability Needs Assessment, Draft of August 28, Christensen Associates Energy Consulting, LLC 2 9/19/12

7 NYISO s voluntary installed capacity (ICAP) market, have worked together to meet New York s resource adequacy requirements over the period 2000 to To review the history behind each of the generating units placed in service during this period, we looked at generators applications for certificates of environmental compliance, and at various other public records. 13 Our main findings are as follows: Over past decades and up to the present, a mixture of bilateral PPAs, merchant plant investments, utility-owned supply, and renewable resources encouraged by the New York State Energy Research and Development Authority (NYSERDA) and by federal tax incentives has provided adequate generation resources to satisfy growing electricity demand, provide reliable electric power service, and meet environmental public policy goals. The voluntary centralized capacity market administered by NYISO has provided a workable complement to the bilateral market, utility-owned supply, and publicly supported renewable resources. The historical evidence of capacity investments over the past twelve years and the proposed capacity investments over the next four years indicate that New York State s present capacity market structure, combined with self-builds, long-term contracts, and NYSERDA support and federal tax incentives for renewables, has provided sufficient generation capacity and promises to continue to do so for the foreseeable future. Consequently, there is no need to fix what is not broken. The report is organized as follows. Section II provides institutional background on the framework and the evolution of the responsibility for assuring resource adequacy in New York State. Section III summarizes New York s generation investment history over the period 2000 to 2012 as well as planned investment from 2012 to Section IV provides discussion of the various factors driving investment in generation in general and in New York in particular. Section V offers conclusions. II. BACKGROUND This section discusses the various institutions that are responsible for determining New York s ICAP requirements, the rules established by those institutions, and the history by which those rules were established. A. Institutional Framework for Assuring Resource Adequacy Resource adequacy is the ability of an electric system s generation resources to reliably meet the aggregate electrical demand, energy, and reserve requirements of customers at all times, taking into account scheduled and reasonably expected unscheduled outages of system 13 Other public records include news releases about generation development as well as various reports by NYISO, NYSERDA, New York Power Authority (NYPA), Long Island Power Authority (LIPA), and NYPSC. Christensen Associates Energy Consulting, LLC 3 9/19/12

8 facilities. In the context of this report, resource adequacy does not refer to the adequacy of transmission resources, though the term does encompass consideration of whether the services provided by generation resources are deliverable to customers given the configuration of the transmission system. The institutions that are responsible for assuring resource adequacy in New York State include the New York State Reliability Council (NYSRC), the Northeast Power Coordinating Council (NPCC), the North American Electric Reliability Corporation (NERC), NYISO, the NYPSC, and the Federal Energy Regulatory Commission (FERC). These institutions and the rules and requirements they establish create significant regulatory and legal forces to ensure resource adequacy in New York State. Many of these rules and requirements pre-date the establishment of the NYISO and exist outside of the NYISO s ICAP market structure. Furthermore, as the NYSRC manual explains, the NYISO s reliability role is to facilitate the attainment of those resource standards established by other institutions: The New York Independent System Operator is required to comply with all of the Reliability Rules. To the extent that Market Participant action is necessary to implement a Reliability Rule, a requirement for such action is included in the NYISO procedures, which are binding on all Market Participants. 14 Resource adequacy requirements in New York State are driven by the reliability rules established in accordance with the NYSRC rules and with agreements between the NYSRC and NYISO. These requirements incorporate the following rules and standards: NERC Standards; NPCC Criteria, Guidelines and Procedures; New York-specific reliability rules; and local reliability rules. NPCC criteria may be more specific or stringent than NERC standards and policies, recognizing regional characteristics or reliability needs. In turn, New York-specific reliability rules may be more specific or stringent than NERC Standards and NPCC Criteria, recognizing New York control area (NYCA) system characteristics or reliability needs. Local reliability rules can be even more stringent than the general New York-specific reliability rules and apply to certain NYCA zones, recognizing unique local area characteristics or reliability needs. The specific NYRSC reliability rules governing resource adequacy and affecting generation investment include: the Installed Capacity Requirement (ICR), which refers to physical generation capacity; the Installed Reserve Margin (IRM) requirement, which refers to the relationship between physical generation capacity and annual peak loads; and 14 NYSRC, Reliability Rules For Planning And Operating the New York State Power System, Version 31, May 11, 2012, p. 4 (Reliability Rules). Christensen Associates Energy Consulting, LLC 4 9/19/12

9 the Minimum Operating Reserve requirement, which refers to the amount by which the generation capacity that is available to produce power at a particular time exceeds load at that time. The NYSRC is responsible for establishing the annual statewide ICR to ensure adequate resource capacity. Factors to be considered in the calculation of the ICR include the characteristics of the loads, uncertainty in the load forecast, outages and deratings of generating units, the effects of interconnections to other control areas, and transfer capabilities within the NYCA. The annual statewide ICR is established by implementing reliability rules for providing the corresponding statewide IRM requirement. The IRM requirement relates to ICR through the following equation: ICR = (1+ IRM Requirement) x forecasted NYCA Peak Load where the IRM Requirement is expressed as a percentage of peak load. To meet the annual statewide ICR established by the NYSRC, the NYISO establishes locational ICAP requirements that recognize internal and external transmission constraints. The NYCA IRM is defined by an acceptable Loss of Load Expectation of one day in ten years. 15 With respect to operating reserves, the NYSRC rule is more specific than the NERC standard in that it specifies scheduled outage requirements and requires procedures for maintaining minimum operating reserve levels. The NYSRC rule is also more specific than the corresponding NERC and NPCC rules in specifying minimum 10-minute and 30-minute reserve requirements and the permissible mix between synchronized and non-synchronized reserves. Under these rules, LSEs must demonstrate that they meet capacity requirements including the IRM. 16 In addition, LSEs must comply with all reliability rules or face penalties assessed by the NYISO. 17 In summary, resource adequacy in New York is ensured by Reliability Rules that are created by institutions other than the NYISO. B. Evolution of Institutional Responsibility for Resource Adequacy In the wake of the wide-scale Northeast blackout of 1965, New York s electric utilities established a state-wide, wholesale power coordinating institution, the New York Power Pool (NYPP). The NYPP operated for over thirty years until it was superseded by NYISO, playing a central role in helping the electric utilities in New York State to operate their systems cooperatively for the purpose of assuring reliable, economic electric service for electricity customers in the state. The revenue to support the cost of operating the NYPP was collected through consumers electric rates. 15 Refer to NYSRC, Reliability Rules, p New York ISO, Installed Capacity Manual, March 2012, Chapter New York ISO, New York ISO Agreement, Article 16: Penalties for Non-Performance, December 6, 2011, p. 80. Christensen Associates Energy Consulting, LLC 5 9/19/12

10 New York created NYPP as a tight power pool responsible for grid management and economic dispatch of the power plants in the state. To serve their own requirements, individual utilities owned and entered into contractual arrangements for generating resources and transmission systems, and they coordinated (or pooled ) their operations for their mutual benefit and the benefit of their customers. NYPP managed many of the reliability functions that would typically be performed by a control area operator. 18 In addition, it provided economic benefits by performing certain functions committing and dispatching generation to minimize the variable cost of producing power for the combined system by arranging efficient trades among the utilities. For this wholesale power production function, NYPP provided what amounts to a centrally administered market for arranging short-term trades among the utilities, whereby the trades were priced (albeit inefficiently) on the basis of a split-savings rule. 19 In 1999, NYISO was authorized by FERC to be the successor to NYPP. NYISO performs the functions that were performed by NYPP, though it performs many of those functions differently. For example, NYISO uses different dispatch models than did NYPP and simultaneously optimizes the provision of energy and operating reserve service. In addition, NYISO performs functions that NYPP did not perform. For example, NYISO operates centralized markets for energy and operating reserves, and sets the prices for these services on a nodal basis for generators and a zonal basis for loads. 20 III. NEW YORK GENERATION INVESTMENT HISTORY This section presents a history of the investment in new generation in New York State over the past twelve years, since the NYISO commenced operations in November 1999 and examines the proposed investment over the coming four years. 18 These functions typically are as follows: real-time balancing of electric system supply and demand, maintaining voltages, monitoring contingencies, managing operating reserves, and committing and dispatching generation. 19 Although the dispatch was efficient, the inefficient pricing eventually led, in the early 1990s, to a breakdown of NYPP s unified dispatch. This occurred because NYPP participants were allowed to trade power with entities outside of New York at market prices. In the wake of the passage of the Energy Policy Act of 1992, electricity markets opened up so that NYPP participants could find better market-based power prices outside of New York than the split-savings prices that they could obtain within NYPP. The creation of NYISO was partly motivated by the need for a better pricing system within New York. 20 Because generators are very price-sensitive, a small change in price can induce a generator to change its output from minimum to maximum, or vice versa. Therefore, it is important that generators get accurate nodal prices. Because loads are much less price-sensitive and most loads do not see wholesale prices at all, efficiency is barely compromised by charging loads less accurate zonal prices. Charging loads on a zonal basis is also consistent with the traditional and still prevalent notion that it would be unfair to charge high locational prices to those customers who happened to have the misfortune of being located at a high-price node. Christensen Associates Energy Consulting, LLC 6 9/19/12

11 A. Generation Investment, 2000 to 2012 Table 1 summarizes the generation capacity placed in service in New York over the period January 2000 through April 2012, by year and zone. It shows that just over half of the investment during these dozen years occurred in the three years It also shows that just over half of the investments occurred by 2005, and that just under half of the investments occurred after Table 1 also indicates that, over the twelve-year period, 82% of generation investment in New York State was located in Zone F (Albany area, also called Capital Zone), Zone J (New York City), and Zone K (Long Island). The bottom of the table, however, shows a remarkable difference between the two subperiods: whereas 97% of investment was in Zones F, J, and K during the period, only 68% of investment was in those zones after Table 2 presents information for the same period by generation technology and zone. It shows that nearly all of the generation investments were in combined cycle (65%), combustion turbine (15%), and wind (16%) technologies. Table 3 shows the investments by technology broken down between the periods through 2005 and after This table indicates that the investment in combustion turbines in the years through 2005, which was motivated almost entirely by reliability concerns, shifted entirely toward wind power in the years after 2005, which was motivated by a combination of federal tax policies favorable to wind resources, the New York State renewable portfolio standard and state-based encouragement through NYSERDA. According to NYISO s Power Trends report issued in 2011: Since 2000, more than 8,600 megawatts of new generation have been built by private power producers and public authorities. Among the new power plants were numerous merchant projects, shifting the risk of building new power supplies from rate-paying consumers to investors. Over 80 percent of the new generation has been sited in New York City, on Long Island and in the Hudson Valley, the regions of New York State where demand is greatest Much of the new generation developed in upstate regions is powered by wind; consequently, it was sited where wind resources are most available. Increased generation in upstate regions also resulted from upgrades in existing nuclear and hydropower plants. Almost all of the conventional new generation has been added near the load centers where power is needed the most. 21 The NYISO s own Power Trends report thus tells a story of the success of what the State has managed to accomplish through a capacity market consisting of utility self-supply, long-term bilateral contracts between load serving entities and merchant plants, merchant plants that rely on the NYISO s centralized markets for revenue, and State environmental policies supported by the State (NYSERDA) and federal tax policies. 21 NYISO, Power Trends 2011: Energizing New York s Legacy of Leadership, undated, p. 12. Christensen Associates Energy Consulting, LLC 7 9/19/12

12 Table 1 New York State Generation Capacity Investment by Zone and Year, January 2000 April 2012 (MW) 22 Zone 23 Year A B C D E F J K Total , , , ,216 1, Total ,925 3,180 1,401 9, ,218 1, , , , NYISO 2012 Gold Book, pp , and CA Energy Consulting analysis. 23 NYISO Zones are: A West, B Genesee, C Central, D North, E Mohawk Valley, F Capital, G Hudson Valley, H Millwood, I Dunwoodie, J New York City, K Long Island. Christensen Associates Energy Consulting, LLC 8 9/19/12

13 Table 2 New York State Generation Capacity Investment by Generation Technology and Zone, January 2000 April 2012 (MW) 24 Zone Technology A B C D E F J K Total Combined Cycle CC 2,886 2, ,939 Cogeneration CG 3 3 Energy Storage ES Combustion Turbine GT ,412 Conventional Hydro HY Internal Combustion IC Photo Voltaic PV Steam Turbine ST Wind Turbine WT ,414 Total ,925 3,180 1,401 9,100 Table 3 New York State Generation Capacity Investment by Generation Technology and Period (MW) 25 Unit Type Total Combined Cycle CC 3,018 2,921 5,939 Cogeneration CG 3 3 Energy Storage ES Combustion Turbine GT 1,412 1,412 Conventional Hydro HY Internal Combustion IC Photo Voltaic PV Steam Turbine ST Wind Turbine WT 48 1,366 1,414 Total 4,674 4,426 9, Source: NYISO 2012 Gold Book, pp , and CA Energy Consulting analysis. 25 Id. Christensen Associates Energy Consulting, LLC 9 9/19/12

14 B. Generation Investment, 2000 to 2005 As Figure 1 shows, of the 4,674 MW of generation capacity placed in service between 2000 and 2005, about 41% was either utility-owned capacity or under long-term PPAs with utilities. Another 58% of the capacity was placed in service as merchant plants relying on the NYISO s centralized markets for revenues. About 1% received public support but also could be classified under merchant plant. Figure 1 Capacity Addition Shares by Transaction Type, January 2000 December 2005, MW 26 Public Support 1% Utility/Bilateral 41% Merchant 58% Utility/Bilateral Merchant Public Support Given the time that must elapse between planning and initially operating a generator, most (if not all) of the generation investment during this period was planned for and initiated under the NYPP and prior to the creation of the NYISO. For example, consider the histories of two particular merchant plants, both located in Zone F, that together accounted for nearly 39% of 26 NYISO Gold Book and CA Energy Consulting analysis. Transaction types are: Public Support = long-term contract sponsored by NYSERDA along with federal tax incentives; Merchant = capacity developed by independent power producer relying on NYISO s markets for revenues; Utility/Bilateral = utility-owned capacity or bilateral long-term PPA between utility and merchant plant developer. Christensen Associates Energy Consulting, LLC 10 9/19/12

15 the capacity installed during the period The first plant, the Athens Generating Station (owned by Athens Generating Company LLC, a subsidiary of U.S. Generating Company (USGen)), began commercial operation in 2004 and consists of three combined cycle units totaling 1,080 MW. The second plant, the Bethlehem Energy Center (PSEG Energy Resource & Trade LLC), began commercial operation in 2005 and consists of a 750 MW combined cycle unit. Both of these plants had their planning origins in the NYPP era. USGen filed a pre-application for siting of the plant with the New York State Board on Electric Generation Siting and the Environment (Siting Board) in September 1997, well before the NYISO came into being. It was granted a permit by the Siting Board on June 15, 2000, barely six months after the launch of the NYISO. 27 At the time, USGen conducted a benefit-cost study of the plant for Greene County where the plant would be located. The study provides the motivations for the development of the plant as it states: As a non-utility generator of electric power, USGen would be selling electricity on the open market with prices subject to competitive pressures now being unleashed through a complex deregulation of the power industry in New York State. 28 The statement reveals that USGen was clearly motivated by the prospect of selling power in the wholesale and retail markets that had been restructured in New York, but the statement does not mention the prospect of selling capacity in a short-term capacity market. Certainly, it was not motivated by the prospect of selling capacity into NYISO s centralized capacity market, as neither NYISO nor a centralized capacity market existed at that time. The Bethlehem Energy Center (BEC) story is more complicated but also has its origins in the pre- NYISO period. In November 1998, before the NYISO took over, Niagara Mohawk Power Corporation (NIMO) filed an application with the Siting Board for a Certificate of Environmental Compatibility and Public Need (Certificate) to construct and operate a 750 MW combined-cycle electric generation station on a 186-acre site where the 400 MW Albany Steam Station was already located. In May 2000, NIMO sold 84 acres and the Albany Steam Station to PSEG Power LLC. Subsequently, on July 2, 2001, PSEG Power New York Inc. supplemented the November 1998 application and thus resumed the process to redevelop the site with a combustion turbine. In February 2002, the Siting Board determined that the PSEG application complied with 27 State of New York, Board on Electric Generation Siting and the Environment, Case 97-F-1563, Application by Athens Generating Company, L.P. for a Certificate of Environmental Compatibility and Public Need to Construct and Operate a 1,080 Megawatt Natural Gas-fired Combined Cycle Combustion Turbine Generating Facility, in the Town of Athens, Greene County, Opinion And Order Granting Certificate Of Environmental Compatibility And Public Need, June 15, Center for Governmental Research Inc., Athens Generating Project: An Assessment Of The Project s Value To The Community and the Owner, prepared for Athens, NY Community, funded by Central Hudson Gas & Electric Corporation, June 1998, p. i. Christensen Associates Energy Consulting, LLC 11 9/19/12

16 the requirements of Public Service Law. 29 Completion of the plant was delayed, however, because PSEG Power experienced financial difficulties; so the plant did not achieve commercial status until In 2006, the NYISO s capacity market was reasonably well developed and PSEG had this to say in describing the attractiveness of the BEC location in New York: Perhaps the most attractive characteristic of BEC s site is its location. It is not only within NYISO s footprint (the robust New York City market is just 150 miles downriver) but also near a small load pocket that includes Albany. Significantly, that load pocket requires considerable reactive support during the summer, when everyone uses their air conditioners, and winter, when they run their electric heaters. Providing that support by selling ancillary services to NYISO was an opportunity that made completing BEC even more attractive to PSEG, which like any utility is always on the lookout for sources of revenue other than capacity payments. The old plant s switchyard connections allow the plant to pump reactive power directly into Albany. 30 The plant s attractiveness centers on its location, which highlights how critical the plant is for providing reliability service (reactive support and other ancillary services) to the grid. It is likely that the retirement of the original Albany Steam Station meant that some plant had to be built to replace it in order to maintain grid reliability. This aspect was also emphasized by remarks of the then-chairman of the New York Public Service Commission: The Bethlehem Energy Center exemplifies how we can meet our growing demand for energy in an efficient and environmentally responsible manner, and I want to thank PSEG for making this investment in New York Investments in new generating capacity are critical to maintaining the high reliability of the state s power grid, particularly during these summer months when the use of electricity spikes. 31 Even though both the Athens and the Bethlehem plants are run as merchant plants today and depend on the short-term ICAP market for a portion of their revenues, their origins lie in the period before the NYISO began operations and well before the current ICAP market came into being. Between 2001 and 2005, LIPA entered into PPAs for 719 MW of capacity for reasons other than the prospect of making money in or avoiding payments to NYISO s capacity market. Very 29 New York State Board On Electric Generation Siting And The Environment, C 97-F Application by PSEG Power New York, Inc. for a Certificate of Environmental Compatibility and Public Need to Construct and Operate a 750 Megawatt Natural Gas-Fired Combined Cycle, Combustion Turbine Generating Facility in the Town of Bethlehem, Albany County. Opinion And Order Granting A Certificate Of Environmental Compatibility And Public Need Subject To Conditions, February 28, John Javetski, Bethlehem Energy Center, Glenmont, New York, August 15, 2006, powermag.com/print/issues/cover_stories/bethlehem-energy-center-glenmont-new-york_457.html 31 PSEG Power Completes 750-MW Bethlehem Energy Center, Christensen Associates Energy Consulting, LLC 12 9/19/12

17 simply, LIPA needed the capacity to satisfy its obligation to serve load as well as satisfy reliability requirements. As LIPA stated, it has moved aggressively to facilitate the upgrading and addition of generation on Long Island as one of the solutions to meet growing customer demand. 32 Table 4 shows that LIPA s load obligation (i.e., it had to meet the locational ICAP requirement) led it to support the building of a dozen generators in New York. Table 4 Long Island Power Authority, Generation Capacity Additions, In- Service Date Developer Facility Name Summer Rating (MW) 2002 Calpine Bethpage FPL Energy Baywater National Grid Glenwood Landing National Grid Port Jefferson PPL Global Brentwood PPL Global Shoreham FPL Energy Jamaica Bay Hawkeye Greenport Equus Freeport Village of Freeport Freeport Calpine Bethpage Pinelawn West Babylon 78 Total 719 In 2001, NYPA placed in service ten gas-fired combustion turbine units in New York City and one unit in Long Island (Brentwood) for a combined total of 550 MW. 35 None of this capacity was brought into service through incentives provided by the NYISO s capacity market. According to NYPA it: had launched a crash program in late August 2000 to install these PowerNow! plants in response to warnings from officials in the public and private sectors 32 Long Island Power Authority, Electric Resource Plan , February 2010, Appendix C, Energy Primer, p Long Island Power Authority, Electric Resource Plan , February 2010, Appendix C, Energy Primer, Exhibit 2-5, p. 9, supplemented by review of the NYISO 2012 Gold Book, Table III Strictly speaking, the Village of Freeport built the Freeport facility to serve its own load, and sold 10 MW to LIPA under a PPA. 35 As listed in 2012 Gold Book. Christensen Associates Energy Consulting, LLC 13 9/19/12

18 that the New York City metropolitan area could face power shortages in the summer of Similar warnings were repeated throughout the 10 months it took to obtain, site, design and install the units a process that normally would require more than two years. 36 NYPA s investment in generation in the early 2000s was motivated to meet its load obligations and satisfy reliability requirements in New York City, rather than by the prospect of revenues earned in the NYISO s administered markets. In summary, of the 4,674 MW of generation capacity placed into service between 2000 and 2005, about 41% was either utility-owned supply or under long-term bilateral contract, 58% was merchant plant, and about 1% was renewable power, some of which was receiving public support from and under long-term contracts with NYSERDA. The 41% was built to meet load obligations in conformance with reliability requirements, not in reliance on the NYISO centralized markets. Most of the 58% was initiated to satisfy increasing load demands and to sell into the broadest set of markets then available, including the residual, short-term capacity market. Thus, the majority of the capacity placed in service in this period was built for reasons having little or nothing to do with a possible future mandatory forward capacity market. C. Generation Investment, 2006 to 2012 As Table 3 shows, 4,426 MW of generation capacity was placed in service over the 2006 to 2012 time period. Figure 2 shows the percentage shares of capacity additions by technology type. Natural gas-fired combined cycle and co-generation units, at 66% of the total, continue to prevail because of their relatively low capital costs, their operational efficiency, and low natural gas prices. Wind turbines make up the majority of the remaining capacity additions (1,414 MW), driven by a combination of RPS, federal renewable resource tax incentives such as the production tax credit, and with a significant portion of that wind generation (1,003 MW, 73%) also encouraged by NYSERDA under long-term contracts Christensen Associates Energy Consulting, LLC 14 9/19/12

19 Figure 2 Capacity Addition Shares by Technology Type, January 2006 April IC PV 1.47% 0.71% ES HY 0.63% 0.24% CG 0.07% WT 30.87% CC 66.00% CC WT IC PV ES HY CG Figure 3 summarizes the shares by transaction type over the period. The renewable resources that have been supported by the federal tax incentives and by NYSERDA (labeled Public Support ) under long-term (mostly 10-year) contracts constitute 25% of the total capacity additions listed in the NYISO s 2012 Gold Book. 38 About 44% of the capacity placed in service during this period was supported by a long-term PPA between a utility (i.e., an LSE) and a merchant plant developer, labeled Utility/Bilateral. 39 The 31% of capacity additions labeled Merchant have been placed in service by independent power producers that depend entirely on the NYISO s centrally administered markets for revenues. 37 NYISO 2012 Gold Book, pp , and CA Energy Consulting analysis. CC = combined cycle, WT = wind turbine, IC = internal combustion, PV = photo voltaic, ES = energy storage, HY = hydro, CG = cogeneration. 38 NYSERDA, 2011 RPS Performance Report, Appendix A Renewable Portfolio Standard, Main Tier Contracts as of December 31, 2011, pp. A-1 A During this period, there were no capacity additions that were directly owned by utilities. Christensen Associates Energy Consulting, LLC 15 9/19/12

20 Figure 3 Capacity Addition Shares by Transaction Type, January 2006 April 2012, MW 40 Public Support 25% Utility/Bilateral 44% Merchant 31% Utility/Bilateral Merchant Public Support Consequently, a combination of bilateral market long-term PPAs, merchant plants, and publicly funded renewables (including support through federal tax credits) have been responsible for securing the generation resources necessary to ensure safe, reliable, efficient, and environmentally conscious capacity for New York State during this period. The voluntary NYISO residual ICAP market has been a useful supplement to these main means by which New York obtains generation capacity. D. Planned Generation Additions The New York State market continues to stimulate investment in economic generation capacity in diverse locations, particularly where it is valued most highly. The NYISO s 2012 Gold Book lists 40 NYISO Gold Book and CA Energy Consulting analysis. Transaction types are: Public Support = long-term contract sponsored by NYSERDA along with federal tax incentives; Merchant = capacity developed by independent power producer relying on NYISO s centralized markets for revenues; Utility/Bilateral = utilityowned capacity or bilateral long-term PPA between utility and merchant plant developer. Christensen Associates Energy Consulting, LLC 16 9/19/12

21 4,266 MW of proposed generation additions by class year and unit type for the period from April 2012 through June Figure 4 summarizes the shares by unit type. A significant share (30%) of the proposed generation investment consists of wind farms in upper and western New York. In keeping with their strong economic advantages, combined cycle units constitute the largest share (57%) of the proposed capacity additions. Figure 4 Proposed Capacity Addition Shares by Technology Type, Hydro 0% Solid Waste 1% Dual Fuel 12% Landfill Gas 0% Wind Turbines 30% Combined Cycle 57% Wind Turbines Combined Cycle Dual Fuel Hydro Solid Waste Landfill Gas Figure 5 summarizes proposed capacity additions by transaction type (Utility/Bilateral, Merchant, Public Support, and Uncertain). The market category labeled Uncertain in Figure 5 accounts for several wind farms whose disposition depends on a number of key factors, 41 The period is defined in terms of the expected in-service date of the proposed plant. 42 NYISO 2012 Gold Book, p. 59 and CA Energy Consulting analysis. Proposed re-ratings, amounting to a total increment of 214 MW, have not been included in this chart. CC = combined cycle, WT = wind turbine, IC = internal combustion, PV = photo voltaic, ES = energy storage, HY = hydro, GT = combustion turbine, CG = cogeneration, ST = steam turbine (fossil). Christensen Associates Energy Consulting, LLC 17 9/19/12

22 including securing investors and long-term bilateral PPAs, as well as overcoming local community resistance to their further expansion. These projects are currently on hold, and therefore categorized as Uncertain. Figure 5 Proposed Generation Additions by Transaction Shares, Uncertain 4% Public support 12% Merchant 16% Utility/Bilateral 68% Utility/Bilateral Merchant Public support Uncertain Developers of two planned combined cycle projects, Cricket Valley Energy Center s (CVE) 1000 MW 44 project and CPV Valley Energy Center s (CPV Valley) 650 MW 45 project, have both indicated the significance of obtaining long-term PPAs in order that they may secure financing 43 NYISO, 2012 Gold Book, p. 59; and CA Energy Consulting analysis. Transaction types are: Public Support = longterm contract sponsored by NYSERDA; Merchant = capacity developed by independent power producer relying on NYISO s centralized markets for revenues; Utility/Bilateral = utility owned capacity or bilateral long-term PPA between utility and merchant plant developer, Uncertain = capacity additions whose transactional relationship could not be determined from information that CA Energy Consulting was able to obtain. 44 Listed at 1,136 MW nameplate capacity in the 2012 Gold Book. 45 Listed at MW nameplate capacity in the 2012 Gold Book. Christensen Associates Energy Consulting, LLC 18 9/19/12

23 for project completion. In response to requests for information from the New York Energy Highway Task Force, Cricket Valley had this to say about long-term contracts: Obtaining a long-term Power Purchase Agreement (PPA), or equivalent contractual off-take agreement, from an investment-grade counterparty will be an essential element for the CVE Project to be financed and constructed. A PPA will ensure a stable cash flow to the project, which will reduce risk and provide the most attractive economic benefits. CVE believes that the State of New York can facilitate such an agreement, and in turn accomplish the goals of the Energy Highways Initiative, through the creation of a state-sponsored Request for Proposals (RFP). 46 In order to minimize the Project s exposure to market risk and provide stable pricing, CVE intends to negotiate long-term off-take agreements for the entire output of the Facility. Ongoing discussions with potential long-term counterparties indicate that future revenue streams for installed capacity (ICAP) in New York are somewhat speculative and, therefore, there is a great deal of uncertainty over the future of this important revenue source. Obtaining a longterm PPA from an investment-grade counterparty (e.g., State or publicly-owned electric utilities or other investment grade counterparties) will be an essential element to reduce pricing and uncertainty for the Project, its equity investors, and debt providers. 47 CPV Valley echoed CVE s statements in its own response to a request for information from the New York Energy Highway Task Force: CPV Valley s finance plan addresses the Project s three distinct periods of activity: development, construction, and operations. During development, CPV Valley s sponsors will contribute the required equity to fund 100% of the capital needs of the Project. Raising debt financing for the CPV Valley Energy Center is predicated on a solution beyond that currently offered in the NYISO market. CPV Valley is flexible and willing to work with the state of New York in developing a structure that provides the greatest value to the New York ratepayers. However, in order to effectively raise the private capital to start construction of the CPV Valley Energy Center, CPV Valley would require some form of surety of future revenues in the form of a long-term contract Cricket Valley Energy, LLC, Response of Cricket Valley Energy to Request for Information from the New York Energy Highway Task Force, May 12, 2012, p. 3, (Cricket Valley Response). 47 Id., p CPV Valley Energy Center, LLC, Response of CPV Valley Energy to Request for Information from the New York Energy Highway Task Force, undated, p. 8. Christensen Associates Energy Consulting, LLC 19 9/19/12

24 NRG Energy, developer of the four-unit, 1,000 MW 49 Astoria Repowering Project, also emphasized the value of long-term contracts to ensure financing when it stated: The following table summarizes the key financing terms which NRG believes, based on its recent experience successfully obtaining project financing and its ongoing consultations with leading financial institutions, could be available to the project, assuming commencement of financing negotiations in 2012 following execution of a long-term, financeable contract and other material project contracts. 50 Combined cycle projects are not alone in looking to the bilateral market to secure financing. Wind project developers have also signaled the importance of long-term contracts to enable completion of renewable resource projects. For example, BP Wind Energy, developer of the 285 MW Cape Vincent Wind Farm, states: Wind projects can benefit greatly from the certainty provided by a long term power purchase agreement. This helps with securing a future revenue stream that can then be used to help with financing the project. Given the purchasing power of the public authorities in New York, we look forward to seeing a stronger willingness by such entities to enter into 20 year power purchase agreements. 51 BP Wind Energy s preferred source of project revenue is to enter into a longterm power purchase agreement with a credit worthy counterparty; however, other sources of revenue which will allow the Project to be financed will also be considered (e.g. a combination of a long-term renewable energy credit (REC) contract from NYSERDA and an energy hedge). 52 A significant proportion of the proposed combined cycle units are replacing older, less efficient units; so the net addition to capacity will be less than the 4,266 MW. Nonetheless, the evidence from the proposed capacity additions strongly reinforces the historical record that New York State s capacity market, as presently configured, is working to reliably meet load growth and fulfill environmental public policy goals. 49 The 2012 Gold Book lists only three units at a total of 580 MW nameplate capacity. The fourth unit is not listed in the Gold Book because long-term contracts have not been secured. 50 NRG Inc., Response of NRG Inc. to Request for Information from New York Energy Highway, May 30, 2012, p. 15. The table referred to has been omitted. 51 BP Wind Energy NA Inc., Response of BP Wind Energy to Request for Information from New York Energy Highway, May 30, 2012, p Id., p. 7. Christensen Associates Energy Consulting, LLC 20 9/19/12

25 E. Fuel Diversity Table 2 and Figure 6 show the diversity of generation that has been installed over the past twelve years. Combined cycle units have provided the lion s share of new generation capacity because of their relatively low cost, an advantage that has become greater as natural gas prices have dropped dramatically. Wind power has ranked a distant second, spurred by New York s RPS, support from NYSERDA and federal tax incentives. Gas-fired combustion turbines have ranked a close third. Other technologies have made only a very small contribution. Figure 6 New York State Capacity Additions by Technology Shares, January 2000 April CG 0.04% ST 1.98% PV 0.35% HY ES 0.16% 0.31% IC 0.85% GT 15.51% WT 15.54% CC 65.27% CC WT IC PV ES HY GT CG ST In spite of the preponderance of gas-fired generation additions over the past twelve years, New York has diverse fuel sources. The NYISO remarked on the achieved fuel diversity in its Power Trends 2011 report: 53 NYISO Gold Book and CA Energy Consulting analysis. CC = combined cycle, WT = wind turbine, IC = internal combustion, PV = photo voltaic, ES = energy storage, HY = hydro, GT = combustion turbine, CG = cogeneration, ST = steam turbine (fossil). Christensen Associates Energy Consulting, LLC 21 9/19/12

26 From a statewide perspective, the mix of fuels used to generate electricity in New York State is relatively diverse and balanced among hydropower, nuclear, coal, natural gas, and oil. However, fossil-fueled generation predominates in the high-demand downstate regions of New York due to stringent environmental requirements in that region. New York State has adopted energy policies aimed to promote the growth of power supplies from clean and renewable resources. Progress is being made toward expanding green power, such as wind and solar energy, and increasing energy efficiency and demand-side resources. 54 The combination of utility-owned supply, bilateral contracts, NYSERDA grants and federal tax incentives for renewables, and the NYISO s voluntary ICAP market have worked to deliver diversity where it has been most economical. For example, substantial amounts of wind capacity were developed following 2004 and, as illustrated by Figure 7, most of it in the western and upstate portions of New York where wind conditions are the most favorable. 54 NYISO, Power Trends 2011: Energizing New York s Legacy of Leadership, undated, p. 6. Christensen Associates Energy Consulting, LLC 22 9/19/12

27 Figure 7 New York State Wind Power Projects May F. Geographic Dispersion: Where It s Needed Most There is evidence that the combination of the bilateral market, owned-supply, and the voluntary NYISO ICAP market has successfully delivered resource adequacy where it is needed most. Figure 8 shows the geographic dispersion of capacity investment over the period January 2000 to April 2012 by zone. The zones that have perennially been in greatest need of capacity are the densely populated zones J and K (New York City and Long Island); and these have been two of the three zones that have received the most capacity investment. 55 New York State Department of Environmental Conservation, There are some relatively small differences between the nameplate capacities of some wind projects listed in the 2012 Gold Book and those same projects shown in the map. The 2012 Gold Book lists a total of 1,414 MW installed nameplate capacity compared to the 1,407 MW shown in the figure. The figure is used here to illustrate the distribution of wind projects throughout the state, not as a data source. Christensen Associates Energy Consulting, LLC 23 9/19/12

28 Figure 8 New York State Installed Capacity Investment by Zone, January 2000 April The concentration of generation in Zone F may be explained by the fact that it is below the Central East transmission constraint dividing upstate and downstate and has convenient access to natural gas pipelines and transmission lines. G. Reliability A combination of utility-owned capacity, bilateral contracts, NYSERDA-stimulated renewables, and merchant plant development has delivered resources adequate for keeping pace with both peak demand and reserve margin requirements. This success is evident in the 2010 Reliability Needs Assessment (RNA), which is part of NYISO s Comprehensive System Planning Process NYISO Zone Map and CA Energy Consulting analysis. The value 3,180 MW applies to capacity additions in Zone J only. The 2012 Gold Book shows no capacity additions in Zones G, H, and I during the period 2000 to NYISO, 2010 Reliability Needs Assessment, Final Report, September 2010, p. 56 ff. Christensen Associates Energy Consulting, LLC 24 9/19/12

29 The RNA includes a scenario analyses that found that reliability violations could occur only under limited circumstances: if the Indian Point plant was retired at the end of its license expiration date; if government initiatives to improve air quality result in retirements that are greater than specific expectations; or if the economic recovery through 2019 is stronger than expected. Despite the challenges noted in its scenario analyses, NYISO concluded that there are no unmet Reliability Needs forecast at this time, assuming that transmission and generation facilities stay in service from NYISO listed two primary factors that have favorable implications for reliability over this intermediate term: Generation additions are forthcoming with two new proposed generating plants totaling 1,060 MW of new capacity in Zone J alone; and Electricity demand growth will be moderated by the continuing impacts of the financial crisis, Statewide Energy Efficiency Programs, and increased registration of Special Case Resources that reduce power usage. NYISO has therefore stated it will not issue a request for additional reliability solutions and will continue to evaluate the progress of the market-based solutions. 58 NYISO will thus continue to monitor whether the resource adequacy and security needs for the New York power grid are continuing to be met. NYISO s Power Trends 2011 paints a positive picture for reliability from the perspective of resource adequacy. NYISO stated: The immediate outlook for New York s electric system is positive. As a result of developments that have contributed to a more reliable system over the past decade, as well as planned additions in the near future, the adequacy of power resources is not an imminent concern. 59 In summing up the resource adequacy assessment, NYISO states: The NYISO s latest assessment of the electric system s reliability needs reports that New York has sufficient resources (generation, transmission and demand response) to reliably serve load through In 2011, resources are anticipated to exceed peak demand by more than 10,000 megawatts, and exceed reserve requirements by more than 5,000 megawatts Id., p NYISO, Power Trends 2011, undated, p Id., p. 15. Christensen Associates Energy Consulting, LLC 25 9/19/12

30 Figure 9, taken from Power Trends 2011, shows the adequacy of generation resources to serve New York State load for the summer In-state resources alone were found to be sufficient to serve forecast peak load plus the installed reserve margin. Figure 9 New York State Resource Capability: Summer According to the NYISO, the existing and planned resources (including demand response and Special Case Resources) are expected to be adequate to serve peak load and satisfy reliability criteria into the next decade: The total resource capability in the NYCA for 2012 is 43,686 MW, an increase of 1,528 MW due to the net impact of additions, retirements and changes in unit ratings This includes existing NYCA capacity and resources (including demand response), all resource changes, and known long-term purchases and sales with neighboring Control Areas. It is greater than 116% of the 2012 projected peak load of 33,295 MW. The total resource capability is also greater than 116% of projected peak loads for all succeeding years through Id., p NYISO 2012 Gold Book, p. 7. Christensen Associates Energy Consulting, LLC 26 9/19/12