On February 20, 2020, FERC issued four separate orders with significant impacts on renewable and storage resources under the New York Independent System Operator, Inc.’s (“NYISO”) buyer-side mitigation (“BSM”) rules (collectively, “February 20 Orders”). BSM rules serve some of the same purposes as PJM’s Minimum Offer Price Rule or “MOPR.” While the orders explicitly limit or reject proposed renewable and storage exemptions, the orders are equally important for what they do not do. Focused on the cases and records before it, FERC declined to extend BSM to apply outside of the so-called Mitigated Capacity Zones or “MCZs” (New York City, or Zone J, and the Lower Hudson Valley, or Zones G through J). Consequently, BSM still does NOT apply to any units, including renewable, storage or nuclear units, outside of these MCZs. FERC also directed NYISO to better tailor a renewable exemption specific to the MCZs. The extent to which this will help the new development of offshore wind in New York remains to be seen. In dissenting opinions, Commissioner Richard Glick argued, among other things, that the majority’s overall approach to BSM will protect incumbent generators while impeding state clean energy policies.
NYISO’s BSM rules were implemented to address concerns that uneconomic entry was being used to suppress capacity prices. Specifically, FERC was concerned that major buyers of capacity might contract for new uneconomic entry in order to suppress capacity prices to decrease their costs for serving the remainder of their load. The BSM rules were developed and refined by the NYISO over several years and were aimed at preventing uneconomic entry from artificially suppressing capacity prices. Importantly, FERC has focused on whether resources have the incentive or ability to suppress Installed Capacity (“ICAP”) Market prices.
Under the BSM rules, NYISO analyzes each new resource seeking to enter the capacity market in MCZs to determine if the unit represents economic entry or is otherwise exempt from mitigation. Absent an exemption, each new capacity resource that enters an MCZ (an “Examined Facility”) must offer capacity at a price at or above the applicable Offer Floor determined by the NYISO. A new entrant can be exempted from the Offer Floor if: (i) the NYISO forecasts the market clearing price will be in excess of 75 percent of Mitigation Net Cost of New Entry (“CONE”) of the proxy unit the NYISO uses to establish the demand curves (referred to as the “Part A Test”); (ii) the NYISO determines that the Examined Facility’s net CONE (cost of entry minus expected margins from energy and ancillary service sales) is less than the NYISO’s forecast of capacity market clearing prices three years forward (referred to as the “Part B Test”) or (iii) the Examined Facility qualifies for a categorical exemption from mitigation.
In the February 20 Orders, FERC addressed compliance filings and requests for rehearing and/or clarification aimed at revising the scope of the BSM Rules. Specifically, the February 20 Orders address whether the following resource types should be subject to or exempt from mitigation: (i) certain renewable and self-supply resources (“Renewable and Self-Supply Order”); (ii) new Special Case Resources or “SCRs” (“SCR Order”); (iii) electric storage resources or “ESRs” (“ESR Order”); and (iv) existing capacity resources needed for short-term reliability and capacity resources with repowering agreements (“Reliability Order”).
In the Renewable and Self-Supply Order, FERC addressed a NYISO filing submitted to comply with an October 2015 order on a complaint (“October 2015 Complaint Order”) filed by the New York Public Service Commission (“NYPSC”), New York Power Authority (“NYPA”) and New York State Energy Research and Development Authority (“NYSERDA”). Among other things, in the October 2015 Complaint Order, FERC found that applying BSM rules to certain renewable resources up to a megawatt (“MW”) cap was unjust and unreasonable because such resources, narrowly defined, have limited or no incentive or ability to exercise market power or artificially suppress capacity prices. FERC directed NYISO to create an exemption for the narrowly-defined renewable resources, and to define the exemption to limit the type and amount of renewable resources that may qualify. FERC similarly found that certain narrowly-defined self-supply resources have limited or no incentive or ability to exercise market power or artificially suppress capacity prices. FERC directed NYISO to exempt from its BSM rules those load serving entities (“LSEs”) whose ICAP portfolios are consistent with their reasonably anticipated levels of future ICAP obligations, measured using net-short and net-long thresholds. FERC gave NYISO flexibility to develop rules and parameters that recognize the unique characteristics of its capacity market in structuring the self-supply exemption.
NYISO submitted its compliance filing in April 2016, proposing revisions to implement the renewable and self-supply exemptions (“April 2016 Compliance Filing”). In the Renewable and Self-Supply Order, FERC accepted in part, subject to condition, and rejected in part NYISO’s April 2016 Compliance Filing. The conditionally accepted tariff provisions will be effective for NYISO’s currently-ongoing interconnection Class Year 2019. FERC directed NYISO to submit a compliance filing within 30 days of the date of its order (i.e., by March 23, 2020) as discussed further below.
Eligibility and Process: Regarding the renewable exemption, NYISO proposed that a resource would be eligible for the exemption if either: (i) it is an Exempt Renewable Technology, meaning that it is an Intermittent Power Resource powered solely by wind or solar energy, or (ii) if, after a unit-specific review, the NYISO determines that a generator not solely powered by wind or solar energy, but that meets the definition of an Intermittent Power Resource or Limited Control Run-of-River Hydro Resource, has high development costs and a low capacity factor. NYISO further proposed to reassess its definition of Exempt Renewable Technology when it engages in its demand curve reset process (currently filed at FERC every four years). In the Renewable and Self-Supply Order, FERC accepted NYISO’s proposed eligibility criteria and process for the renewable exemption. Rejecting requests to expand the renewable exemption to include renewable resources coupled with storage, FERC emphasized that the renewable exemption is meant to be narrowly defined and should be limited to renewable resources that are purely intermittent. FERC also found that reassessing the definition of Exempt Renewable Technology as part of the demand curve reset process will allow NYISO to ensure consistency in the near-term while maintaining flexibility to consider other resource technologies in the future.
MW Cap: In response to the October 2015 Complaint Order, NYISO proposed a 1,000 MW cap on renewable resources that can qualify for the renewable exemption in a single Class Year. FERC rejected NYISO’s proposed cap and directed the NYISO to make a compliance filing to revise the cap in two ways. First, NYISO had proposed to make the cap based on the entire New York Control Area, rather than on MCZs only. FERC directed NYISO to develop a MW cap narrowly tailored to MCZs, since only new resources entering MCZs are subject to BSM rules. Second, NYISO had proposed to base its MW cap on ICAP rather than Unforced Capacity (“UCAP”) for several reasons. FERC rejected NYISO’s rationale, however, and directed it to base the MW cap on UCAP, finding that doing so would better reflect the renewable exemption’s actual effect. FERC further confirmed that the renewable exemption’s MW cap should be applied on a Class Year basis, since that is the way NYISO evaluates new capacity resources for interconnection.
Eligibility: NYISO proposed to exempt from BSM those LSEs that develop or enter into long-term contracts to develop new projects if NYISO determines that the entities satisfy proposed net-short and net-long thresholds. Generally, under NYISO’s proposal, an LSE that supplies more than 50% of its own capacity obligations would qualify for the exemption. In the Renewable and Self-Supply Order, FERC accepted in part NYISO’s eligibility criteria. FERC rejected, however, NYISO’s proposal to allow certain Public Power Entities to be eligible for the self-supply exemption, finding that allowing certain State instrumentalities to be exempt is contrary to the rationale underlying that exemption.
Contract Term Length: NYISO’s proposed definition of “Long Term Contract” established a minimum of a 10-year commitment. In the Renewable and Self-Supply Order, FERC found that the 10-year commitment in the definition of “Long Term Contract” was appropriate, as it recognizes long-term business strategies and investment horizons. FERC directed NYISO to submit a further compliance filing, however, to clarify that there must be 10 years remaining on the contract at the time the applicant applies for the self-supply exemption.
Net-Short and Net-Long Thresholds: In the October 2015 Complaint Order, FERC directed NYISO to implement net-short and net-long thresholds in order to prevent an LSE from manipulating ICAP market prices in a way that benefits the LSE’s other purchases from the ICAP market. In its compliance filing, NYISO proposed to calculate the thresholds to ensure that it does not grant an exemption to an applicant that is significantly net short or net long. NYISO proposed that a request would satisfy the net-short threshold if NYISO determines that the self-supply LSE’s total capacity costs without entry are expected to be less than the self-supply LSE’s total capacity costs with entry. For the net-long threshold, NYISO proposed to determine the largest amount of ICAP MW that could reasonably be expected to be associated with the applicant. FERC accepted NYISO’s proposed thresholds, subject to condition. Specifically, FERC directed NYISO to calculate the net-long threshold based on the portion of the LSE’s customer base that is truly long-term.
In the SCR Order, FERC addressed requests for rehearing and clarification filed in response to a February 2017 order addressing a complaint (“February 2017 Complaint Order”) filed by the NYPSC, NYPA, NYSERDA, Long Island Power Authority, City of New York, Advanced Energy Management Alliance, and National Resources Defense Council (“Joint Complainants”). FERC granted rehearing and clarification in part, denied rehearing in part, rejected as moot a compliance filing NYISO submitted in response to the February 2017 Complaint Order, and initiated a paper hearing.
Generally speaking, SCRs are demand response resources that participate in NYISO’s ICAP market. SCRs that have cleared the capacity market are obligated to reduce their demand on the system when called upon by NYISO, provided that NYISO gives the resource provider notice that it will be called prior to the time of activation. In their complaint, the Joint Complainants challenged NYISO’s application of BSM rules to SCRs, arguing that subjecting SCRs to BSM limited the full participation of SCRs in NYISO’s ICAP market and interfered with federal, state, and local policy objectives. The Joint Complainants requested that FERC establish a blanket exemption from BSM for all SCRs, including those already subject to mitigation. Alternatively, the Joint Complainants requested that FERC direct NYISO to exclude from the SCRs’ offer floor payments received from certain retail-level demand response programs.
In the February 2017 Complaint Order, FERC granted the complaint in part and denied it in part, and directed NYISO to submit a compliance filing. Specifically, FERC directed NYISO to revise its BSM rules to exempt SCRs from those rules, but found that such exemption should apply prospectively only.
In the SCR Order, FERC reversed course and held that all new SCRs should be subject to BSM rules. FERC found that a blanket exemption does not appropriately recognize that certain payments made to SCRs could provide SCRs with the ability to suppress ICAP market prices. While FERC found that SCRs should be subject to the BSM rules, it found that their offer floors should include only the incremental costs of providing wholesale-level capacity services, not payments from retail-level demand response programs that are designed to address distribution-level reliability needs. To that end, FERC reopened the evidentiary record in the proceeding and established a paper hearing to evaluate which retail-level demand response programs are designed to address distribution-level reliability needs and whether these retail-level demand response programs address solely distribution level reliability needs. FERC indicated that this information will help in assess whether payments made outside of the ICAP market provide SCRs with the ability to suppress ICAP market prices below competitive levels.
Initial testimony, evidence and/or arguments are due within 60 days of the date of the order (i.e., by April 20, 2020); reply testimony, evidence and/or arguments are due within 90 days of the date of the order (i.e., by May 20, 2020)
In the ESR Order, FERC addressed a July 2019 complaint filed by the NYPSC and NYSERDA arguing that NYISO’s BSM rules are unjust and unreasonable because the rules limit ESRs’ entry into and participation in NYISO’s ICAP market and interfere with federal and state policy objectives. FERC found that NYPSC and NYSERDA failed to satisfy their burden under section 206 of the Federal Power Act (“FPA”) to demonstrate that NYISO’s existing rules are unjust and unreasonable.
As an initial matter, FERC rejected arguments that application of BSM rules to ESRs inappropriately interferes with state policies and is inconsistent with cooperative federalism. While FERC acknowledged that New York State has several energy and environmental policies and objectives, FERC found that the NYSPC and NYSERDA did not establish that unmitigated entry of ESRs in MCZs would result in capacity price suppression. FERC held that mitigating ESRs in New York does not divest New York State of its jurisdiction over generation facilities or its authority to set generation-related environmental goals. FERC explained, however, that it is obligated to ensure wholesale rates are just and reasonable, and that application of BSM to ESRs in NYISO “appropriately protects the capacity market from the price suppressive effects of resources receiving out-of-market support while preserving the cooperative federalism approach established under the FPA.”
FERC also rejected arguments that subjecting ESRs to BSM would limit such resources’ ability to participate in NYISO’s ICAP market. FERC noted that the NYISO will still conduct Part B Tests for such resources, and that the Part B Test takes certain incentives into consideration, including the expected benefits to zero-emissions resources that result from New York’s participation in the Regional Greenhouse Gas Initiative. FERC further noted that ESRs could potentially qualify for the competitive entry exemption or the self-supply exemption.
In the Reliability Order, FERC addressed requests for clarification and rehearing filed in response to a March 2015 order denying a complaint filed by the Independent Power Producers of New York (“IPPNY”) against the NYISO (“March 2015 Complaint Order”), as amended. In its initial complaint, IPPNY had argued that NYISO’s BSM rules were unjust and unreasonable because they failed to prevent existing capacity resources needed for short-term reliability and capacity resources with repowering agreements from offering their capacity at de minimis levels into NYISO’s ICAP market. IPPNY requested that FERC require NYISO to either exclude from the ICAP market existing resources that would have otherwise left the market but that received Reliability Must Run (“RMR”) agreements or Reliability Support Services Agreements (“RSSAs”), or require such resources to offer their capacity at no lower than their going forward costs. IPPNY pointed to two specific units in support of its complaint, each of which were located in NYISO’s Rest of State zone, i.e., not in an MCZ.
In its amended complaint, IPPNY argued that an executed term sheet between National Grid USA Service Company and one of the identified generators related to the repowering of that generator contemplated significant out-of-market payments for repowering uneconomic units. IPPNY argued that these payments would, over the 10-year period, significantly suppress ICAP market prices.
In the March 2015 Complaint Order, FERC denied IPPNY’s initial complaint and the amended complaint. FERC agreed with NYISO’s Market Monitoring Unit that existing capacity resources needed for short-term reliability and capacity resources with repowering agreements “are economic from the perspective of satisfying the NYISO’s reliability requirements,” and that “[i]f the reliability needs satisfied by these units were reflected in the capacity market, the units would . . . clear.” On the other hand, FERC expressed concerns that RSSAs could raise potential issues of prices suppression. FERC therefore directed NYISO to initiate a stakeholder process to address whether: (i) there are circumstances that warrant the adoption of BSM rules outside of MCZs, and (ii) resources under repowering agreements have the characteristics of new rather than existing resources, triggering a BSM power evaluation because of their potential to suppress prices in the capacity market. NYISO submitted two informational reports detailing the stakeholder process, recommending that FERC not extend BSM measures to non-MCZs or to resources with repowering agreements.
In the Reliability Order, FERC clarified that its findings regarding the RSSAs at issue in the March 2015 Complaint Order did not address issues in a then-ongoing proceeding related to NYISO’s RMR processes, on which FERC has since ruled. FERC denied all remaining requests for rehearing and clarification regarding its dismissal of the initial and amended complaints.
In NYISO’s informational reports, it recommended that FERC not extend BSM measures to non-MCZs or to resources with repowering agreements. In response, FERC merely noted in the Reliability Order that NYISO complied with the March 2015 Complaint Order by establishing a stakeholder process and filing a status report. FERC did not require that BSM be extended outside of the current MCZs or existing resources needed for reliability.