FERC Rejects NYISO Buyer-Side Mitigation Proposal Aimed at Clean Energy Transition

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On September 4, 2020, FERC rejected the New York Independent System Operator, Inc.’s (“NYISO”) proposed revisions to its buyer-side mitigation (“BSM”) rules that sought to prioritize storage, wind, solar, and other zero-emitting resources (“Public Policy Resources”) in NYISO’s Installed Capacity (“ICAP”) Market, rather than prioritizing new resources purely on a least-cost basis. While NYISO argued the state’s carbon and nitrogen oxide emissions reduction goals mean that a resource’s cost structure is no longer the best predictor of whether it will ultimately be developed, FERC held that NYISO’s proposal was unduly discriminatory because it prioritized Public Policy Resources over other non-Public Policy Resources. The decision sparked a dissent from Commissioner Richard Glick, who characterized FERC’s order as appearing to stake out the “radical” position that it is improper for NYISO to design its Tariff in a way that acknowledges state public policies, and a departure from FERC precedent focused on balancing the effects of state policies with measures to address how those policies affect capacity market prices.

NYISO’s BSM rules were implemented to address concerns that major buyers of capacity might contract for new, uneconomic entry in order to artificially suppress ICAP Market prices and decrease costs to serve the remainder of their load. Under the BSM rules, NYISO analyzes each new resource seeking to enter the ICAP Market in certain mitigated capacity zones (“MCZs”). Absent an exemption, each new capacity resource that enters an MCZ must offer capacity at a price at or above the applicable Offer Floor determined by NYISO. A new entrant will be exempted from the Offer Floor if: (i) the capacity price forecast in the first year of a new entrant’s operation is higher than the default Offer Floor, which is 75 percent of the Net Cost of New Entry (“CONE”) of a hypothetical unit (referred to as the “Part A Test”); or (ii) the forecast of capacity prices in the first three years of a new entrant’s operation is higher than the Net CONE of the new entrant. Thus, under these tests, new entrants may be exempted from NYISO’s Offer Floor if capacity gets tight—whether because load is growing or because resources are exiting the market—or if the resource is likely to be economic over the course of its first three years of operation.

In April 2020, NYISO proposed several revisions to its BSM Rules, including to the Part A Test. Specifically, with respect to the Part A Test, NYISO proposed to evaluate Public Policy Resources in ascending order of Net CONE before evaluating any non-Public Policy Resources in ascending order of Net CONE. NYISO explained that, although its currently-effective Tariff requires it to evaluate resources under the Part A Test based purely on project costs, a resource’s cost structure is no longer the best predictor of whether it will ultimately get developed. According to NYISO, this is because New York State’s recent policy initiatives mean that Public Policy Resources are likely to be built even if they do not have the lowest Net CONE among the resources evaluated under the Part A test. These public policy initiatives include the Climate Leadership and Community Protection Act (“CLCPA”) and the Peaker Rule. The CLCPA requires 70% of energy consumed in the state to be produced by renewable resources by 2030, and all energy consumed to be completely emissions free by 2040. The New York State Department of Environmental Conservation’s “Peaker Rule” requires lower thresholds for nitrogen oxide emissions from gas-fired peaking units.

FERC rejected NYISO’s proposed changes to the Part A Test as unjust and unreasonable, finding that NYISO’s proposal was unduly discriminatory because it did not provide sufficient justification for prioritizing Public Policy Resources over non-Public Policy Resources, independent of cost. FERC held that Public Policy Resources and non-Public Policy Resources are similarly situated because they must adhere to similar requirements for interconnection and for participation in NYISO’s ICAP Market, and that NYISO’s proposal would unjustifiably limit non-Public Policy Resources’ ability to pass the Part A test and participate on equal footing with Public Policy Resources. And while NYISO’s independent market monitoring unit argued that NYISO’s proposed changes to the Part A Test would minimize surpluses and avoid inefficient incentives for investment in new resources, FERC found these arguments unavailing. FERC concluded that states are free to make their own decisions regarding how to satisfy their capacity needs, but they must bear the costs of those decisions, including possibly having to pay twice for capacity. FERC did not address NYISO’s arguments that its proposal would not cause price suppression, finding that its conclusion that NYISO’s proposal is unduly discriminatory is dispositive.

In his dissent, Commissioner Glick stated his view that NYISO’s proposal struck the right balance between the state’s policy considerations and the imperative to avoid any price suppression in the capacity markets. Pointing to FERC precedent recognizing that state support may constitute a distinguishing factor that renders resources not similarly situated, Commissioner Glick concluded that NYISO’s proposal does not unduly discriminate against non-Public Policy Resources. Commissioner Glick also concluded that NYISO’s proposal would not result in price suppression in the capacity market because it would not change the number of resources that qualify or the supply of capacity that is exempt from NYISO’s BSM provisions. Describing FERC’s opinion as “pervert[ing] NYISO’s buyer-side market rules into a mind-boggling series of unnecessary and unreasoned obstacles aimed at stalling New York’s efforts to transition the state towards its clean energy future,” Commissioner Glick warned that “the most likely outcome of the Commission’s misguided campaign to ‘protect’ capacity markets is their ultimate dissolution.”

FERC’s September 4 order is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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