New York’s Ambitious Transitions: Who Wins? Who Loses? Who Knows?

New York's electricity system and markets face a blizzard of changes, driven by policy, politics, and economic forces. The New York Independent System Operator and the New York State Energy Research and Development Authority are two key-and sometimes competing-players trying to make sense and order of the policy storm.

Rubik's Cube. The game of Twister. Electricity Tetris. A jigsaw puzzle in which all of the pieces may not fit and some may be missing. Those items are all about as difficult to solve as New York's power conundrum. The Empire State faces a blizzard of market structure, policy, and generation changes-all taking place at once-in its electricity sector.

The central policy issue is powerful Gov. Andrew Cuomo's revolutionary "Reforming the Energy Vision," widely known among New York's acronym-addicted energy mavens as REV. Following the chaos of Hurricane Sandy in 2012, Cuomo set about creating a political response to change the way the state would look at and build its electrical supply and grid during the 21st century.

Among the institutions involved are the New York Independent System Operator (NYISO), Cuomo's New York State Energy Research and Development Authority (NYSERDA), the state's Public Service Commission (PSC), New York's six investor-owned utilities, the state-owned New York Power Authority (the largest state-owned electric utility in the U.S., created by Gov. Franklin Delano Roosevelt in 1931 and a model for the federal Tennessee Valley Authority), the state's nonutility generators, and the Federal Energy Regulatory Commission (FERC) in Washington, D.C. Whom did we miss?

Winds of Change at NYISO

NYISO, which runs the transmission grid and the competitive wholesale electricity market, and NYSERDA are the central forces trying to create order out of what so far appears to be a chaotic situation. It's not clear that they see the future in exactly the same way, but they will have to work out the relationship if REV is to live.

The conservative online news service The Daily Caller earlier this year reported that NYISO was critical of Cuomo's REV plan to boost renewable energy to the tune of $360 million, while NYSERDA chief Richard Kauffman, a former Goldman Sachs partner widely described as Cuomo's "energy czar," said NYISO was "held captive" by special interests, lacking "understanding into the imperative to address climate change."

NYISO's core mission is grid reliability, a consideration at the heart of all of the swirling events in New York. All the somewhat incoherent policy directives and market changes will have to come together at NYISO in order for the emerging electricity system to work.

"NYISO is right at the forefront of the changes taking place in the industry. We are addressing emerging public policy goals, including the move to low carbon output and a strong shift in New York to distributed energy resources (DERs)," NYISO President and CEO Bradley Jones (Figure 1), told POWER in March. "Our markets have a proven track record of adapting to change, and I am confident they will serve as an effective platform for continued progress."

1. New York Independent System Operator (NYISO) President and CEO Bradley Jones. Courtesy: NYISO

"The NYISO's first, and primary, function is to reliably operate New York's bulk electric system in accordance with mandatory national, regional, and state reliability requirements and standards," Jones told the state legislature in February. NYISO, said Jones, also must run the wholesale competitive markets, "enabling generators and other resources to sell power to utilities and other parties who, in turn, supply it to New York consumers." Third, NYISO is a major system planner for the state's bulk electric system.

Jones joined NYISO in the fall of 2015, replacing Stephen Whitley, who retired after heading up the ISO since 2008. Jones came from the Electric Reliability Council of Texas, where he was a key manager, and before that, from Luminant, a Texas competitive generator.

Multiple Drivers at NYSERDA

Meanwhile, NYSERDA is pushing to transform the grid from its traditional one-way highway for central station generation sent across high-voltage transmission lines to local distribution lines and into retail consumers' homes and businesses. The REV vision is instead a two-way street, with power flowing from wholesale markets into a system where distributed resources (solar, combined heat and power, on-site generation, energy efficiency, demand response, and so forth) can both serve local load and send power back onto the grid.

NYSERDA's Kauffman recently wrote that the goal of REV "is to change regulatory and financial structures to build a 21st century grid. For too long we've been rebuilding the old, central-station production system, which is not the grid we're supposed to have today. The 21st century grid is a hybrid that has both central station power and distributed energy resources (DERs), where electrons flow in more than one direction, and supply and demand are dynamic."

REV, said Kauffman, has two principle "drivers." The first, he said, "is clear price indicators to DER providers to deploy these technologies in grid locations where all customers benefit-not only the DER customers themselves, but all customers." The second driver, said Kauffman, "is migrating financial incentives for clean energy deployment away from one-time grants funded by ratepayers." Traditional utility cost-of-service regulation, he said, "leads to financial and energy inefficiencies." The traditional "rate-base" approach, Kauffman said, "serves as a disincentive to innovation and is a deterrent to deployment of DERs."

Is it possible to reconcile the need to maintain a steady, strong, reliable bulk system with a vision for a dynamic and flexible two-way grid with growing numbers of distributed generating and storage resources? Both NYISO and NYSERDA officials told POWER they believe it is possible, but they wouldn't specify how, other than anodyne statements about working together to seek common solutions. Those may exist. They may not.

Many Other Players and Concerns

The electricity policy turmoil includes a swarm of other initiatives and transitions that complicate the issue.

DERs. What exactly are DERs? Are they retail resources, wholesale resources, or both? If they are retail, they belong to NYSERDA and the PSC, where former chairman Audrey Zibelman had much to do with creating Cuomo's REV in 2014. In early March, the PSC approved an order for a new compensation structure to, as Electricity Daily described it, "more accurately and efficiently value distributed energy resources" in the Empire State. The order says the PSC is "accelerating opportunities for consumers to take control of their electricity costs and usage while supporting the clean energy economy."

Zibelman, who left the PSC (and the U.S.) shortly after the order to run Australia's electricity and gas wholesale network, said, "Distributed resources offer tremendous value to the electric grid, but until now those values were not reflected in the energy prices paid to these resources. Today's order will finally give distributed energy resources their due." Cuomo will have to replace Zibelman and name a new chair.

Clearly, the PSC sees DERs as retail assets. But both NYISO and NYSERDA acknowledge that DERs can be wholesale resources-bid into and dispatched by NYISO. NYISO in early February published a "roadmap" to dispatchable DERs as part of the implementation of REV. CEO Jones said the document is a "step toward building the grid of the future," and a way to integrate DERs into the ISO's energy, capacity, and ancillary services markets. Online newsletter UtilityDive said it would take "three to five years" to develop the market design, noting that the timeline "resembles the old game Twister."

Dispatchable DERs add a complication to the evolving New York system, because FERC, through the Federal Power Act, has jurisdiction over wholesale electric rates (Figure 2). FERC governs the ISO, which began life as the New York Power Pool but became an independent system operator under FERC's authority in 1999.

2. Down on the farm. Community solar farms, such as this one southwest of Buffalo near the shores of Lake Erie, are growing rapidly in popularity in New York as a result of generous state support, complicating utility planning. Courtesy: Monolith Solar

Amicable tension between FERC and the states over jurisdiction has played out for decades. The feds and the states have never been able to establish a "bright line" between FERC's wholesale authority and the retail power of the states. That may be something to watch for in the DER discussion.

ZECs and RECs. The PSC and NYSERDA administer both "renewable energy credits" (RECs), essentially state subsidies for wind and solar, and "zero emission credits" (ZECs) for upstate nuclear generation (the equivalent of a limited state carbon tax)-another Cuomo initiative known as the "Clean Energy Standard" that the PSC approved last year.

RECs are a common state government approach to subsidizing renewables, available in about 30 states to allow wind and solar projects to bid into competitive markets. When combined with federal production tax credits, they can let renewables, particularly wind, offer the ISO or regional transmission operator power for free and still make a profit on the subsidies once they win the auction.

ZECs are a mechanism to subsidize several upstate nuclear power plants that were unable to compete in NYISO's competitive wholesale markets by giving them financial rewards for the fact that they do not produce greenhouse gases when they generate electricity. Illinois recently enacted a similar program to keep some of its uncompetitive nuclear plants operating, and utilities in Ohio, New Jersey, Connecticut, and Pennsylvania are exploring similar strategies in their states.

Critics charge that both ZECs and RECs distort the market, putting a thumb on the scale that determines a fair price in the NYISO market. Joe Bowring, the independent monitor for the neighboring PJM Interconnection, the nation's largest regional transmission operator, as reported by RTO Monitor, gave a presentation recently where he said, "I don't believe that any of the subsidies are being driven initially by state policy. They're being driven by the specific requests of generation owners about particular units because those units are not profitable."

On the renewables side, NYSERDA in January approved about $360 million in subsidies for wind and solar projects, most of it for wind. The big beneficiaries are NextEra Energy in Florida and Illinois-based Invenergy. Both are proposing 100-MW wind farms to collect some $286 million from NYSERDA (funded by consumer bill surcharges) over the next 20 years, according to calculations from Robert Bryce, a long-time energy journalist and now a fellow at the Manhattan Institute.

According to Bryce, NYSERDA will subsidize the wind projects to the tune of $24.24/MWh. The federal production tax credit amounts to $23/MWh, for a total subsidy of $47.24/MWh. The average wholesale price of electricity in the NYISO in 2016 was $34.28/MWh. "I've heard of sweetheart deals," Bryce wrote in the New York Post, "but this one deserves a medal."

On the ZEC side, the purpose of the subsidies is to keep three large upstate nuclear plants, owned by Chicago-based Exelon, operating (Figure 3). The plants are popular locally (where Cuomo is not particularly popular) as big employers and large contributors to the local tax base. Cuomo came up with a program similar to what Exelon persuaded the Illinois legislature to approve, payments to the operators for the value of avoided carbon dioxide emissions. That allows the expensive nuclear units to bid successfully into wholesale markets-NYISO in New York and the PJM Interconnection in Illinois.

3. Save the nukes. Policy changes in New York pulled the James A. FitzPatrick nuclear plant in Scriba back from the brink of retirement. Entergy agreed to sell the plant to Exelon in August 2016. The deal was completed on March 31. Source: Nuclear Regulatory Commission

The value of the ZECs is a complex calculation that begins with the "social cost of carbon," a controversial analysis based on work done by the Environmental Protection Agency under the Obama administration. However, on March 28 President Trump signed an executive order calling for a review of the social cost of carbon, complicating New York's ZEC program.

The moves in New York and Illinois have prompted strong objections from independent generators, who have filed suit in federal courts and complaints at FERC. Led by the Washington independent generator's lobbying group, the Electric Power Supply Association, the filings argue that the state has no authority to interfere with the FERC-governed wholesale markets. They may have a point, as the Supreme Court last year struck down a somewhat analogous program in Maryland that was intended to support construction of a natural gas plant.

The state legislature has also gotten into the discussion over ZECs, which Cuomo and the PSC imposed administratively. In March, senators and members of the assembly held a public hearing, seeking to understand the details of the subsidy deal. The PSC failed to appear, prompting denunciations from the legislators, but the PSC responded that late notice of the meeting prevented their attendance. In written testimony, the PSC said, "Were New York's safely operating nuclear fleet to close prematurely, old and new dirty fossil fuel generation would replace the emission-free nuclear power, with consumers footing the bill."

Blair Horner, head of the anti-nuclear New York Public Interest Research Group, complained, "The most outrageous part of this from our point of view is that the public was shut out, but they're going to pay for the tab."

The Feds Take Notice It comes as no surprise that what's going on in New York (and in Illinois and other eastern markets) has drawn attention in Washington, D.C. In early March, the Federal Energy Regulatory Commission (FERC) announced it would hold a technical conference May 1-2 at its headquarters. The aim is "to discuss certain matters affecting wholesale energy and capacity markets operated by the Eastern Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). "In announcing the conference, FERC said, "In recent years, there has been increased interest by state policy makers to pursue policies that prioritize certain resources or resource attributes. Because the wholesale competitive markets, as currently designed, select resources based on principles of operational and economic efficiency without specific regard to resource type, there is an open question of how the competitive wholesale markets, particularly in state or regions that have restructured their retail electric service, can select resources of interest to state policy makers while preserving the benefits of regional markets and economic resource selection." As this story goes into production, it is unclear if the commission will have a three-member quorum so that it can take major actions. Only two of the five commissioners are now in place. The lack of a quorum, however, does not prevent events such as the technical conference from being held.

Indian Point. Shortly after Cuomo bailed out Exelon's upstate nuclear reactors, he cut a deal with New Orleans-based Entergy to shut down two pressurized water reactors downstate at Indian Point (Figure 4), some 40 miles from New York City, in five years. With over 2,000 MW of baseload generating capacity, the station generates almost 12% of New York's instate electricity, according to NYISO.

4. Deadline. The Indian Point nuclear power plant outside New York City will shut down by 2021 under a deal with Gov. Andrew Cuomo. Courtesy: Tony Fischer

Can the state replace such a significant chunk of its generating capacity without jeopardizing reliability? NYSERDA officials are confident it can, noting that they have several years to work out the replacement supply, which could include new high-voltage transmission to move upstate wind and hydro south to the New York City market, along with new gas-fired capacity close to the city. NYISO officials generally agree, noting that Entergy has not yet filed a formal notice that the company was retiring the two units.

In legislative testimony in late February, NYISO's Jones said, "Within 90 days of receiving a formal retirement notice, the NYISO assesses whether any reliability needs will arise over a five-year period. This analysis focuses solely on the reliability impacts to the electric system that could result from the generators' deactivation."

Many options are available to replace the lost nuclear generation, including upstate renewables, expanded transmission bringing hydropower from the north, perhaps from Canada, and much more gas generation.

Gas-Fired Generation. Independent Power Producers of New York (IPPNY), a trade group for the nonutility generators, notes that gas generation close to New York City is likely to be the immediate beneficiary of Indian Point shutting down. IPPNY CEO Gavin Donohue said, "Thanks to the [NYISO] Lower Hudson Valley Zone, which was put in place a few years back, 1,000 MW have come back online in that area, saving ratepayers $400 million in capacity costs. And now, because the right market signals are in place, there are two natural gas facilities-one at 650 MW and one at 1,000 MW-currently under construction."

Manhattan Institute's Bryce makes the same case. Bryce notes that Cuomo has said the state must "double down by investing in the fight against dirty fossil fuels and fracked gas from neighboring states." But by closing the two nuclear units, long on the governor's to-do list, "Cuomo has virtually assured that New York will be burning even more natural gas for electricity generation than it is right now. Indeed, in 2016 alone, gas-fired electricity generation in New York increased by nearly 8 percent," Bryce said.

The first of the two projects that IPPNY's Donohue mentioned is a 650-MW, $900 million gas-fired plant in Wawayanda, some 70 miles northeast of Indian Point. The project is under construction and expected to be generating power in 2018. The other plant is the 1,100 MW, $1.6 billion Cricket Valley Energy Center near Dover, about 80 miles north of New York City. That project lined up financing based in part on the anticipated Indian Point closure. Cricket Valley construction is scheduled to begin in July, with the plant in operation in early 2020. Indian Point 2 is set to close in April 2020 and Indian Point 3 a year later.

An irony in what could turn out to be a gas boom is that the fuel for the two new generating projects will be coming from Pennsylvania, produced by hydraulic fracturing. Cuomo's antipathy to gas is mostly political hand waving, notes Bryce. "Between 2005 and 2015 the state's consumption [of natural gas] increased by nearly 26 percent, according to data from the Energy Information Administration," he said. "Over that same period, the amount of gas being burned for electricity generation increased by 56 percent." a-

-Kennedy Maizeis a long-time energy journalist and frequent contributor to POWER.

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