To: New York Public Service Commission

From: Columbia Consulting Inc.

Date: March 10, 2014

Subject: Policy Recommendation to Private Investor in Renewable Energy in New York State

I. Summary:

In September 2004, the New York Public Service Commission (PSC) adopted a renewable

portfolio standard (RPS) which set a renewable energy target of 30% of state electricity

consumption by 2015. Of this 30%, approximately 20.7% of the target will be derived from

existing renewable energy facilities and one percent (1%) of the target to be met through

voluntary green power sales. The remaining will need to be met through new renewable

generation managed by the New York State Energy Research and Development Authority

(NYSERDA). However, with the RPS mandated timeline coming to a close next year, the state

government will need to decide whether to extend the RPS to encourage renewable energy

generation and if so, whether the target should remain the same, be decreased, or increased.

This policy memo will support the recommendation that New York State should extend the RPS

through to 2025, without modifying the targets. This recommendation is supported by the fact

that the RPS has already proven to provide economic and social benefits to New York State

since its inception in 2004 and will likely continue to do so into the future. Furthermore, the RPS

will also help the state reach its greenhouse gas emission reductions commitments.

Two alternatives were analyzed. The first alternative is to remove the RPS entirely based on

common criticisms, however data from the current RPS program have proven these criticisms

unfounded. Another alternative is to keep the RPS and increase the target, however this is not a

viable option as the current RPS program will likely not meet the 30% target due to market

factors. These market factors, such as cheap natural gas and uncertain tax incentives, will

continue to persist for the next 10 years making a higher renewable energy target difficult to

attain.

In summary, the memo argues that New York State should continue to encourage renewable

energy development through its current RPS program and maintain the target for another 10

years to 2025, with a review in 2020.

The policy question this memo aims to answer is the following: “With the New York State

Renewable Portfolio Standard commitment expiring in 2015, should the state extend the

timeline and if so should the target change?”

The policy recommendation is that New York State should continue to encourage

investment in renewable energy by extending the existing renewable portfolio standards

through to 2025, without modifying the targets. However, the target should reviewed in 2020.

II. The Current Situation – Energy in New York State

New York allows electric and natural gas utilities to decouple revenue from the sale of electricity

and natural gas, respectively. By allowing utilities to decouple, New York allows utilities to

increase their revenue by selling less electricity and natural gas

New York obtains its generation mainly from natural gas, nuclear, and hydroelectricity. Natural

gas is the leading generation fuel, accounting for 44 percent of the state’s generation, followed

by nuclear power from its four nuclear plants which contribute 30 percent of the state’s

electricity. Hydroelectricity produces 18 percent of the state’s electricity. Coal, wind, solar and

biomass contribute a combined share of 7 percent. New York also imports electricity from

neighboring states and Canada.

The bulk of current renewable generation in New York comes from hydroelectricity, with small

but growing amounts from wind, solar and biomass. The state is home to the largest

hydroelectric power plant in the eastern United States, the 2,353-megawatt Robert Moses

Niagara plant, and produces more hydroelectric power than any other state east of the Rocky

Mountains. New York is also among the top states using landfill gas and municipal solid waste

to fuel electricity generation.

In a report published by Mark Jacobson in Energy Policy, the Stanford researcher along with 12

other academics mapped out how New York State could transition entirely to wind, water and

solar power by 2030. The report calculated a cost savings of $33 billion per year and that there

would be enough energy left over to power every vehicle in the state. Although this research

finding presents an aggressive view on the renewable energy potential for the state, it does

show that renewable energy has the capacity to play a large role in the state’s future energy

mix.

III. Renewable Portfolio Standard in New York State

The Renewable Portfolio Standard

(RPS), established by the New York

State Public Service Commission

(PSC) and administered by the New

York State Energy Research and

Development Authority (NYSERDA),

has been New York’s primary policy

initiative to promote the development

of new renewable energy resources

since it was established in 2004.

The PSC established two tiers of

resource types under the RPS. The

Main Tier consists primarily of

medium to large-scale electric

generation facilities that deliver their

electrical output into the wholesale power market administered by the New York Independent

System Operator (NYISO). The PSC also established a separate tier called the Customer-Sited

Tier (CST). The CST consists of smaller, “behind-the-meter” resources, and make up 5% of the

target. CST technologies include photovoltaic (PV) systems, fuels cells, wind facilities,

anaerobic digester gas, and similar technologies that for the most part produce electricity for

use on site. The CST also includes a competitive program (Competitive PV) for larger solar PV

installations from 200 kW to 2 MW. The RPS target consists of approximately 9.5 million MWh

from the Main Tier and 0.9 million MWh from the Customer-Sited Tier.

Table 1- Pace Energy & Climate Center Study- New York RPS, Where to From Here?

Only renewable energy systems installed on or after January 1, 2003, or previously installed

facilities that make improvements to their renewable energy generation that is incremental to

historical production levels are eligible to participate in the RPS. The Main Tier and Competitive

PV programs operate through the issuance of periodic competitive solicitations; all other CST

resources are supported through first-come/first-served open enrollment programs that provide

a combination of standard offer incentives for the “buy-down” of capital costs and/or energy

production. As of December 31, 2012, the seven completed RPS solicitations have resulted in

active contracts to procure RPS Attributes from 54 large-scale electricity generation projects,

facility upgrades or facility re-powerings. These solicitations resulted in facilities under contract

from a variety of renewable generation types including wind, biomass, biogas, and hydroelectric.

Wind comprises the majority of contracted projects, representing approximately 79% of

generation. When all of the currently contracted projects reach commercial operation,

approximately 1,834 MW of new renewable capacity will be added.

IV. Recommendation: Extend the RPS to 2025

The New York State RPS target, which mandates the state to derive 30% of its energy

generation from renewable sources, will expire in 2015. With the RPS mandated timeline

coming to a close next year, the state government will need to decide whether to continue with

an RPS approach for encouraging renewable energy generation and if so, whether the target

should remain the same, be decreased, or increased.

This policy memo will support the recommendation that New York State should extend the RPS

through to 2025 without modifying the targets. Section IV.I of this memo supports this

recommendation by demonstrating that the RPS has made a positive social and economic

impact to the state. Section IV.II of this memo demonstrates how the RPS will help the state

meet its greenhouse gas emission reduction commitments. Section IV.III discusses why keeping

the target at its current level is realistic, as the state will likely fail to meet current targets by

2015 and an increase would not be feasible.

IV.I – The RPS made a positive impact to New York State

In September 2013, NYSERDA released a 2013 review of the renewable portfolio standard. The

report included an analysis of quantifiable benefits and costs which demonstrated that public

investment through the RPS Main Tier had a positive impact on the State’s economy and added

social value. The report concluded that approximately $1 of State RPS funding invested

captured on average almost $3 in direct investments in New York. Specific highlights from the

summary report include:

Approximately $2.7 billion dollars of direct investments in New York State are expected

over the projected life of the renewable energy facilities

Fossil fuel usage is expected to be reduced by 1% or approximately 130 trillion Btus.

Program costs are expected to comprise less than 0.2% of total retail electricity

expenditures.

Net electricity imports are expected to decline by approximately estimated 4.7%, or an

average of 1.17 million MWh per year

One key success factor of any government program is the creation of jobs and the RPS has

successfully fulfilled this criteria. There is expected to be a per year net gain of approximately

670 jobs in the New York economy. This increase in jobs is mainly due to the displacement of

approximately 5% of imported electricity from other states or from Canada. By increasing the

state’s generation capacity through renewable energy, more jobs are created with a positive

impact on the economy. The cumulative gross state product (GSP) gain is expected to be

approximately $2 billion, with a net present value (NPV) of $921 million. In a time period where

unemployment rates are still at a high, continuing the RPS could be a political move favored by

voting New Yorkers.

From 2002 to 2037, electricity system modeling results show that New York generators produce

approximately 37.5 million more megawatt-hours of electricity in-state in the current generation

profile. This generation results in a cumulative GSP gain of approximately $1.1 billion, with an

NPV of $414 million.

IV.II - GHG Emissions Reductions

New York is a member of the Regional Greenhouse Gas Initiative (RGGI), a regional agreement

among ten Northeast states to limit greenhouse gas emissions. This agreement requires states

to cap carbon dioxide emissions from the electrical generation sector and to reduce those

emissions by 10 percent by 2018 through a cap-and-trade scheme. Furthermore, in the 2014

Draft New York State Energy Plan, the state has established a goal to reduce the emission

intensity of the electricity sector by 50% by 2030 and to achieve an 80% reduction in total

emissions by 2050 (with 2010 baseline).

Having an RPS beyond 2015 and into 2025 will help to compliment all of the New York State’s

aggressive emission reduction targets. Based on the current RPS, there is evidence that GHG

emissions have been reduced significantly. Between 2014 and 2025, the peak years of

renewable energy generation from the Current Portfolio, it is estimated that 50 million tons of

CO2 per year will be avoided, as well as displacing about 15 million tons each of NOx and SO2

from 2006 through 2037. Positive environmental impacts are attributed to the fact that the

portfolio of renewable generation is dominated by wind energy, a zero-emission resource that

displaces a significant amount of fossil fuel combustion, avoiding the emissions of greenhouse

gases and criteria air pollutants.

IV.III – Keeping the 30% RPS target

Currently, NYSERDA anticipates the state will not meet the 30% RPS target. Production of 4.77

million RPS Attributes are expected to result in 2015 from commitments made through

December 31, 2012, under both the Main Tier and the Customer-Sited Tier programs. This

represents progress of about 46% toward the NYSERDA portion of the RPS target (recall that

the non-NYSERDA target was fulfilled by pre-existing renewable energy sources). Current

Customer-Sited Tier contracts and accepted applications are anticipated to support the

installation of systems capable of producing 287,972 MWh by 2015, representing 33% of the

total Customer-Sited Tier portion of the NYSERDA RPS target. Renewable energy production

under active Main Tier contracts is expected to be 4.49 million MWh in 2015, corresponding to

47% of the Main Tier target

NYSERDA has $1.316 billion of authorized and committed funds to promote renewable energy

project development to reach the RPS target. However, even with this dedicated investment, it

is unlikely NYSERDA will fulfill its RPS mandate and as such, New York State will not likely

reach the full 30% target.

Factors influencing the economics of renewable energy projects, which have changed since the

inception of the RPS, are mostly to blame. The most significant factor is that expected future

prices of natural gas has lowered substantially from what was expected back in 2009.

Continued low natural gas prices result in reduced wholesale revenues for projects, increase

financing and hedging difficulties, and ultimately drive up ratepayer premiums to develop

renewable energy. The 2016 expiration of the federal business energy investment tax credit,

which is generally equal to 30% of renewable energy capital expenditures, creates uncertainty

in the future revenue streams of proposed renewable energy projects. The uncertainty

translates to increases in borrowing rates and also impacts the future cash flows of the project.

Program Target Progress Progress as % of Target

Customer-Sited Tier 878,089 287,972 33%

Main Tier 9,519,765 4,486,656 47%

Total 10,397,854 4,774,628 46% Table 2-NYSERDA (2013) RPS Main Tier Program Review

Finally, project developers face challenges in siting and permitting, which result in higher project

costs and reduce the pace of development of market-ready projects.

Therefore the RPS should still be encouraged, but with the current market conditions that will

not likely change in the next 10 years, maintaining the current goal of 30% is advisable and the

most feasible. However, market conditions do change and technology is rapidly advancing

which leads to decreased costs and increased efficiencies. Hence a review of the RPS target in

2020 should be conducted and at the time, an increase in the target can be assessed if seen to

be feasible.

Table 3- Pace Energy & Climate Center Study- New York RPS, Where to From Here?

V – Alternative #1 - Cancel the RPS after 2015

Utilities often argue that increases in renewable energy put pressure on the existing electricity

system, thereby increasing the cost of production. The NYSERDA 2013 Review found that,

taking into account wholesale electricity price, reductions resulting from the program had a

cumulative net rate impact of essentially zero.

Utilities may also see the RPS as a threat to their current business. However, much of the

current RPS generation is displacing out-of-state generation. The RPS is in turn creating new

opportunities for existing utilities to increase their market share. From 2002 to 2037, electricity

system modeling results show that New York generators produce approximately 37.5 million

more megawatt-hours of electricity in-state in the current generation profile. This generation

results in a cumulative GSP gain of approximately $1.1 billion, with an NPV of $414 million. In

fact, projections show an overall net increase in GSP from the RPS well into 2034.

Figure 1- NYSERDA (2013) RPS Main Tier Program Review Vol. 2, Figure 17: Net GSP Impacts by Year of RPS Current Case

Often critics of

renewable energy

deployment will argue

on the basis that the

cost per MW is higher

than conventional

sources. It is important

to distinguish between

two types of costs,

capital costs and the

marginal cost to operate.

Although the capital

costs for renewable

energy may be higher

than conventional

sources with current

technology, the marginal

costs per MW is lower. It is critical to note that generation displaced by the operation of new

renewable energy facilities is typically the most expensive generation, which sets the prices for

the entire market. By displacing this generation, the wholesale electricity price paid by in-state

ratepayers is reduced. The effect is known as the Merit Order Effect and is a phenomenon seen

in many jurisdictions that deploy a great deal of renewable energy. As renewable energy takes a

larger share of power generation, more expensive forms of generation will essentially be

“priced-out” of the market and will in turn, lower the price of electricity across the board.

V.II – Alternative #2- Increase the RPS target

Although the results to date for the RPS program have been achieved more cost-effectively than

originally projected, market conditions are not as favorable as in the past for renewable energy

development. NYSERDA has suggested that the remaining authorized funding doesn’t appear

sufficient to achieve the 2015 program targets that were originally established for the reasons

cited in section IV.III above.

Looking forward to 2025, natural gas price projection continue to remain relatively low, with

natural gas taking a larger share of electricity production (see diagram below for EIA

projections). This suggests that the market conditions for financing renewable energy will

remain difficult and an increase in the RPS target is not feasible. However, a review of the target

should be conducted in 2020 in the chance that market conditions have changed.

VI - Addressing Future RPS Challenges:

As stated in section IV.III, there are several factors influencing the economics of renewable

energy projects, which have made it difficult for the state to reach the 30% renewable energy

target by 2015. These factors include lower natural gas prices, uncertainty in federal tax

policies, and permitting; all of which effect the ability for these renewable energy projects to

attract the financing needed to execute the project.

One potential way the state is looking to address the availability for renewable energy financing

is through the New York Green Bank. In December 2013, the New York State Public Service

Commission (PSC) issued an Order establishing the New York Green Bank, a state fund with

an initial capitalization of $218.5 million with the sole purpose to facilitate private market

financing of renewable energy and energy efficiency projects that have difficulty accessing

financing due to market barriers. The Order was issued in response to a petition filed by

NYSERDA on September 9, 2013 seeking $165.6 million of uncommitted funds raised through

clean energy surcharges on the State’s investor owned utility customers. This was combined

with $52.9 million in auction proceeds from the Regional Greenhouse Gas Initiative. Eligible

proposers include energy service companies, developers, equipment manufacturers or others

that provide equipment, materials and/or services related to renewable energy and energy

efficiency projects along with financial institutions or other third-party capital providers that are

financing, or intending to finance, such project. Projects to be supported by the NY Green Bank

can include a broad range of commercially proven technologies, including solar, wind and other

renewable energy generation technologies; residential and commercial/industrial energy

efficiency measures; electricity load reduction; on-site clean generation, and similar projects that

can support the State’s clean energy objectives, including the RPS. Examples of the types of

investment partnerships the NY Green Bank may engage in include credit enhancements, co-

investing with the private sector in a loan fund for clean energy, loan warehousing/short-term

project aggregation or other similar arrangements.

The creation of the NY Green Bank will leverage the states funds with private capital and help to

meet the RPS targets in a more cost effective way.

VII. Implementation

New York State should seek internal approvals and announce the extension of the RPS target

into 2025. Doing so will show a commitment to renewable energy generation and help to create

some certainty in the market place for renewable energy. The state should also consider how

much more funding is necessary to meet the extended commitments.

Sources:

The NYS Public Service Commission’s Consumer Website - NY's Green Power Program.

Accessed 3.9.2013.

http://www.askpsc.com/askpsc/page/?PageAction=renderPageById&PageId=a8022193f892947

a1d26b67506005183#top

Capital New York: More renewable energy for state. January 8, 2014.

http://www.capitalnewyork.com/article/albany/2014/01/8538507/more-renewable-energy-state

New York State Publice Service Commission: Your Energy Your Choice.

http://www3.dps.ny.gov/W/PSCWeb.nsf/All/E49B23F98BB39EAF85257687006F3ACF?OpenDo

cument

New York: An Energy and Economic Analysis: July 29, 2014.

http://www.instituteforenergyresearch.org/2013/07/19/new-york-an-energy-and-economic-

analysis/

US Energy Information Administration - New York State Energy Profile. Accessed March 5,

2014. http://www.eia.gov/state/print.cfm?sid=NY

US Energy Information Administration – Natural Gas Forecasts. Accessed March 13, 2014.

http://www.eia.gov/forecasts/aeo/MT_naturalgas.cfm

2014 Draft New York State Energy Plan. Accessed March 7, 2014. http://energyplan.ny.gov/

NY Green Bank. Accessed March 5, 2014. http://greenbank.ny.gov/Approach.aspx

NYSERDA Renewable Portfolio Standard Main Tier 2013 Program Review. September 5, 2013.

Michigan and New York renewable portfolio standards (RPS) are adding jobs and reviving

economic growth. November 11, 2013.

http://switchboard.nrdc.org/blogs/pbull/renewable_portfolio_standard_r.html

Examining the feasibility of converting New York State’s all-purpose energy infrastructure to one

using wind, water, and sunlight. Energy Policy. 12 Mar 2013. Jacobson MZ, RW Howarth, MA

Delucchi, SR Scobie, JM Barth, MJ. Dvorak, M Klevze, H Katkhuda, B Miranda, NA Chowdhury,

R Jones, L Plano, AR Ingraffea, Navid A. Chowdhurya, Rick Jones, Larsen Planoa, Anthony R.

Ingraffeaf

Pace Energy and Climate Center. New York’s Renewable Portfolio Standard: Where To From

Here? Jackson Morris, Andrea Cerbin, Jordan Stutt and Adam Cohn