Memorandum in Strong Opposition - Parts FF and GG of A.9508 / S.7508

Parts FF and GG of A.9508 / S.7508 - A BUDGET BILL - AN ACT … to amend the public authorities law, in relation to energy-related projects, programs and services of the power authority of the state of New York (Part FF); and to amend the public authorities law, in relation to the provision of renewable power and energy by the power authority of the state of New York (Part GG)

Independent Power Producers of New York (IPPNY) is a trade association representing companies involved in the development of electric generating facilities, the generation, sale, and marketing of electric power, and the development of natural gas facilities in the State of New York. IPPNY Member companies produce approximately 75 percent of New York’s electric power by utilizing cutting-edge technologies and a diversity of fuel types at facilities within this state, such as wind, hydro, cogeneration, nuclear, coal, oil, landfill gas, natural gas, and biomass.

IPPNY strongly opposes Parts FF and GG of A.9508 / S.7508. This Budget language would significantly expand the New York Power Authority’s (NYPA or Authority) authority to provide energy-related projects, programs and services and to develop, own and operate new renewable electric generating facilities in the State. This Budget language could result in higher costs for energy consumers and sends the wrong signal to the private sector whose investment is critically needed to meet the State’s renewable energy, energy storage, and emission reduction goals.

This Executive Budget language sends a negative investment signal to private companies that produce more than 75 percent of New York’s electricity upon which the State’s businesses and residents rely for economic stability and growth. Independent power producers have invested over $10 billion to purchase, construct, and operate their facilities. Many of these facilities are either the largest or amongst the biggest employers and taxpayers in their local communities. They employ more than 10,000 individuals across the State, pay annual taxes of over $600 million, and invest more than $50 million in their host communities.

What the Proposed Budget Language Does

Part FF would expand NYPA’s authority to provide services that currently are provided by private companies by amending the definition of "energy-related projects, programs and services" to include “energy management, distribution, or control projects and services, energy supply security, resiliency or reliability projects and services, energy procurement programs and services for public entities.” Among other provisions, the Budget Bill Memo states that Part FF “would also enhance NYPA’s authority to support projects that are critical to security, resiliency and reliability of electric systems and supply, such as micro-grids.”

Part GG of the proposed Budget language would authorize NYPA to, among other things, “acquire, construct, operate or manage . . . renewable power and energy generation projects [including projects that store power] . . . which the authority deems necessary or desirable to assist the state in meeting any state clean energy standard or goals, and/or supply the needs of any public entity or authority customer within the state.” “Authority customer” is defined as “an entity located in the state that purchases or is under contract to purchase power or energy from the authority.” The proposed Budget language would entitle NYPA to recover its development costs from the entities that purchase renewable energy and related attributes (also known as renewable energy credits or RECs) from the Authority. The proposed legislation also would authorize NYPA to finance the development of energy projects through notes and bonds that it issues “or any other available funds.”

Taken together, the proposed Part FF and Part GG significantly expand the scope of projects that NYPA can construct, own, and operate. Part GG would authorize NYPA to build, acquire and own vast quantities of renewable generation in the guise of assisting the State in meeting its clean energy goals and serving any energy consumer located in the state.  

Harmful to Ratepayers

  • PSC Has Decided That Private Independent Power Producers Should Develop New Generation for the Benefit of Consumers

The proposed Budget language is contrary to New York State’s long-standing policy of relying on competition as the best approach to promoting innovation and meeting the electricity needs of the State’s consumers at least cost. The New York State Public Service Commission’s (PSC or Commission) determination that private companies can build and operate generation more efficiently than utilities was one of the main reasons the PSC decided to restructure the electric utility industry in New York two decades ago. Consistent with this policy, the PSC barred the State’s monopoly utilities from constructing and owning renewable generation because of the potential that such ownership would inhibit entry by private market participants, which could result in less competition and higher costs in the long-run. The PSC ruled that a utility should only own distributed energy resources if market participants are unwilling to address the need and no one in the market is providing the solution.          

New York cannot afford to overlook the benefits and tremendous successes of competitive wholesale electricity markets by allowing utilities, including NYPA, to once again put ratepayers directly on the hook for costly investments – especially when the private sector has been successfully developing and operating large-scale renewable electric generation facilities for more than a decade. Since the creation of competitive markets, private developers have brought more than 11,000 megawatts (MW) of all types of electricity generation online, including more than 1,800 MW of wind power. NYPA has not built a new power plant in over 13 years and, instead, has successfully obtained its new power supplies through competitive procurement and from the competitive wholesale electricity market. New Yorkers have directly benefited from the innovative technologies private companies have used to dramatically reduce emissions and improve fuel efficiency by 30 percent, all while enhancing reliability, through competition between private developers - an unthinkable outcome under the previous model.

Part FF would enhance NYPA’s authority to support resiliency projects that are micro-grids, and this provision is contrary to the structure of the NY Prize program, which intends that third party private companies develop and own generation within a microgrid. Private developers can make investments to support the resiliency of the electric system, much like the investments they already make to help maintain a secure and reliable electricity grid. Information about resiliency can be provided in an open and nondiscriminatory manner to all merchant developers to facilitate project entry that best supports the resiliency, reliability and security of the system.   

  • Higher Costs for Consumers

Under current law, any resolutions authorizing NYPA to issue bonds must contain a covenant by NYPA that it will, at all times, maintain rates, fees or charges sufficient to pay the principal of, and interest on, any bonds it issues for its projects and that any contracts NYPA enters into for the sale, transmission or distribution of power must contain rates, fees or charges sufficient to pay the costs of operation and maintenance of its projects. All notes that NYPA issues are general obligations of NYPA payable out of any of its moneys or revenues. As a result, NYPA’s customers are on the hook for paying off the bonds and notes that NYPA would issue to pay for its new renewable energy projects, given that the proposed Budget language specifically authorizes NYPA to finance the development of renewable projects though its authority to issue notes and bonds. These higher costs for NYPA’s customers would be in addition to NYPA’s recent costly obligations to operate the New York State Canal Corporation, which has been experiencing cost overruns.

  • NYPA’s Ability to Develop New Electric Generation Through its Bonding Authority Will Chill Private Investment

No private investor can compete with State-owned projects whose costs are financed by and guaranteed by State government entities and their customers. Allowing NYPA to develop and own renewable generation would constrain this innovation and chill the private investment that the State seeks to encourage. The proposed Budget language would guarantee NYPA the ability to recover all of its costs and, therefore, removes the incentive for NYPA to control and minimize its costs, as would be the case for private developers in competition with each other to obtain revenue through the competitive market. 

The Budget Bill Memo states that enactment of this Budget provision is necessary because of the potential energy cost savings for State agencies and authorities, other public entities, and NYPA customers who purchase renewable products from NYPA; however, the Budget Memo does not further quantify those savings. Any argument that NYPA-owned generation is advantageous because the Authority has a lower cost of capital than private developers is flawed. It is impossible to fairly compare the costs and benefits of a proposed project that is financed through NYPA’s bonding authority with a private developer’s proposed project that must rely on competitively awarded REC payments and wholesale electricity market revenues for cost recovery.

Cost Overruns Can Be Avoided by Relying on Competitive Markets

NYPA has the ability to set its own rates, thus guaranteeing recovery of cost overruns of its projects. If the Authority is allowed to develop and own new renewable generation, government customers, and ultimately the State’s taxpayers, will be put back in the position of being at risk of shouldering unwarranted costs. Cost overruns have been a pattern for prior monopoly utility (including NYPA) construction projects that were passed through to captive ratepayers, leading to cost burdens.

In the case of privately owned renewable generation projects, private investors bear the risk of cost overruns and loss, not consumers. The risks of operation, maintenance, and performance are faced by private companies, who are incented to maximize the value of a project’s output. Because they do not have the luxury of an assured regulated revenue stream to cover their costs, they are forced to be more efficient and to find innovative solutions to minimize costs due to the very structure — competitive markets and risk-based capital to finance development — that the PSC adopted. NYPA’s ownership of generation, with its guaranteed cost recovery, does not have the same incentives. Problems such as cost overruns and negative impacts on private developers can be avoided by prohibiting the Authority from developing and owning new renewable generation.

State Goals to be Met by Private Developers

  • Clean Energy Standard (CES) and Pending NYPA Request for Proposals (RFP)

In 2016, the PSC issued an order adopting the CES mandating that 50 percent of all electricity used in the State must be generated from renewable energy resources by 2030 (50 by 30 goal). To reach the 50 by 30 goal, thousands of megawatts of new renewable electric generation will need to be constructed in New York. The Commission determined that the 50 by 30 goal should be met through the competitive procurement of RECs from renewable generation developed and owned by private companies that compete against each other rather than by the State’s monopoly electric utilities that are guaranteed cost recovery.

The Budget language is contrary to current law which requires that NYPA procure clean energy on behalf of its customers and public entities through a competitive process rather than developing clean energy resources on its own. Indeed, in 2017, NYPA issued a competitive solicitation for up to 1 million megawatt-hours of new renewable energy and RECs developed by private companies to assist the State in meeting the CES and its customers’ needs. In addition, in 2017, the New York State Energy and Research Development Authority issued a competitive solicitation for up to 1.5 million RECs from eligible new renewable private development projects. There is no evidence that the proposals submitted in response to these solicitations are inadequate or that the State’s CES requirement cannot be met through the development and ownership of renewable generation by private developers. Thus, no need exists for NYPA to finance and build new renewable projects in contravention to investments that will be made by the private sector.

  • Offshore Wind Goal

The State has a goal to obtain of up to 2.4 gigawatts of offshore wind by 2030. The Governor’s 2018 State of the State Briefing Book indicates that two solicitations will be issued, one each in 2018 and 2019, to procure at least 800 MW of offshore wind power. Since the State has yet to issue these RFPs, much less award them, again, no evidence exists that private developers cannot meet this offshore wind goal.

  • Energy Storage Target

The Governor’s 2018 Briefing Books for the State of the State Address and the Executive Budget launched an energy storage initiative to deploy 1,500 MW of energy storage by 2025. The storage projects would be developed through means involving procurements, changes in wholesale energy markets, and incorporation of storage into criteria for large scale renewable procurements. Since these procurements have yet to be issued, again, no evidence exists that private developers cannot meet the energy storage target, and no need exists for NYPA to develop new energy storage projects. Private developers already are making investments in energy storage.

  • Emission Reductions

The most recent State Energy Plan puts forth a goal to reduce greenhouse gas (GHG) emissions statewide by 40 percent from 1990 levels by 2030. Executive Order #24 of 2009 requires that GHG emissions be reduced by 80 percent across the economy from 1990 levels by 2050. 

No new investments by NYPA are needed to meet these goals. Since 2000, through the implementation of competitive electricity markets and regulatory requirements, privately owned independent power producers have provided significant environmental benefits. For example, in New York State, the rate of power plant emissions of sulfur dioxide has dropped 98 percent, nitrogen oxides declined by 87 percent, and carbon dioxide has been reduced by 43 percent. Notably, since 1990, the electric generation sector has reduced its GHG emissions by 53.8 percent. Our companies continue to provide reliable and low-emitting electricity supply at a time of low natural gas and electricity prices.

For the reasons stated above, IPPNY strongly opposes Parts FF and GG of A.9508 / S.7508.

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