Executive Summary of Comments on Consultant’s Draft Report for Demand Curve Reset

Introduction

The purpose of the Demand Curve is to send a market signal that either incentivizes new capacity generation onto the market while retaining existing generation or shows that there is excess capacity on the system. Given the New York Independent System Operator’s (NYISO) continual warnings about decreasing reliability margins (and the large loads set to come onto the system), the reference prices from this Demand Curve Reset (DCR) would be expected to incentivize and retain capacity resources, which the 2-hour battery energy storage system (BESS) would not. Several 2-hour BESS put together come closer to meeting this need but would result in a multiplication of aggregate costs that would make the technology more expensive compared to the other alternatives. Reliability needs can be defined both as the Loss of Load Event requirement, and through transmission security.

The 2-hour BESS is not eligible as a peaking technology due to reliability requirements

The NYISO has the onus to confirm that any proxy option constitutes an eligible peaking plant technology under the tariff. In doing so, according to Federal Energy Regulatory Commission (FERC) precedent, the technology must be capable of being deployed for a sufficient duration and supporting reliable operations of the system. In assessing whether the proxy meets this threshold qualification, the NYISO cannot solely look at Capacity Accreditation Factors (CAFs), because they are only designed to assess resource adequacy, not reliability. Notably, transmission security needs are becoming more important in the New York Control Area (NYCA), as seen in the NYISO Q2 2023 Short Term Assessment of Reliability Report, which identified a 9-hour need. This could not be met with a 2-hour BESS.

Similarly, the NYISO, the Public Service Commission (PSC), and the Hochul Administration all recognize the need for long duration storage, defined as four hours or more. This is distilled from the PSC’s Final Energy Storage Roadmap, the Hochul Administration’s funding for long-duration storage (10-hour plus) through the New York State Energy Research Development Authority (NYSERDA), and the NYISO’s 2023 System and Resource Outlook. Price signals based on a 2-hour BESS will indicate a market with limited value for capacity and may result in resources retiring. The most recent Market Monitoring Unit (MMU) State of the Market Report indicated that certain steam generators in the Lower Hudson Valley did not receive enough revenue in 2024 to cover their costs going forward. Should the 2-hour BESS proceed, it could result in the need for reliability must-run agreements, long disfavored by FERC. Since the 2-hour BESS cannot meet system reliability needs, it is not an eligible peaking technology.

The 2-hour BESS is not Economically Viable

If the NYISO finds that the 2-hour BESS’ operating parameters accommodate deployment for a sufficient duration to meet peak conditions, the technology is not economically viable. Study results demonstrate that the 2-hour BESS will have a precipitously decreasing CAF as the system transitions to more intermittent and non-dispatchable resources. Future actions by the New York State Reliability Council, or the pairing of the battery with a renewable resource, cannot be considered. Further, floor or ceiling values for CAFs are not appropriate, since it would lock in CAF levels that exceed the actual reliability value of the resource. The decline in CAF will outstrip the impacts of lower fixed costs within the 15-year amortization period, and thus the project will be unlikely to recover its investment. This will make investors hesitant to invest in batteries of this limited duration, and if they do, will have an impact on the risk premium they ascribe to it. In the same vein, utilizing a consistent Weighted Average Cost of Capital (WACC) across all technologies being studied in the DCR is unreasonable, as the 2-hour BESS has the most risk out of all the choices.

The 2-hour BESS Net Energy and Ancillary Services (Net E&AS) revenues will also decline as battery penetration in the NYCA increases. The assumed operating reserves account for more than two-thirds of the total Net E&AS revenues, when averaged across locations. Thus, as more BESS are added, the relatively small reserve market will be swamped by cheap reserve providers, cratering the reserve clearing price. The Net E&AS modeling also over optimizes expected revenues by step two of its three-step modeling technique, which allows for perfect foresight. Empirical evidence from other ISO markets with more established BESS resources indicate that actual revenues are much lower than those projected in the Draft Report.

Thus, the 2-hour BESS is ineligible as a peaking technology under the NYISO tariff due to its inability to meet reliability needs of the system, and lack of economic viability on a merchant basis.

The Net Cost of New Entry (Net CONE) for all Technologies must be increased to adequately reflect their costs

IPPNY argues that the Consultant’s acted unreasonably in assuming the same WACC parameters across all technologies. Given that the technologies studied encapsulate three separate Capacity Accreditation Resource Classes, they will all have different CAF values and be ascribed varying risk by investors. Further, the Draft Report continues to weigh corporate debt heavier than project finance debt, which is more applicable for merchant driven projects. In addition, since most of the merchant capacity market supply is owned by privately held companies, the Analysis Group (AG) needs to change their approach to calculating financing parameters. The Draft Report also failed to consider Buyer Side Mitigation rule changes, which were promised to be taken into account. Thus, reasonable WACC assumptions would be a Cost of Equity of 18%, a Cost of Debt of 9%, and a Debt-to-Equity ratio of 40/60.

The 2-hour BESS assumptions must be updated with proper derating factor adjustments accounting for when the battery lacks sufficient energy to meet its hourly day-ahead commitment. The Draft Report fails to demonstrate why a 15-year amortization period is appropriate among all durations of battery storage, given that 2-hour BESS CAF is much more volatile than longer durations. IPPNY’s comments did a thorough assessment of the Consultant’s use of the Investment Tax Credit (ITC) assumed, and how it should be corrected to 30% of all eligible capital costs monetized for $0.92 per credit. This assessment included ITC eligibility, tax implications, monetization, expenses, and timing of the credit’s usefulness. The Draft Report must also be updated to reflect New York City (NYC) Fire Code and NYC Fire Department Rules, which directly affect, among other things, the Operations and Maintenance assumptions of the battery, requiring a certain number of certified employees to operate the plant. These Operation and Maintenance assumptions should also be location specific, due to the increased costs expected in Zone J.

The comments discuss the impact of Discretionary Sales and Mortgage Recording Tax Exemptions. IPPNY made it clear that only as of right payments should be included in the assumptions that reduce the Net CONE, which a number of those in the Draft Report regarding battery development are. However, the Consultants did omit any discretionary payments from NYSERDA procurements, which is proper.

IPPNY points out the inconsistencies between the JLL report submitted on Zone J land leasing cost, and the Consultant’s recommendation. The Consultant’s use of an arbitrary Cap Rate of 5.5% is the first mistake, as this does not reflect expected rate cuts properly. The assessment also fails to consider the existing property tax assessed on the land which does not qualify for