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May 29, 2009

THREI's Comments on the New York State RPS Evaluation of 2009

The Hudson Renewable Energy Institute, Inc.
Allan R. Page
Chairman and CEO


May 29, 2009

The Honorable Jaclyn Brilling
Secretary
New York State Public Service Commission
Three Empire State Plaza
Albany, New York 12223

Dear Secretary Brilling:

Re: Comments on the NYSERDA RPS Program Evaluation Draft Report Dated March 31, 2009-Required by Public Service Commission Order of April 14, 2005 in Case 03-E-0188.

Introduction

The public comments that are presented herein are provided by The Hudson Renewable Energy Institute, Inc. The Hudson Renewable Energy Institute (THREI) is a not-for-profit organization dedicated to encouraging the use and development of renewable energy through education and competitive market mechanisms. THREI defines renewable energy broadly and includes energy efficiency and conservation as significant sources of renewable energy.


Although there are numerous topics covered as part of the RPS Program Evaluation, the Institute will confine its comments to areas dealing specifically with the Summit Blue Consulting Market Conditions Final Report dated February 19, 2009, with two exceptions. The first exception notes the disparity in the State between New York Pubic Service Commission (PSC) jurisdictional utility customers and customers served by authorities or municipal utilities. The second is the erroneous statement made in the March 31 Draft Evaluation that “Biomass eligibility issues were resolved in a guidebook issued on May 26, 2006.”

Suffice it to say that PSC jurisdictional utility customers need to have more choice in account billing ordered by the Public Service Commission. The playing field needs to be leveled for all customers taking service in the State and jurisdictional customers should not be subsidizing program benefits for other in-State customers making no contribution. In regard to the Biomass Guideline Manual for adulterated biomass, more questions were raised than answered. KEMA and Summit Blue were aware of these concerns regarding the Biomass Guideline Manual but still made the erroneous statement that the guidebook had resolved biomass eligibility issues.

The February Report by Summit Blue forms the basis for market conditions and market direction presented in the March RPS Program Evaluation Draft Report. Specifically The Hudson Renewable Energy Institute will comment on Section 6: Voluntary Market Activity, and Section 8: Steps to Transition New York’s RPS to a More Market Based System.

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The commentary which follows presents and supports issues proposed by The Hudson Renewable Energy Institute to transition the State to a more competitive renewable energy marketplace. Issue one proposes that the Commission account for renewable energy generation on a bundled product basis, eventually eliminating the archaic Renewable Energy Credit. Second, the Commission should work to develop a retail access program within the State for bundled renewable energy products as part of federal, state, and industry initiatives taking place under the title of the Smart Grid.

Voluntary Market Activity

In Section 6 of the Summit Blue February 19 Final Report, the voluntary marketplace is described in terms that are deferential to the RPS Program established in the State. The description which follows of the voluntary market, recasts Summit Blue’s perspective toward a market that is more deferential to voluntary marketplace customers.

The New York voluntary marketplace for renewable energy as of September 2007, had
approximately 60,000 customers purchasing approximately 64,000 Mwh of renewable energy, as compared to an RPS goal of 457,000 Mwh for the year. September 2007 was the last time an estimate of voluntary use of renewable energy was made by the Public Service Commission. By the year 2013 the voluntary usage is projected to be approximately 1,829,000 Mwh. Using the September 2007 quantities the voluntary marketplace was at 14% of its RPS projected goal for that year. During that period, voluntary payments for RECs over and above the cost of energy were in the range of 1 to 2.5 cents per Kwh purchased. The voluntary market is falling significantly behind its anticipated contribution of 1% of the total 25% of the renewable energy supply objective for the State by 2013.

The RPS program has been structured in the State so that jurisdictional utility customers are required to pay for centralized renewable energy procurement. This would suggest that customers who are interested in the purchase of renewable energy believe that the State is already assuming the purchase responsibility as noted on their utility bill. Such thinking obviously puts a damper on the voluntary renewable energy market.

Also to the extent that developers think they may sell into the centralized procurement solicitation or into a compliance market in an adjoining state, the elimination of product marketing to say nothing of the elimination of the transaction costs involved in the voluntary market, becomes very attractive.

Thus in the opinion of the Institute the centralized procurement design of the RPS has placed negative sales pressure on the voluntary market. The Institute also believes that the separation of energy and the attribute of being renewable has complicated the sales process and the value proposition for the voluntary customer. Customers do not understand the meaning or basis for separating renewable energy from its attributes. The press contributes to this lack of understanding by stating that customers are receiving a certain percentage of their energy from renewable energy sources when in effect the customer is only purchasing an attribute or a REC.

The severe shortfall in voluntary market attainment against RPS goals is to be expected based upon the “Main Tier” RPS design which rewards large, well-capitalized developers. A kilowatt-hour is viewed under the RPS as any other typical commodity and centralized procurement by NYSERDA to acquire renewable energy attributes has only one mission, which is to acquire and retire. Approached from a different standpoint, NYSERDA has become the New York State renewable energy credit monopoly. It is difficult to imagine a voluntary competitive market taking market share from a well-funded monopoly capitalized in large part by the same voluntary jurisdictional customers that support the “Main Tier”.

The Public Service Commission and NYSERDA were not chartered to create and stimulate competitive markets. A competitive market responds quickly to customer needs. State entities are deliberate, cautious and interested in investments that produce returns for jurisdictional customers.

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Competitive markets seek risk and base returns on levels of risk assumed. Competitive markets and customers accept program failure as part of the risk assumed. The State is not willing to accept similar levels of failure and therefore has to get the program “right” at the expense of timely development.

NYSERDA and the Public Service Commission have created a system that for RECs, in contrast to kilowatt-hours, replicates how electric power supply is provided by electric distribution companies in the State. It stands to reason that the system designed by the Commission would replicate systems in which it has the most experience and in which it is most comfortable. Unfortunately it is hard to envision a competitive voluntary market standing side by side with a market having one well-financed customer.

Transition to a Market Based System

Noted on page 1 in Section 8 of the Summit Blue Market Conditions Assessment is the need in the 2009 RPS Program Evaluation to “address the steps necessary to transition to a more market-based approach in the future.” Summit Blue in Section 8 further states that “A more market-based system would be one less driven by a government compliance standard and abetted by public funds.” Still on page 1 of Section 8 referenced is the Public Service Commission’s aim in the original 2004 Order of “establishing a viable self-sustaining competitive renewable generation market.”

Summit Blue then proceeds on page 2 of Section 8 to state “this chapter highlights the elements necessary to build a successful market-based system, and explores the extent to which New York’s renewable energy market currently possesses these elements.”

The Hudson Renewable Energy Institute applauds the foresight of the Commission in forecasting the need to design a more competitive approach to a self-sustaining renewable generation market. Also, Summit Blue should be applauded for its identification and summary of the drivers necessary for a more market-based system as previously quoted. However, The Hudson Renewable Energy Institute does take exception to some of the elements Summit Blue proposes to achieve a more market-based system.

Summit Blue starts with the premise that the market is a commodity marketplace and ultimately the only way to compete is on price. This commodity market premise is one that is well-founded historically but one that has changed and is changing. Information technology supporting the LBMP marketplace of the NYISO and the retail access programs of jurisdictional utilities have changed how electric power generation may be sold in a competitive market. The competitive markets for kilowatt-hours generated in NYS are becoming niche markets for differentiated kilowatt-hour products, produced from different energy sources.

Another Summit Blue assumption is that the transition to a more market-based system needs a better adapted renewable energy credit tracking system. To support a better REC tracking system Blue Summit on page 12 of Section 8 states that, the current voluntary market for RECs is “insufficient in scale to function as a significant driver of large scale renewable energy project development in the State, and it is unlikely that this market will become a major driver within the next few years.” Summit Blue postulates that better REC tracking will lead to a scale up in voluntary RECs sold and will drive large scale renewable energy project development in the long term. The Institute questions the logic Summit Blue uses to draw the conclusion that better REC tracking will grow the voluntary REC market. The Institute believes that the reason why voluntary RECs have limited market appeal is based upon the market questioning the value of a REC as compared to the energy associated with a renewable source of supply.

Electric energy historically has been considered a commodity incapable of differentiation. Renewable energy is testimony to the fact that electric energy production has become differentiated. This differentiation has occurred prior to the capability of the delivery system to administratively differentiate a kilowatt hour produced by a wind turbine from one produced by a coal-fired facility. To accommodate the requirement to administratively differentiate attributes and attribute tracking, RECs were developed. However RECs will shortly become an artifact of the past and attributes will again be rebundled. The

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bundled product however will be differentiated and the marketplace will sell energy of different types whether nuclear, fossil-fired, or possibly produced by a hydrogen-rich gas generated from biomass sorted and separated from municipal solid waste.

Information technology currently exists to track, on a kilowatt-hour basis, a transaction to sell a kilowatt-hour produced at a specific facility and delivered to a retail end user. The entire transaction following the kilowatt-hour from the source of production to end use may be monitored and accounted for using an interval meter at a source of generation, through the NYISO LBMP based scheduling and dispatch, to an intelligently metered customer location within the franchise of a New York State jurisdictional utility. Absent data coordination, on-line security, restrictions placed by the NYISO, and tariffs of jurisdictional utilities, such a transaction is in many regards similar to the retail access programs that every State jurisdictional utility has available today. These retail access programs were all initiated and created under the auspices of the Commission in the mid-1990s. To transition to a sustainable competitive marketplace, the Commission needs to move in the direction of differentiating generation products and allowing for the sale of electric energy products based upon a customer’s perceived value. There will be some customers that are interested only in price and think of a kilowatt-hour simply as a commodity. There will be others that would like to know that they are purchasing a certain percentage of their supply from a specific source, a specific company, or a specific generation unit. The system should be able to identify and complete a purchase/sale transaction on-line. Future pricing will be on a customer-specific basis with the customer receiving a bundled product of attributes, energy, capacity, ancillary services, etc.

To continue to invest in an archaic REC system that separates energy from source characteristics makes no sense in the long term. It is much simpler to sell a product indicating that the customer is receiving energy and attributes than to sell an attribute with no associated energy.

Selling a bundled product also ties into making the Smart Grid more attractive. By and large the Smart Grid is a euphemism for demand side management or controlling costs. Providing a customer an energy purchase option as part of a connection to the Smart Grid makes the Smart Grid much more attractive. Why not provide the customer with a choice of selecting for example a kilowatt-hour that is advertised as coming from a beautifully sited solar project set on top of a County office building? Why not allow this customer the choice to purchase a future stream of kilowatt-hours from a wind farm or project off the coast of Long Island thus providing a commitment to a revenue stream for the developer that would assist the developer in project financing? Such off-take commitments to future projects and revenue streams level the playing field between very large well-capitalized firms and smaller firms that lack the support of a multi-billion dollar balance sheet to finance a project.

Direct customer access to a producer and/or production unit promotes the capability of unit financing, with the developer having the option to sell supply forward against a required base price to finance the project. As opposed to a PPA with one designated party, a forward sale at a designated price per future Kwh, with many identified off- takers, minimizes default risk, and allows for transactions at prices above NYMEX futures pricing levels.

For those skeptics who question the capability to sell a differentiated kilowatt-hour it should be pointed out that a Model T Ford was once thought of as a commodity, as was a cup of coffee. In the future, customers of renewable energy will be able to view kilowatt-hour production on-line and will be able to take credit for the actual type of energy purchased to support the theme of environmental compatibility within the business the customer operates.

The Summit Blue position of continuing to perpetuate the current centralized procurement system with the hope that sometime in the future national carbon regulation or a decline in equipment costs will improve the voluntary market makes little sense. Making even less sense is the suggestion that jurisdictional utilities should be added to the REC customer list. Adding utilities adds another regulated monopoly to accompany the monopoly the PSC has already established under the RPS. The Summit Blue recommendations attempt to patch an existing program that needs to be replaced.

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Suggesting that the “State should adopt an attribute tracking system that is compatible with those in neighboring regions” is a concept that will just never happen. If the State was interested in such energy related compatibilities, New York would today be part of a bordering ISO.

The value of a type of generation is for the customer to decide. Nuclear generation to some is the answer to the greenhouse gas issue while to others it is a generator of unacceptable wastes. Either way let the market decide.

From the first three centralized procurement solicitations issued by NYSERDA the average price for renewable attributes was 1.76 cents per Kwh. As previously indicated, the voluntary market for green energy is pricing RECs between 1 and 2.5 cents per Kwh. Thus the State should take pride in the fact that its three solicitations have produced renewable energy within the pricing of the competitive marketplace band width indicated previously. The 25% goal by 2013 was laudable, but as is the case with all goals, the real value is in what resulted and the State has indeed stimulated the renewable energy industry within New York State and that market will continue to be self-sustaining.

The Commission should focus its efforts on the elimination of barriers to entry or development and promote a liquid competitive market down to the retail residential customer level. This is the time for the PSC to focus on the NYISO opening its administrative capabilities to allow for small block accounting of energy supply. What should be created is an electric energy highway for all customers.

Respectfully submitted,



Allan R. Page
Chairman and CEO





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