Acquisition of Renewable Energy Attributes is Underway in New York

By

Steven D. Wilson, Esq.
David B. Johnson, Esq.
Read and Laniado, LLP

On February 7, 2005, the New York State Energy Research and Development Authority (“NYSERDA”) announced five bidders won awards for contracts to supply renewable attributes in its first request for proposals (“RFP”) to help meet Governor George Pataki’s policy of supplying 25 percent of New York’s retail electricity requirements from renewable sources by the year 2013. The New York State Public Service Commission (“NYPSC”) implemented the governor’s policy by adopting a renewable portfolio standard (“RPS”) in an order issued last Fall. The RPS designates NYSERDA, a New York public benefit corporation, as the central procurement administrator for the procurement of renewable attributes and all associated funding. The five winning bidders, which include two wind farms (one in New York and one in New Jersey) and three hydroelectric projects located in New York, were chosen from twenty-two proposals and will provide approximately 700,000 megawatt hours (“MWh”) to New York retail consumers in 2006. NYSERDA estimates the amount of funding that will be provided to the five projects is $15.7 million in 2006, resulting in an average incentive of $22.5 per MWh. At this time, winning bid prices, annual output from each project and contract durations have not been disclosed.

NYSERDA developed the RFP to secure rights to renewable energy attributes associated with up to 1,400,000 MWh of incremental renewable energy in 2006. NYSERDA issued the RFP on a fast track basis to help realize the benefits of a federal energy production tax credit only available to newly constructed renewable projects placed into commercial operation no later than December 31, 2005. The RFP sought bids from new facilities constructed after January 1, 2003, and before December 31, 2005. Under the RFP and other RFPs to be issued over the next few years, NYSERDA seeks to accomplish the objectives of the RPS by competitively seeking contracts with suppliers to purchase the rights to the environmental attributes of energy produced in accordance with the provisions and rules of the RPS.

The NYPSC is expected to issue eligibility rules for renewable energy facilities constructed prior to January 1, 2003. These “Maintenance Tier” facilities include in-state wind facilities and less than five megawatt run-of-the-river hydroelectric facilities. In its September 24 Order, the Commission emphasized that it did not desire to encourage the development of additional renewable resources at the cost of losing existing resources.

While the first RFP was conducted on a fast track basis, it is possible that it will be a model for future RFPs, including those for Maintenance Tier facilities. The contractual sale of RPS attributes to NYSERDA will doubtlessly raise novel issues throughout the course of the parties’ dealings.

Eligibility Requirements

Future RFPs will likely contain requirements regarding delivery of energy. For a facility to be eligible, it must demonstrate that the electric output associated with the renewable attribute is scheduled and delivered into a market administered by the New York Independent System Operator (“NYISO”) and that it must be consumed in New York State. The current RPS rules provide that energy sold by physical bilateral contracts to third parties does not qualify, though this may change if and when New York develops an attribute tracking and trading system.

Bid submissions

Eligible facilities submit bids on the forms provided by NYSERDA in the RFP. Along with the form, a bidding facility must also submit a bid deposit of the lesser of one dollar ($1.00) for each MWh produced annually or $50,000. The bid deposit is returned once an offer is rejected or, if accepted, once a security deposit is made. Bid deposits will likely be required in all future RFPs.

Choosing bids

Bid proposals are evaluated according to bid price - - the bid price being the $/MWh (MWh being calculated on an annual basis) that a facility is willing to accept for an RPS attribute. NYSERDA first ranks the bid proposals according to bid price using the lowest net present value payment per MWh. Using independently developed economic analyses on market prices and resource costs, bid proposals are then evaluated for “reasonableness of price.” Proposals are accepted as offered or a counteroffer might be made, based on ranking and subject to procurement limits and available funds.

Importantly, even if the State is short of the RPS annual target, NYSERDA is not required to accept a single bid. NYSERDA retains the right to reject any or all of the bid proposals. Therefore, submitting a high bid price in hopes that NYSERDA must accept the offer for lack of alternatives will not work. This was demonstrated in the first RFP, which solicited 1,400,000 MWh and received 22 bids, but contracted for approximately half that amount from five bidders.

Post selection process

Although it may have been helpful to the “fast track” procurement, all permits and regulatory approvals necessary to construct and/or operate the renewable facility throughout the contract term remain the responsibility of the developer. Selection under an RFP does not alleviate the developer of any licensing responsibility although it should facilitate the licensing process. RFP requirements, such as security deposits discussed below, make receiving the necessary permits and regulatory approvals in a timely manner critical.

Facilities with accepted bids enter an RPS Standard Form Contract (“SFC”) with NYSERDA. A few of the key provisions/obligations of the SFC, which is likely to be used in future RFPs, are discussed below.

Under the SFC, facilities send monthly invoices to NYSERDA for RPS attributes. The maximum aggregate amount of payment cannot exceed the bid price multiplied by the bid quantity and the number of years of the contract.

The SFC also requires that, within ten (10) days of being selected, accepted facilities must provide NYSERDA with a security deposit. The security deposit is calculated as three dollars ($3.00) per MWh produced on and annual basis. The security deposit is designed to ensure that the accepted facility will not terminate the contract prematurely or fail to commence commercial operation by set deadlines. For example, NYSERDA will retain fifty (50) percent of the security deposit if the bid facility terminates the contract before July 1, 2005, or the entire deposit if the facility fails to commence commercial operation by June 30, 2006.

The SFC contains a number of other provisions regarding assignment, payments, audits, default and termination, to name a few. Notably, the SFC provides that a facility must maintain its eligibility under the Commission’s rules as they existed at the expiration of the RFP. If a selected facility under the RFP fails to maintain eligibility requirements as they existed on January 18, 2005, the ineligibility of the facility also renders the RPS attributes ineligible for purchase by NYSERDA.

Conclusion

New York has a long way to go to achieve its goal of having 25 percent of the power consumed in the state derived from renewable energy resources. While eligibility requirements may change in future RFPs, many of the first RFP’s provisions may reemerge in their current or a reconstituted form.