There's a debate going on in New York over who should own and operate large-scale renewable energy projects. Contrary to what Con Edison claimed in a recent editorial at GTM, we think utility ownership of large projects would be a costly mistake for New York ratepayers.
Utility ownership of generation assets would only serve to put ratepayers directly on the hook for costly investments, while ignoring the benefits and undermining the functionality of non-discriminatory, competitive energy markets.
Competitive wholesale electricity markets are where independent power producers sell electricity to utility companies through a competitive auction process designed to meet energy demands using the most affordable resources. This process ensures that market participants strive to improve efficiencies and reduce costs.
In fact, according to recent data from the New York Independent System Operator, New York’s competitive market has resulted in power producer fuel-efficiency improvements that are three times the national average, cutting costs by $6.4 billion. The market has also seen a 41 percent reduction in carbon emissions. Further, when adjusted for inflation, electricity costs were 35 percent lower in 2013 than in 2000.
When it comes to large-scale renewables, private investors bear the risk of loss -- not consumers. And because they must rely on a limited, predetermined income stream to cover their costs and produce revenue, cost overruns are avoided and efficiency is paramount.
This approach has been successful. In fact, independent power producers have been developing large-scale renewables successfully for quite some time now, installing 1,730 megawatts of wind power between 2003 and 2014.
If utilities are allowed to own large-scale renewables and recover costs via cost-of-service rates, it will not only harm competitive electric markets in the state, but will also chill future private investment. As private investment dwindles, utilities, which have been unresponsive to price efficiencies in the past, will dominate development without being subject to discipline provided by the market.
We know this is the case because we have been down this road before. Under the old utility ownership model, utilities owned generation, transmission and distribution assets, and they were entitled to cost-of-service rates -- a structure where utilities are guaranteed a return on investment, paid for by ratepayers, regardless of the outcome of a project.
That vertical monopoly structure resulted in little innovation and massive, routine cost overruns. For example, consider the ill-fated Shoreham Nuclear facility, which Long Islanders are still paying for to this day, or Con Edison’s East River Repowering Project, which had an initial estimated cost of $406 million. The final cost ballooned to $788.3 million.
Recognizing the inefficiencies of this system and the harm to ratepayers, in 1996, the Public Service Commission issued a groundbreaking opinion introducing competitive wholesale electricity markets in New York state, determining that private developers would have a greater incentive to lower costs than utilities under a cost-of-service regulatory regime. The commission found that the most efficient means of procuring new generation resources was through competition, the primary benefit being that the investment risks shift from captive utility ratepayers to private developers.
As a result, utilities were required to sell off their generation assets to private developers, also known as independent power producers, who now compete with one another in wholesale markets to generate electricity as affordably and reliably as possible.
That same logic has been re-enforced very recently. The commission, in its prominent Reforming the Energy Vision (REV) proceeding, has already restricted utility ownership of small-scale renewables to an extremely limited number of circumstances, ruling that the use of competitive markets and risk-based capital, as opposed to ratepayer funding for asset development, is a basic tenet underlying REV. It only makes sense that a similar conclusion should be reached concerning large-scale renewables.
"Is it better to rent or own an asset that will be needed over a long period of time?" asked Con Edison's Christopher Raup, implying that ownership is always preferred.
But the answer is not straightforward. Consider homeownership. There are certain risks that go along with owning a home such as damage, cost of maintenance, liability issues, and future value. When renting, those costs and risks are covered by the landlord. Likewise, with non-utility owned LSRs, costs and risks are covered by private developers, and should the value of a LSR depreciate, you won’t be on the hook for a valueless asset.
In NYSERDA's report on large-scale renewables, the organization freely admits that utility ownership presents issues “of comparability and potential bias in evaluation and selection” and “risk transfer to ratepayers.” In other words, utility ownership of generation would allow utilities to exercise vertical market power.
Vertical market power, as defined by the commission, occurs when “an entity that has market power in one stage of the production process [transmission and distribution] leverages that power to gain advantage in a different stage of the production process. A [utility] with an affiliate owning generation may, in certain circumstances, be able to adversely influence prices in that generator’s market to the advantage of the combined operation.”
Put simply, a utility could use its control of the transmission system to increase constraints and raise the value of its generating assets over others. This discovery is what lead to the dissolution of utility-owned generation assets and to the creation of a competitive wholesale market.
Fifteen years ago, New York went through great pains to move away from a vertical market power structure. Reverting to this old monopolistic way of doing business would be a foolish move back to the days when ratepayers footed failed utility investments through their monthly electricity bills.
Gavin Donohue is the President and CEO of the Independent Power Producers of New York, Inc. IPPNY member companies generate 75 percent of New York’s electricity using a wide variety of resources, such as water, wind, coal, oil, natural gas, nuclear, solar, waste and landfill gas.