How Will Prioritizing Viability and Maturity in Procurement Impact Prices and Costs?

Part 3 of SEA’s New York REMO Clean Energy Standard Biennial Blog Series

Publish Date: December 4, 2024

Written by: Sahil Bakht, Senior Analyst; and Po-Yu Yuen, Director

Estimated Reading Time: 12 Minutes

New York’s Tier 1 large scale renewable (LSR) progress has slowed dramatically due to a series of development headwinds resulting in attrition of a substantial portion of the previously contracted development pipeline. These headwinds include global factors such as inflation, supply chain disruptions, and elevated interest rates fueled by the ‘black swan’ combination of COVID-19 and the Ukraine war, as well as interconnection and permitting process bottlenecks. In recent Tier 1 LSR solicitations, New York State Energy Research and Development Authority (NYSERDA) has raised the bar for project viability and maturity in attempts to reduce the likelihood of future contract attrition. The July CES Biennial Review pushed for even greater emphasis on project viability and maturity. The proposed changes include shifting some evaluation weighting away from price toward project viability and maturity. If implemented, how will such adjustment impact future Tier 1 LSR contract prices and costs?

What Could Shifting Evaluation Scoring Toward Viability and Maturity Mean to Procurement Outcomes?

Since the first Tier 1 LSR solicitation in 2017, NYSERDA has maintained consistent evaluation weighting: 70 points for Price, 20 points for Project Viability and Operational Flexibility (previously separate categories), and 10 points for Incremental Economic Benefits. This weighting reflects the state’s emphasis on awarding projects that are cost-effective to ratepayers. However, New York’s experience with LSR development to-date has shown that prioritizing the lowest-priced bids doesn’t always ensure successful cost-effective project deployment, raising questions about whether a different weighting scheme is necessary to ensure timely and successful LSR deployment that puts the state’s renewable energy progress back on track.  

The CES Biennial Review and the stakeholders’ comments to the Biennial Review proposed to reduce the 70% Price weighting to as low as 50%, shifting the weighting toward Project Viability. Using data from our July New York Renewable Energy Market Outlook (NY REMO) analysis, we analyzed the potential impact on the resulting procurement price and cost results of four alternative weighting schemes, as follows:

Our analysis considered a hypothetical bid cohort of 143 uncontracted New York LSR projects currently in the development pipeline. We assigned each project a  ‘maturity’ scoring value (on the scale of 0 to 7, with 7 being the most mature) based on our assessment of their interconnection and permitting statuses. We then performed a simple simulation of the outcome of a NYSERDA Tier 1 solicitation, assigning each project scores for the Price and Viability and Maturity categories based on their ranking among the bid cohort. The lowest-ranked project (i.e., highest levelized net REC cost (LNRC) or least mature) would receive 0 points and the highest-ranked project would receive the maximum points. All projects were assumed to receive the maximum points for the Operational Flexibility and Peak Coincidence and Incremental Economic Benefits categories.

We then modeled the award strike price results and LNRC results under each weighting scheme, assuming a 5,600 MWh procurement volume. Figure 1 below shows the results, with the lines representing the average award strike price and LNRC, and the shaded areas representing the range of award strike prices and LNRCs. The results show an approximately $3.16/MWh increase in average strike price and LNRC when shifting the Price weighting from the current 70% to 60%, and an additional $5.43/MWh increase when shifting the Price weighting to 50%. The results also show moderate evolution in the lower bound of the award price and LNRC range, but a substantial increase in the upper bound as the Price weighting shifts from 70% to 60% ($9.32/MWh increase) and 60% to 50% ($10.41/MWh increase). The widening ranges of award price and cost results highlight that at a certain inflection point, securing the next most mature project may become costly.

Considerations Moving Forward

These analysis results underscore the need for policymakers to carefully consider how much it is willing to pay (by shifting additional weighting away from Price toward Viability and Maturity) to balance successful project completion (and real progress toward renewable energy goals) with affordability. If the weighting scheme is shifted away from Price, the expected increase in award prices could prompt corresponding mitigation actions, such as extending contract tenors and modifying REC settlement structures. We will discuss these potential changes in our next blog post.

For the LSR sector, the increased emphasis on project maturity and viability may necessitate some changes to current strategies and business planning. Developers may need to strategically optimize their portfolio development to align project milestones with bid schedules, ensuring compliance with the new thresholds. Furthermore, heightened maturity requirements for the Tier 1 LSR solicitation as well as the reformed interconnection process (following FERC Order 2023) will lead to increased upfront expenditures (before a contract or interconnection agreement is secured) and higher financial risks. Developers with substantial financial resources will be better positioned to meet these demands, while smaller developers may need to seek capital partners to remain competitive in this evolving landscape. The changes may also create opportunities for acquisitions or pipeline optimization, as less competitive projects are reprioritized or sold. Lastly, if NYSERDA’s evaluation focus shifts away from Price, bidders may also require better understanding of the development  pipeline competitive field to assess competitiveness in each procurement round.