MA Energy and Climate Bills Shake things up for Clean Peak Standard Market

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The last few weeks have been exciting for those working in the clean energy space!  On August 11, Massachusetts Governor Baker Signed HB 5060, An Act driving clean energy and offshore wind into law, following some speculation that he might not sign it over the inclusion of provisions he had requested be excluded from the bill.  On August 16, President Biden signed H.R.5376 – the Inflation Reduction Act of 2022 into law, enacting climate provisions whose prospects seemed to have dimmed prior to announcements of a deal reached between Senators Manchin and Schumer.  Both statutes have important ramifications for the Massachusetts Clean Peak Energy Standard (CPS) market, some direct, some indirect, which will lead to updates to the Clean Peak Market Outlook (CPMO) team’s modeling of the CPS market.  In this post, we focus on the Massachusetts energy omnibus bill.

Storage-specific provisions

Section 72: Storage tariffs

The omnibus bill directs each of the EDCs to file with the DPU a notice of intent to “promptly” file with FERC a wholesale distribution service rate schedule to apply to distribution-connected standalone energy storage participating in wholesale markets.  This requirement reflects a lack of clarity both in Massachusetts and across New England in the rate treatment of these types of resources.  Anecdotally, many EDCs, including those in MA, have been applying general commercial retail tariffs to these systems, which include prohibitively high non-coincident demand charges that effectively kill the economics of many storage projects. 

The legislation further directs the EDCs, in developing these wholesale distribution tariffs, to “identify the costs to the distribution network not recouped through project sponsor-funded interconnection upgrades or otherwise paid directly by the project sponsor and design rates to recoup the distribution company’s net costs in a manner similar to how they are incurred by the distribution company, without unduly impeding the participation of energy storage systems in power markets and other uses of such systems that provide benefits to the grid.”

There is, to say the least, a lot to unpack in this sentence.  An oft-cited, FERC-approved wholesale distribution charge precedent applied to similar storage resources in Commonwealth Edison territory applies a carrying charge to system upgrade costs directly attributable to the interconnecting storage resources, an approach that yields a fixed, annual charge specific to each interconnecting resource.  The statutory language, by specifying that the tariff should consider “costs to the distribution network not recouped through project sponsor-funded interconnection upgrades,” appears to allow for a design different from the Commonwealth Edison tariff, which might include kWh- and kW-denominated charges.  Still, the final clause requires that the tariff not “unduly imped[e] the participation of energy storage systems in power markets,” which storage stakeholders may cite in opposing demand charges.  It’s not clear that the Massachusetts legislature has the authority to dictate the specifics of FERC-jurisdictional tariffs, so some of these specifics may end up being rendered moot.  Regardless, Section 72 prompts action that should resolve a lack of clarity that has challenged distribution-connected standalone storage resources in MA.  Given that these resources, unlike their larger, transmission-connected brethren, will be eligible for EDC solicitations of CPECs, this greater clarity (especially if accompanied by favorable rate treatment) could stimulate more of this resource type being deployed.

Section 72 also directs the EDCs to file at least one tariff “which addresses operational parameters, to apply to energy storage systems interconnected to [the EDC’s] distribution network.”  This would appear to apply to resources not participating in wholesale markets, that would be subject to the DPU’s authority.  Specific direction for how the tariffs should be developed, cited above, would appear to apply to these state-jurisdictional tariffs as well.  While the state-jurisdictional storage tariff could yield more favorable rate treatment, we anticipate that the impact of the state-jurisdictional tariff will be small relative to the FERC-jurisdictional tariff.

Section 80: Storage study

Section 80 directs DOER, in consultation with the Massachusetts Clean Energy Center, to conduct a study of storage, and submit a report and recommendations to the legislature by the end of 2023, considering, among other things:

  • The potential to require the EDCs to procure up to 4,800 GWh of storage
  • The current uses (location, usage patterns, etc.) of storage
  • Various means to further promote the deployment of storage, including tax incentives and funding from alternative compliance payments and energy efficiency programs
  • The benefits of storage, including contributions to meeting climate goals, integration of renewables including offshore wind, resiliency benefits, ratepayer benefits

DOER must also make recommendations for mid- and long- duration storage (defined as having 4 to 10 and greater than 10 hour durations, respectively) deployment targets.  Subject to several requirements, Section 80 also directs DOER to “require solicitations and procurements in accordance with the study recommendations” and grants DOER the authority to “promulgate regulations to implement this section consistent with the study recommendations,” including establishing an EDC procurement methodology.  The statutory language does not directly address how these provisions might interact with CPS.  Legislation resulting from recommendations from the storage study could be designed to leverage CPS, or make storage supported through new mechanisms ineligible for CPS.  Under existing regulations, however, energy storage solicited through this new authority granted to DOER would not be subjected to the 1% contracted multiplier.  The result is that the section, in addition to requiring an energy storage study which might lead to future legislation, also provides DOER with the authority to initiate storage solicitations.  We do note, however, that while there are deadlines for completing the study and delivering recommendations, there are no deadlines for DOER to initiate EDC storage solicitations.  Still, the new authority granted to DOER to conduct storage solicitations could become a significant driver of CPS supply in the future.

CPS-specific provisions: Anaerobic digestor procurement

While the bill is largely silent on CPS itself, Section 39 includes a rather odd new requirement for the Department of Energy Resources (DOER) to conduct a one-time procurement of “Class 1 renewable energy certificates” from existing anaerobic digestion facilities through the CPS, with a “floor price sufficient to stimulate the development of anaerobic digestion facilities.”  We note that this section likely includes a few drafting errors (e.g., referring to Class 1 RECs instead of Clean Peak Energy Certificates) which may need to be rectified in future legislation.  While the volume of procured CPECs may not, in and of itself, materially alter the market in the long-term, by including a deadline of January 1, 2023, the provision could lead to action on the electric distribution company (EDC) solicitation of CPECs through long-term tariffs, which have still not been filed with the Department of Public Utilities (DPU).  The required focus on solicitations could even lead to reconsideration of the solicitation methodology proposed in DOER’s final straw proposal. That said, because the anaerobic digestion and long-term tariff solicitations obligations fall on different parties (DOER and the EDCs, respectively), there may not be any direct impacts from one on the other. The CPMO team will continue discussions with relevant stakeholders to probe for potential impacts of this strange provision on CPEC solicitations.

Other provisions with CPS implications

While most sections of the bill have the potential for at least tangential impacts on the CPS market, the following sections are particularly notable.

Section 62: Offshore wind solicitations

Modifications to the Commonwealth’s offshore wind policies were one of the primary drivers of the omnibus bill.  While not the most salient changes, the law directs DOER to prioritize bids that include benefits from paired energy storage and firm energy delivery.  This language increases the likelihood that future OSW procurements may be altered to reduce or remove current disincentive for offshore wind bidders to include storage (since they would receive little or no benefit from incurring the incremental cost), and thus increase the likelihood that future offshore wind bids will include storage (potentially remote or co-located, pending specifics included in regulation).  While current CPS regulations apply a 1% multiplier to resources that have a Section 83 contract (including offshore wind solicitations), it’s possible that future OSW solicitations may enable bids that could be structured such that CPECs produced by paired energy storage would not be subject to this multiplier.  Importantly, Section 72 transferred the responsibility for running offshore wind solicitations from the EDCs to DOER. Given DOER’s interest in achieving a CPS market in greater supply/demand balance, it is plausible that DOER could enable bids that allowed for storage paired with offshore wind to avoid the 1% multiplier.

Section 60: Grid modernization

Section 60 directs the EDCs to develop grid modernization plans, emphasizing reliability and resiliency, enabling the achievement of climate goals (by integrating more renewables and accommodating building and transportation electrification), and mitigating ratepayer impacts.  While there is some overlap between the requirements of this section and grid modernization plans that the EDCs first filed in 2018, Section 60 emphasizes storage as a means to “decarbonize the environment and economy” and to “improve renewable energy utilization and avoid curtailment.”  Impacts from this provision on the CPS market are not likely to be realized in the next few years.  We anticipate that this provision could be cited by EDCs advocating for increased EDC ownership of storage resources.

Provisions related to electric vehicles

The bill includes a number of provisions encouraging the adoption of electric vehicles, including the establishment of the Electric Vehicle Adoption Incentive Trust Fund, expanding incentives to medium and heavy duty electric vehicles (EVs), and requiring the MBTA to purchase only zero-emission passenger buses after December 31, 2030.  We note that while, to date, EVs have not participated in CPS, their future participation represents a major wildcard for CPEC supply.  Rapid adoption and participation of EVs could lead to them generating a substantial portion of overall CPEC market supply in future years, especially if EVs are used to supply building loads or feed back into the grid.

Putting it all together

In sum, the MA energy omnibus bill is a sprawling piece of legislation, with provisions with the direct and indirect, near-term, and long-term implications for the CPS market.  The CPMO team will include updates to our modeling in our 2022 #3 briefings, scheduled for late October or early November of this year, to help you understand the various components of this new law will translate into CPEC supply, demand, and pricing.

If you’re interested in learning more about the Massachusetts CPS market, including benefitting from detailed supply/demand and pricing projections that incorporate all of the latest developments, including the MA energy omnibus bill, you can see our sample content and learn more about subscription options.  We’d also love to hear from you!  You can reach out to us here.

CPS: A New(ish) Market Means Unique Opportunities

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While it still feels like a new policy, the Massachusetts Clean Peak Energy Standard (CPS) dates back to 2018 enabling legislation.  Following an extensive regulation development and stakeholder process, the Department of Energy Resources (DOER) filed Final Regulations in July 2020, leading to obligations that applied to compliance year 2020. 

Still, in some ways, the market seems new to many participants.  Even after the promulgation of the Final Regulations, DOER has worked with stakeholders to clarify and introduce additional elements of CPS, issuing and updating various CPS guidelines governing resource participation, multipliers, and applicability of CPS to retail sales, drafting and releasing a Final Straw Proposal for long-term procurement of Clean Peak Energy Certificates (CPECs) by the electric distribution companies (EDCs), and working with stakeholders as DOER developed the design of the Distribution Circuit Multiplier, among other things.  Some entities seeking to qualify resources have had to work through critical details with DOER, such as exactly how CPEC volumes will be calculated for demand response resources.  More generally, many market actors on both the supply and demand side have struggled to internalize and master the nuanced and complex policy that is CPS.

Certain critical components of the policy have yet to be implemented.  DOER’s Final Straw Proposal for long-term CPEC procurements anticipated that the EDCs would file the relevant tariff with the Department of Public Utilities (DPU) in 2021.  As of the date of this post, this has not occurred.  Furthermore, recent experience shows that the DPU has struggled with its caseload, delaying action on dockets that don’t have legislatively-mandated timeframes. This creates uncertainty when the first procurement might be issued, potentially delaying the development of resources that will rely on CPEC price certainty in order to be deployed.  The Distribution Circuit Multiplier, which could play a critical role for some resources, has also not yet been implemented. 

CPEC Supply – Opportunities Not Yet Realized

The qualification of supply also reflects a market that is slow to ramp up, even among eligible resources that are already operating.  For example, the 12/3/2021 SMART Solar Tariff Generation Units report indicates a total of approximately 145 MW of storage capacity that has reached commercial operation and has an Approved or Qualified status.  However, only 32.7 MW of storage was included in the 1/8/2022 update to the CPS Qualified Resource report, which could include some storage that is not SMART storage.  The same report shows a total of 90 MW of qualified CPS resources. 

Source: DOER CPS Qualified Units Report.  Data as of January 8, 2022 update.

For resources that have not yet qualified, this represents a real opportunity.  A 1.6 MW, 4-hour SMART energy storage system could expect to produce approximately 1,300 CPECs per year.  At the current ACP of $45, this represents lost revenue of almost $60,000 per year.  Based on the numbers cited above, many market actors are not capturing these revenues. 

Uncertainty = Potential for Competitive Edge

While some might consider the current (im)maturity of the market and the speed with which it’s developing reasons to delay serious study of it, the reality is that the CPS’s current status provides unique benefits to those with the insights provided by CPMO.  Understanding when the market is likely to mature and supply will catch up with demand, and how supply-demand dynamics might drive the dynamic targets, ACP and CPEC price, is particularly important for those on both the supply and demand sides of the market to understand. 

CPMO’s next briefing, anticipated in late February 2022, will explore these CPMO’s next briefing, anticipated in late February 2022, will explore these questions and how they translate into future price scenarios.  If you’re interested in gaining access to CPMO’s market intelligence to guide your decision-making during a critical phase of the CPS market, email us at [email protected], or call Stephan Wollenburg at 508-834-3050 or Mike Berlinski at 617-431-2274.