
Jan 30, 2024
On VDER: Simplifying the (Somewhat) Simplified Economics of DG Projects in New York State
New York has long been an active market for distributed energy resources (DERs) and community-scale clean energy projects. Camelot has supported numerous community solar projects, as well as a variety of energy storage projects and despite strong policy support for clean energy, the New York market remains one of the most complex for developers and investors. The VDER program was established to simplify and streamline the economics of smaller projects but we still find that many developers struggle with some of the nuances. In our due diligence reviews of VDER projects, we typically find a few common points of discussion:
How to project some revenue streams forward past the end of VDER value streams like LSRV and DRV
Forecast and assumptions for ICAP revenues
Coincidence of energy arbitrage and DRV time periods
Approach to modeling charging costs
When modeling the revenues for purely merchant projects, Camelot uses a sophisticated toolset including an optimized dispatch model but projects with significant programmatic revenues, such as NY VDER projects, often require a more customized approach to validating revenue streams and financial model inputs. Below, we provide some background on the VDER program to help developers and investors better understand this important program.
Background on VDER
The “Value of Distributed Energy Resources” (VDER) program, implemented by the New York Independent System Operator (NYISO), is a novel pricing mechanism designed to value and compensate distributed energy resources (DERs), including solar, wind, and energy storage systems. This program marks a shift from the traditional net metering system, specifically for certain DERs in NYISO. Unlike its predecessor, VDER is a more intricate system that considers various factors such as the location of the resource, the timing of energy production and storage, as well as the impact on the grid and the environment. This comprehensive approach aims to provide a more precise and potentially more advantageous form of compensation for owners of DERs.
The introduction of VDER is a key element in New York's broader strategy to revamp its energy system. It supports the state's efforts to increase the use of renewable energy and reduce greenhouse gas emissions, thereby aligning with state-level policies such as the Reforming the Energy Vision (REV) initiative. This initiative reflects New York's commitment to modernizing its energy infrastructure, promoting sustainable practices, and moving towards a more environmentally conscious energy landscape.
Projects under the VDER program can be as large as 5 MW-AC in capacity. The value of these projects is determined by several factors, including their geographical location and the time of day or year they operate. This valuation is determined through the VDER's Value Stack, which is composed of several key components for energy storage projects:
Energy Value (LBMP): This component is primarily based on the zonal day-ahead hourly location-based marginal pricing (LBMP) set by NYISO. The LBMP is influenced by several factors:
Market Dynamics: The LBMP is affected by the number of generators bidding into the market. This includes the cost of fuels such as natural gas and oil, which play a significant role in setting the price.
Renewable Energy Integration: The integration of renewable energy sources like solar and wind power into the grid also affects the LBMP. Typically, a higher presence of these renewable sources tends to drive down energy costs.
Demand Fluctuations: Another significant factor is the fluctuation in energy demand, which varies hourly across different zones in NYISO. This demand is particularly sensitive to weather conditions, as the usage of air conditioning and electric heating systems can dramatically increase energy demand.
Impact of External Factors: External factors also play a role in shaping LBMP. For instance, in 2019 and 2020, there was a notable decrease in the pricing for capacity and energy. This trend was attributed to an abundance of generating facilities, lower natural gas prices, relatively mild peak demand periods, and a reduction in energy consumption due to the COVID-19 pandemic.
Within the VDER framework, a critical element impacting the Energy Value is the Charging Costs, which differ across utility territories and significantly influence net energy revenues. In regions like the ConEd Territory, encompassing New York City and Westchester, these Charging Costs are particularly variable and can change monthly. As a result, net energy revenues in these areas are often higher, but these fluctuations also present a substantial risk by potentially reducing net revenues.
To optimize the financial performance of a Battery Energy Storage System (BESS) in these areas, it is essential to identify and utilize periods when charging costs are at their lowest. By charging the BESS during these optimal times, project operators can minimize charging costs and thereby maximize net energy revenues. This strategy is particularly relevant in territories like ConEd, where the impact of these charging costs is more pronounced.
Capacity Value (ICAP): Known as Installed Capacity, which is an essential factor in evaluating how effectively a project mitigates energy usage in New York during the most energy-demanding days of the year. This value is closely linked to the NYISO wholesale capacity markets.
The rates for ICAP are subject to fluctuations based on several factors:
Increase in ICAP Rates: These rates can rise in scenarios where power plants retire or when the State experiences a high annual peak load, indicating increased demand for energy.
Decrease in ICAP Rates: Conversely, ICAP rates may decline if there's an excess in power generation, such as when new power plants come online, or if the annual peak load is lower than expected, indicating a surplus in energy availability.
ICAP Alt 3 rates change monthly and vary based on NYISO Load Zones.
For standalone energy storage projects, the only applicable ICAP payout option is known as Alternative 3 (Alt 3). Under Alt 3, project compensation is calculated and awarded each month throughout the year. This is based on the energy injections from the peak hour of the previous summer, which are then multiplied by the monthly ICAP Alt 3 rate, expressed in dollars per kilowatt ($/kW). This approach ensures that the compensation is reflective of the actual contribution of the project to reducing peak demand, thus aligning with the core objective of ICAP in the VDER framework.
Demand Reduction Value (DRV): This aspect of the Value Stack quantifies the impact of DERs on reducing the need for future grid upgrades by utilities. This value is essentially determined by assessing how much a DER project can lessen the necessity for utilities to enhance their distribution networks to handle new peak load demands.
The DRV value and is locked in for 10 years and Based on Several Factors: These rates are derived from the utilities' estimated costs associated with upgrading their distribution networks to accommodate increasing peak loads.
Decrease in DRV Rates: Peaks can be lowered by factors such as enhanced energy efficiency measures and declining populations. These developments could lead to a reduction in DRV rates.
Increase in DRV Rates: Conversely, factors that contribute to higher peak loads, such as population growth and increased electric consumption during peak times (e.g., due to the adoption of heat pumps and electric vehicles), can lead to an increase in DRV rates.
Compensation and Performance: The compensation for the DRV value is closely tied to the performance of the BESS during a predefined DRV Window. The DRV value, expressed in $/kW-yr, is calculated with the assumption that the BESS is capable of discharging at its full capacity during all the hours within the DRV Window.
Variation by Utility and Region: It's important to note that both the DRV Window and the associated value can vary depending on the specific utility and the region in question. This variation reflects the differing needs and characteristics of each utility's grid and the regional differences in peak load patterns.
Therefore, in the VDER framework, the DRV is a dynamic component that reflects the evolving landscape of electricity demand and supply, as well as the regional characteristics of utility grids. It plays a vital role in incentivizing DER projects that can effectively reduce the need for costly grid upgrades.
Locational System Relief Value (LSRV): This value recognizes the additional benefits DERs can provide to the grid in specific utility-designated locations. Here are the key aspects of the LSRV:
Project Location Requirements: To qualify for LSRV, a project must be situated in a utility-specified substation or location. Some projects might also be eligible for a Location Adder, which provides additional incentives for being in specific areas deemed crucial for grid support.
Availability in Designated Locations: LSRV is accessible only in certain areas designated by utilities where DERs can offer extra benefits to the electrical grid. These areas are typically identified based on their potential for grid relief or congestion reduction.
Capacity Limitations: Each designated location for LSRV has a finite amount of capacity available, measured in megawatts (MW). This means that there's a limit to the amount of DER capacity that can qualify for LSRV benefits in any given area.
Minimum Call Events: Each utility is required to have a minimum of 10 call events per year. These events are opportunities for DERs to demonstrate their capacity to provide grid relief.
Advance Notice: A notice of 21 hours prior will be given for these call events, and they are scheduled to occur during the DRV window.
Duration of Calls: The duration of these calls will range from 1 to 4 hours.
Compensation Structure: Compensation for participating in these call events is based on the lowest hourly kilowatt (kW) injection during a call window. This method ensures that DERs are rewarded based on their actual contribution to grid relief during these critical periods.
The LSRV is thus an integral part of the VDER framework, incentivizing projects that are strategically located to provide maximum benefits to the grid. Through this component, the VDER program aims to encourage the deployment of DERs in areas where they can significantly contribute to grid stability and efficiency.
Conclusions
To conclude, each of these components plays a role in determining the overall worth of an energy storage project within NYISO’s VDER framework, reflecting its multifaceted approach to valuing DERs. If you're interested in evaluating energy storage projects in NYISO’s VDER Program, don't hesitate to reach out and say hello at info@camelotenergygroup.com.