New York’s Public Service Commission (“PSC”) issued an order on March 16 modifying its energy storage procurement requirements to give utilities more time to run competitive procurements and support the underlying economics of storage projects for the state’s ambitious energy roadmap.

The order was issued in response to a November petition by six utilities (the “Joint Utilities”) and approves two specific requests in the petition:

1. Extend the required in-service date for resources, from December 31, 2025, to no later than December 31, 2028; and

2. Extend the maximum dispatch rights contract duration, from “up to ten years” to “up to fifteen years.”

Background on Procurement Requirements and Results

The PSC issued its original energy storage order in 2018 requiring, among other things, that the Joint Utilities competitively procure dispatch rights for bulk-level energy storage systems. The original in-service deadline was December 31, 2022, and permitted contracts with a maximum term length of seven years. In April 2021, the PSC extended the deadline to December 31, 2025, and permitted contract terms up to ten years.

The PSC noted in its March order that it has pursued ambitious energy storage deployment goals, and that, after two rounds of utility solicitations, only 120 MW of storage projects have executed contracts against the initial 350 MW originally to be placed in service by the end of 2022.

Developments in the Energy Storage Sector Necessitated Modifications

In the order, the PSC acknowledged several developments highlighted by the Joint Utilities bearing on the market that will impact future solicitations and the timing of deployment:

• The new federal standalone energy storage investment tax credit (“ITC”) created in the Inflation Reduction Act;

• New rate settings to lower the cost of charging for energy storage projects; and

• Estimates that the projects in the most recent solicitations would practically not be able to hit the 2025 in-service deadline, especially if they were required to enter NYISO’s Class Year Process or if the projects encountered “complicated permitting requirements.”

With respect to contract terms, the PSC noted the Joint Utilities’ contention that a longer maximum contract term was important to achieving more competitive bids and awards in the face of “developer uncertainty” over merchant market revenues, the potential for additional NYISO market changes, and a belief that the current market does not provide sufficient revenue to enable a robust storage market. The Joint Utilities argued that a longer maximum contract term would therefore allow amortization of costs over a longer period and result in lower costs on an annual basis, while also offering developers the upside of a merchant tail to pursue new revenue streams after the original contact term.

PSC Conclusions and Orders

Echoing their rationale from 2021, the PSC acknowledged that, “Real world experience in developing storage projects continues to help inform Commission policy and program requirements” and that, “It is important to continually assess the state of the storage market and make programmatic changes as necessary” to increase the likelihood of future successful storage solicitations.

The PSC agreed with the Joint Utilities that, “It would not be feasible to select and complete negotiations with winning bidders, and to then afford adequate time for any necessary permitting and construction activities, to meet a December 31, 2025 in-service date.” In approving the deadline extension, the PSC clarified that the extension applies to (1) utility RFP storage projects that are not yet in-service and (2) future contracted projects.

With respect to the maximum contract term, the PSC expressed its belief, in agreement with the Joint Utilities’ petition, that extending the maximum contract duration to fifteen years will allow developers more flexibility in financing projects and lower utility and ratepayer cost impacts.

As a next step, the PSC ordered the Joint Utilities to (1) file updated implementation plans reflecting the changes within 30 days of the effective date of this Order, and (2) file tariff amendments consistent with the order, on not less than thirty days' notice, to become effective on June 1, 2023.

Development and Financing Considerations

Developers facing a tight calendar will certainly breathe a sigh of relief that they have a few more years to develop and construct projects. It remains to be seen how the industry may respond to contract terms of up to 15 years. Solar and wind developers certainly benefitted from long-term power purchase contracts to attract financing. But storage presents unique operation and maintenance challenges by comparison, which will vary by use case. And despite rapid growth in deployment, storage is still a relatively new sector with comparatively modest operational histories for investors and lenders to draw upon with independent engineers – a challenge only underscored by the rapid pace of technological innovation. As contract terms lengthen, developers will need to balance the certainty of revenue against equipment warranties, the viability of supply chain partners, and their confidence in projecting capacity degradation over longer periods of time. Financing parties will want to review even more closely hardware warranties from battery manufacturers and integrators, along with evaluating whether developers have well-defined strategies for capacity maintenance or augmentation covering the full contract term.