Report by Principals Jürgen Weiss and Mark Sarro Examines Impact of Long-Term Contracting on Development of Renewable Energy Projects in New York
Brattle principals Jürgen Weiss and Mark Sarro have recently authored a report that assesses the potential effect of long-term contracting on facilitating renewable energy project development in New York State.
The report, commissioned by Ridgeline Energy LLC, considers the extent to which long-term contracting can aid in the financing and construction of renewable energy projects. Over the past several years, the majority of power plants have been built either by vertically-integrated utilities or with the support of long-term contracts, and even more so the case for renewable energy projects. The authors point out that there are important theoretical and practical reasons that long-term contracts and utility ownership have been the dominant approaches to support the development of renewable energy projects.
Based on both economic theory and the reality of making large, irreversible sunk investments in the absence of a long-term contract, as well as the observed practice by states successfully building out significant quantities of renewable energy, Drs. Weiss and Sarro conclude that long-term contracts are an important means of overcoming hurdles to renewable energy development. They point out that in the absence of long-term contracts, investors in and lenders to renewable energy projects will be reluctant to commit funds.
The authors also suggest that modifications to the procurement process for renewable energy certificates (RECs) through the New York State Energy Research and Development Authority (NYSERDA) would be helpful. The current 10-year REC contracts do not address the inter-dependency of revenue from energy, capacity, and RECs, which, in total, have to be sufficient to provide investors and lenders with the required returns to their investment. Drs. Weiss and Sarro suggest that a contracting mechanism that bundles all three major products through a single long-term contracting mechanism would provide more revenue certainty to attract private equity and debt, and therefore enable significant additional renewable development in the state at potentially significantly lower costs to ratepayers compared to the current procurement approach.
The report, “The Importance of Long-Term Contracting for Facilitating Renewable Energy Project Development,” can be downloaded below.