Electricity Markets

New York ISO releases straw proposal for CO2 pricing

The New York Independent System Operator in late April issued a straw proposal on incorporating pricing for carbon dioxide emissions into its wholesale energy markets.

The proposal reflects the ISO’s desire to better harmonize its operations with New York State’s policy goals, specifically the state’s goal of reducing CO2 emissions 40% by 2030 and 80% by 2050, relative to 1990 levels.

Work on the CO2 pricing proposal is complicated because there is a patchwork of carbon pricing regimes in neighboring markets. New York and eight other New England and Mid-Atlantic states participate in the Regional Greenhouse Gas Initiative, a mandatory market-based CO2 reduction program.

To the north, Ontario and Quebec participate in the Western Climate Initiative. On New York’s southern and western borders, Pennsylvania and New Jersey are part of the PJM Interconnection, which does not have a CO2 pricing scheme.

Work on the carbon pricing proposal is being conducted by the Integrating Public Policy Task Force comprised of staff from NYISO, the New York Department of Public Service, and the New York State Energy Research and Development Authority.

NYISO’s proposal calls for all generators in New York State to be subject to CO2 charges equal to the product of the applicable CO2 price and their point-of-production carbon emissions.

The CO2 price would be based on the Public Service Commission’s gross social cost of carbon less the cost of Regional Greenhouse Gas Initiative allowances. Suppliers not covered by RGGI would pay a carbon price equal to the gross social cost of carbon.

The straw proposal only deals with the process of incorporating the cost of CO2 emissions into the wholesale market. NYISO is proposing that the carbon pricing mechanism would use the social cost of carbon that will be determined by the PSC.

To avoid market distortions, NYISO’s plan would treat imports and exports similar to the way they are now handled but apply a carbon charge to imports and a credit to exports.

NYISO acknowledges that the addition of carbon pricing would affect the ISO’s capacity market and transmission planning process. Most changes would automatically flow through the existing capacity market and transmission planning processes, but several changes would be necessary to account for the changes in the energy market, such as changes to the demand curve that factors into capacity market pricing.

Otherwise NYISO says one of the chief benefits of its proposal is that it would not require changes to existing energy market mechanics or procedures. Generators would be expected to incorporate their CO2 charges into each applicable component of their energy offers. But generators’ energy market payments would continue to be based on the full locational market prices.

NYISO notes that because the CO2 charges would increase the variable costs of CO2 emitting generation, it would raise the energy market clearing price whenever CO2 emitting resources are on the margin. All generators would receive the higher prices but would have to pay the CO2 charges on their emissions, so low or non-emitting resources such as efficient fossil generation, renewables, hydropower, and nuclear generators would benefit from higher net revenues.

Load serving entities would continue to pay the full locational market price, including the effect of the carbon charge, but they would be allocated the carbon charge residuals collected from suppliers through a cost levelizing allocation. The carbon charge residuals would be allocated to customers in two steps. NYISO would allocate all carbon residuals to LSEs, and then LSEs would allocate their portion of the residuals to customers.

Under the current schedule, NYISO is accepting stakeholder feedback on the straw proposal through May and intends to present a carbon pricing proposal to the Integrating Public Policy Task Force in December.

The final proposal will have to be approved by the Federal Energy Regulatory Commission before it is implemented.

The ISO in 2016 hired the consulting firm Brattle Group to draft a report on the effects a carbon price would have on the state's wholesale power market and environmental policies. The Brattle report, which was released in August 2017, found that adding a $40 per ton charge would have little effect on customer bills in the state.