Electricity Markets

NYISO CO2 pricing would benefit clean energy push: study

Introducing a social cost of carbon dioxide (CO2) emissions into New York’s wholesale energy markets could help the state meet its clean energy goals more quickly and more cost effectively while maintaining grid reliability, according to a new study by the Analysis Group done for the New York Independent System Operator (NYISO).

NYISO began pursuing carbon pricing in 2017 in an effort to align its energy markets with New York State policy goals. The state has passed legislation requiring that 70% of its electrical energy come from renewable sources by 2030 and 100% from zero emission sources by 2040. In April 2018, NYISO and the New York Department of Public Service released a carbon pricing straw proposal and summarized it in a December 2018 white paper. In April of this year, NYISO staff made a presentation on how the ISO would incorporate carbon pricing into its wholesale power rates. The carbon pricing proposal has not yet been formally adopted by the ISO.

The Analysis Group study, led by Susan Tierney, senior advisor at the consultancy, found that NYISO’s carbon pricing plan would facilitate quicker entry of clean energy projects into the market and lower the cost – by up to $850 million – of achieving New York’s emission reduction targets while preventing “leakage” or the shifting, instead of reduction, of CO2 emissions from New York into other regions.

Under the current proposal, NYISO would incorporate a carbon price into its administered wholesale energy markets on a dollar per ton of CO2 basis.

The carbon price would be based on the social cost of carbon as determined by the New York Public Service Commission, minus the carbon price paid under the Regional Greenhouse Gas Initiative (RGGI), which includes New York State. The December 2018 white paper provided the carbon prices considered by the NYISO, equal to a 2020 social carbon cost of $47.30 per ton, equal to a $40.74 price after netting the RGGI price, rising to a $56.77 per ton carbon price by 2030.

Generators would be responsible for paying the carbon price on their actual emissions, which would be deducted from the wholesale price they receive.

If a generator under reports its CO2 emissions, it would be charged for twice the amount of applicable CO2 emissions.

Power imports into New York would also include a carbon price in order to discourage leakage of CO2 emissions from neighboring states and regions.

As generators include the cost of carbon in their wholesale market bids, those costs would be incorporated into the prices load serving entities would pay for energy, but the carbon price paid would be returned to the LSEs through a credit to partially offset the impact of carbon pricing on consumers.

 Lower carbon emitting generators, including renewable, hydropower and nuclear generation, would benefit from the higher revenue. NYISO says the analysis of its carbon pricing proposal shows that a carbon price would reduce the cost of renewable energy credits (RECs) and zero emission credits (ZECs) because facilities eligible for those subsidies would be able to gain higher revenues from NYISO’s energy markets.

If NYISO’s proposal was adopted, the forward estimate of wholesale market payments would take carbon pricing into account, “so that presumably, the ZEC payments would be adjusted downward (or perhaps zero-ed out, depending upon the market prices relative to payment needs),” Tierney said in an email.

New York regulators in August 2016 established a ZEC program to compensate certain nuclear power plants in the state for their zero emission generation output.

According to a 2017 Brattle Group report on NYISO’s carbon pricing plan, at a $40/ton cost of CO2, the plan would have “a relatively small impact on customer costs” in the order of an increase of $1.7/MWh/0.17¢/kWh, representing a −1% to +2% change in total customer electric bills.

Review of the Analysis Group report is under way at NYISO under its governance process, which includes transmission owners, suppliers, consumers, and environmental interests.

If supported by New York State and approved by NYISO stakeholders, NYISO’s board of directors and then the Federal Energy Regulatory Commission (FERC), NYISO’s carbon pricing plan would be implemented no earlier than the second quarter of 2021.

A price on CO2 is implicit in the wholesale prices in New York, California and the New England states by way of their participation in CO2 reduction mechanisms such as RGGI, but New York’s “proposal to set the CO2 price at the social cost of carbon would put in a truly meaningful carbon price and, unlike the other states’ approaches, it would be embedded into NYISO’s tariff,” Tierney said.