Electricity Markets

Panelists at FERC conference back carbon pricing regime for RTOs/ISOs

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Panelists participating in a Federal Energy Regulatory Commission (FERC) technical conference expressed support for the idea of a carbon dioxide pricing regime for organized wholesale power markets.

FERC convened the online conference (Docket No. AD20-14-000) to discuss considerations related to states’ adoption of mechanisms to price CO2 emissions in the territories of regional transmission organizations (RTOs) and independent system operators (ISOs) that fall under the commission’s jurisdiction.

(The remarks in this article include comments from participants in two panels at the conference. There were a total of four panels).

Chatterjee points out that FERC is not an environmental regulator

“We’re all here to address what boils down to a narrow, but critical topic: When states or regions adopt a carbon pricing framework, what considerations does that raise for FERC and the markets we oversee?,” FERC Chairman Neil Chatterjee said in remarks for the conference.

“There’s no dispute that states are actively exploring and adopting policies to curb emissions, and diverse stakeholders have embraced carbon pricing as an important tool in that effort. Many view carbon pricing, when correctly designed and implemented, as having the potential to be an efficient, least-cost and transparent way to reduce emissions. That’s why groups like the Natural Gas Supply Association have actively supported carbon pricing as a critical tool for decarbonizing energy systems,” the FERC Chairman said.

Chatterjee went on to say, “We’re not here today to focus on the merits of various environmental policy goals or tools. In any action we take, I think a market-based solution are preferable to heavy-handed regulations. But I think it’s important to be very clear about our starting point today: FERC is not an environmental regulator. We have neither the expertise nor the authority to weigh in on how to best curb emissions.”

What FERC does “have is the expertise – and the mandate – to ensure just and reasonable wholesale rates,” he said in the remarks. “In our modern construct, that requires us to ensure that the organized wholesale markets we oversee – with their layers of complexity, their diverse footprints, and their constantly emerging and evolving challenges – remain efficient and transparent. In doing so, we can continue to protect consumers by ensuring a reliable supply of affordable energy at just and reasonable rates.”

He said that the “focus here is about the reality facing this Commission: as states and regions move forward with carbon pricing policies – sometimes conflicting policies – how do we ensure that our markets continue to deliver on their promise? What is our role and what is our responsibility in this moment?”

Sen. Whitehouse points to Regional Greenhouse Gas Initiative

Sen. Sheldon Whitehouse, D-R.I., said at the conference that “carbon pricing has worked in the Northeast’s Regional Greenhouse Gas Initiative, generating economic advantage.”

Whitehouse over the last several Congresses has introduced legislation to place an economy-wide, border-adjustable fee on carbon emissions.

RGGI is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont to cap and reduce CO2 emissions from the power sector.

CEOs of grid operators weigh in

The development of CO2 pricing, or carbon pricing, as it is often called, is “critical to the future” of wholesale power markets, Gordon van Welie, president and CEO of ISO New England, said.

In recent years, van Welie noted, New England states have implemented measures to fight greenhouse gas (GHG) emissions, primarily by sponsoring clean energy resources using mechanisms that are not part of wholesale power markets, such as renewable portfolio standards or credits for nuclear energy.

In response, wholesale markets have created “work arounds” such as adjustments to capacity markets, van Welie said, citing ISO-New England’s minimum offer price rule (MOPR) and Competitive Auctions with Sponsored Policy Resources (CASPR) programs. Carbon pricing will “reduce the market’s dependency on capacity markets,” he said.

A carbon pricing signal would be the most effective pricing signal to achieve New York State’s “challenging” environmental targets, Richard Dewey, president and CEO of the New York ISO, said.

New York’s Climate Leadership and Community Protection Act calls for the state to derive 70% of its load from renewable resources by 2030 and to reach a zero-emissions electricity sector by 2040.

A market approach to carbon pricing is preferable to “an inefficient technology or unit specific subsidy approach or inconsistent RPS rules that in some cases subsidize carbon emitting resources,” Joseph Bowring, independent market monitor for the PJM Interconnection, said.

He noted that PJM has already incorporated emission pricing in its market with price signals for nitrogen oxides and sulfur dioxide, as well as managing the contributions of generators in states that participate in the Regional Greenhouse Gas Initiative (RGGI).

In response to a question from Chatterjee, Bowring said he would anticipate no changes to PJM’s rules would be necessary to incorporate carbon pricing just as no changes were necessary to incorporate RGGI, which was done “seamlessly.”

Van Welie at ISO-New England and Dewey at NYISO also agreed that carbon pricing could be incorporated into their markets without major changes, just as they have incorporated RGGI into their markets.

The fact that many states now have different rules to address climate change issues does present a problem, though, the panelists agreed in response to questions from Chatterjee on “leakage,” that is, the problem of “dirty” energy spilling over into “clean” energy jurisdictions and skewing prices.

“Leakage is unavoidable,” Bowring said. “It is a fact of markets, but you don’t need complicated rules to deal with it.” It is, in fact, all the more reason for states to embrace carbon pricing, he said.

The problem is inconsistent policies from state to state that can often have unintended consequences and create “collateral damage,” William Hogan, Raymond Plank professor of global energy policy at Harvard University’s John F. Kennedy School of Government, said. If there were a common, transparent price on carbon, “it would not require RTOs or FERC to do anything,” he said.

A uniform carbon price could prevent leakage, agreed Matthew White, chief economist at ISO New England, but the price would have to be set high enough to avoid another problem, namely, a shortfall in resource adequacy.

In many RTOs, capacity markets are designed to solve the “missing money” problem, that is, to provide adequate monetary incentives for investment in new generation resources. Without some indication of forward prices, investors face “significant financial challenges,” White said, but stable CO2 prices could eliminate the need for capacity markets and provide a stable signal for investors and, ultimately, lower costs for consumers.

Addressing these market design problems could be difficult. “One state’s desired leakage control may be another state’s extraterritorial regulation of its power generators,” Travis Kavulla, vice president of regulatory affairs at NRG Energy, said.

But as state policies continue to evolve in the absence of federal leadership the gap between state and wholesale market policies grows larger and forces wholesale markets to come up with piecemeal fixes.

From a developer’s point of view, the misalignment between competitive markets and public policy has resulted investment strategies that are “more focused on arbitraging the misalignment rather than investments for a sustainable and reliable electric market for the future,” Sherman Knight, president and chief commercial officer at Competitive Power Ventures, said.

To address the perverse incentives that arise when state policies lead to wholesale market design issues, FERC should consider asking states to help solve them, Kavulla said. Although seldom used, the Federal Power Act promotes “cooperative federalism” by permitting consultation with, or even joint or delegated decision-making with or by state officials of certain questions within the federal jurisdiction, he said.