Tuesday, March 19, 2019

State Climate Policies and Markets: Irreconcilable Differences?

By Michael Kuser and Rich Heidorn Jr.

Executives from PJM, NYISO and ISO-NE will gather with stakeholders, state officials and others at FERC this week to seek ways to incorporate state policies on greenhouse gases into wholesale markets.

FERC scheduled the two-day technical conference out of concern that the RTO/ISO energy and capacity markets could lose relevance — or have their pricing signals undermined — because of state plans to procure out-of-market renewable power and prop up nuclear generators (AD17-11).

The conference will build on the grid operators’ initiatives, including white papers and the New England Power Pool’s Integrating Markets and Public Policy (IMAPP). It also comes as FERC has pending before it challenges to zero-emission credits for nuclear generators in NYISO and PJM.

FERC staff indicated the high stakes posed by increasing tensions between state policies and RTO/ISO resource adequacy efforts, asking witnesses to consider whether there will be “a diminished role for the RTO/ISO.”

The first day of the conference devotes two panel sessions to each of the three grid operators, with one session for state officials to offer their perspectives and one for stakeholders and RTO/ISO officials. The second day will include one panel dominated by state regulators and generating company executives; a second featuring economists and consultants; and a final one giving RTO/ISO officials an opportunity to respond to what they’ve heard.

Below, based on interviews and a review of filed testimony by the witnesses, is a preview of the issues to be discussed.

Incorporating Carbon Costs

Changing the energy resource mix is complex and often controversial, said the Brattle Group’s Judy Chang, an energy economist with a background in electrical engineering, whose clients include NYISO. “Anytime you change the rules, someone is not going to be happy, because rule changes affect revenue,” she said in an interview. An energy economist with a background in electrical engineering, Chang advises clients, including NYISO, on transmission, resource and strategic planning.

ISO-NE Chief Economist Matthew White said New England states are more focused than most others on subsidizing new renewables to meet environmental goals.

“To date, stakeholders and ISO-NE have only identified one solution that would help the states ‘achieve’ their goals while simultaneously preserving the benefits of competitive markets — a carbon cap-and-trade system,” White said in his prepared comments.

Carbon pricing could efficiently price the environmental attributes sought by the states, providing a market framework to select resources based on the least cost. White said that despite the potential advantages of carbon pricing, “there are significant jurisdictional and political issues regarding the implementation of such a carbon pricing mechanism.”

NYISO CEO Brad Jones focused on the ISO’s search for a method “to incorporate the social cost of carbon into generation offers and reflect that cost in energy clearing prices.”

“A generating unit that may appear uneconomic based on its electricity market revenues alone may nevertheless be viable if it could capture the economic value of its environmental attributes,” Jones said. “The problem we face is that current wholesale market designs function well to send economically efficient market signals needed to maintain reliability, but they do not value externalities such as environmental attributes [that] are at the heart of certain state policies.”

Energy and Capacity Markets Implicated

RTO Insider asked Chang whether FERC and the RTOs have the same agenda for the technical conference. “That’s a really good question,” she responded. “The commission wants to ensure that the market functions properly. If FERC is smart, and they are, they’ll recognize that these things cannot stay static. There’s a lot of change going on these days. Policymakers, to succeed, need the market to shift with policy, to improve and adapt.”

Susanne DesRoches, deputy director of infrastructure policy for New York City, said that energy market changes provide only part of the solution. “Changes also are needed to the capacity markets to ensure that developers of renewable resources are able to recover their non-operating costs. At present, the capital costs of many renewable technologies are greater than the cost of a gas-fired plant, but the installed capacity demand curves are not designed to take into account such costs.”

state climate policies greenhouse gases

Indian Point Nuclear Plant

Improvements need to take place because the wholesale electricity markets are only about a decade old, at a time when coal-fired generation dominated in many regions and renewables had little market share. “The designers had no conception of what the world would look like 15 or 20 years later,” Chang said. (See EBA Panel: States Acting on CO2 Because Markets Can’t.)

NEPOOL Chairman Thomas W. Kaslow referred the commission in his prepared comments to a new paper issued by ISO-NE, “Competitive Auctions with Subsidized Policy Resources,” which proposes coordinating the entry of subsidized new resources with the exit of unsubsidized existing capacity resources. Under the proposal, ISO-NE would use a two-stage, two-settlement process in its Forward Capacity Auctions to provide “financial incentives for existing, high-cost capacity resources to transfer their capacity obligations to subsidized new resources and to permanently exit the capacity market.”

PJM Looks to Value Resiliency

Reducing carbon emissions is the major driver for New York and the New England states, all members of the Regional Greenhouse Gas Initiative.

That’s not the case in PJM. Although most of the RTO’s 13 states have renewable portfolio standards, only two — Maryland and Delaware — are in RGGI.

In Ohio, state initiatives have been focused not on reducing emissions but on preserving coal-fired generation.

In March, PJM released a study, “PJM’s Evolving Resource Mix and System Reliability,” in response to stakeholder concerns that the system is losing too many traditional baseload resources as coal plants retire and nuclear assets struggle to remain profitable. The study concluded the RTO can maintain reliability with a generation fleet almost entirely composed of natural gas units, but that a capacity mix of more than 20% of solar would unacceptably increase the risk of loss-of-load events. (See PJM: Increased Gas Won’t Hurt Reliability, Too Much Solar Will.)

state climate policies greenhouse gases

Seeking 90% from the Markets

Chang said the states aren’t seeking a confrontation with the RTOs.

“It’s not one or the other, not who has the upper hand,” she said. “It would not be in the state’s interest to always work outside a competitive, centralized marketplace. And it’s not in the grid’s interest to maintain the status quo. We want to get to the point where state policymakers can rely on the market to accomplish 90% of what they want. Coordination is key; otherwise, ratepayers could end up paying for something twice. You let some resources retire just because they’re not efficient, and at the same time you set price incentives to encourage development of clean energy. They have to go hand in hand.”

Jeffrey Bentz, director of analysis for the New England States Committee on Electricity, in his prepared remarks referred the commission to a recent NESCOE study on IMAPP. Not only does NESCOE not support an additional carbon-pricing mechanism to be run by ISO-NE and regulated by FERC, but the member states are concerned about the risks of a FERC-jurisdictional tariff reflecting carbon pricing.

Specifically, New England states are concerned that such a tariff poses “risks to states’ ability to make their own determination regarding the implementation of their carbon-reduction laws,” Bentz said. “For example, as illustrated in recent years, a few market participants with an appetite and budget to litigate matters could seek to disrupt a design over which ISO-NE, NESCOE and NEPOOL find agreement. FERC could also seek to direct changes on its own initiative.”

Absence of Federal Leadership

Will people be wasting their time changing capacity or energy markets to accommodate state clean energy policies after President Trump earlier this month ordered EPA to begin unwinding its Clean Energy Plan? On Friday, the D.C. Circuit Court of Appeals granted the Trump administration’s requests to hold in abeyance lawsuits challenging the CPP and EPA’s Mercury and Air Toxics Standards. (See DC Circuit Puts Hold on CPP, MATS Challenges.)

Chang said no. “New York and the New England states are going to push through their policies no matter what. Holding back on a FERC-approved action will not stop states from adopting cost-effective measures to meet their policy objectives. One could argue that the states are going to push harder in the absence of federal leadership.” (See RTOs Unfazed by Trump Climate Order.)

1 Comment

  1. EnergyExpert on May 4, 2017 at 6:46 AM

    As a physicist, energy expert, and NY native, I’d say that it is extremely unfortunate that the discussion about the best energy policy is a political one, rather than one based on real Science.

    We should aggressively be promoting alternative energy options. However, just because an energy option is an “alternative” should not give it a free pass from scientific scrutiny.

    Briefly, no alternative electrical energy source should be allowed on the public grid (a privilege), until there is scientific proof that it is a NET Societal Benefit.

    After doing that, all the issues identified above would be properly addressed.

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