United States: Carbon Pricing Update: All Eyes On FERC's Upcoming Technical Conference As Eastern Grid Operators Seek To Harmonize Wholesale Electricity Markets And State Policies

In our February update, we noted that ISO New England (ISO-NE) and New York Independent System Operator (NYISO) stakeholders continue to discuss carbon pricing as one potential solution to better align state and regional decarbonization goals with wholesale electricity markets. Since that update, carbon pricing remains on the agenda, though ISO-NE has shifted its focus to "near-term" solutions, and NYISO has halted a study on carbon pricing in anticipation of the Federal Energy Regulatory Commission's (FERC) upcoming technical conference on state energy policies and the wholesale markets operated by the three eastern grid operators: ISO-NE, NYISO and PJM Interconnection, L.L.C. (PJM). Only the two former grid operators have initiated formal stakeholder discussions featuring carbon pricing thus far; however, as indicated in a recent statement by PJM President and CEO Andrew Ott prior to the conference, PJM is now in the beginning stages of discussing carbon pricing with its stakeholders and state policy-makers. With all three eastern grid operators now considering carbon pricing, FERC's upcoming technical conference will likely serve as a forum to advance the conversation on carbon pricing as one potential solution to reconcile the wholesale markets with state energy policies.

ISO-NE

In advance of NEPOOL's1 May 17 Integrating Markets and Public Policy (IMAPP) meeting, ISO-NE introduced a conceptual proposal for a two-stage Forward Capacity Auction (FCA) as a "near-term" solution to accommodate the participation of state-subsidized, "out-of-market" generation in its Forward Capacity Market (FCM). As envisioned by ISO-NE in a discussion paper, the two-stage FCA is designed to achieve four objectives: (i) competitive capacity pricing, (ii) the accommodation of state-subsidized generation into the future, (iii) the avoidance of cost shifts from one state's subsidies to another state's consumers and (iv) the extension of ISO-NE's existing FCM design through a market-based approach. ISO-NE notes, however, that these objectives fail to address a major long-term goal of the IMAPP process—the decarbonization of the power sector. ISO-NE envisions that this long-term goal can be achieved with "market-based mechanisms" such as carbon pricing, but reiterates its concern that such a mechanism "would be a lengthy, multi-year effort" and "require substantial resources from both stakeholders" and ISO-NE.2 

Though ISO-NE remains in favor of carbon pricing as a potential long-term, market-based solution, the New England States Committee on Electricity (NESCOE)—serving as the voice for the six New England governors—poses a hurdle. In an April 7 memorandum to NEPOOL stakeholders, NESCOE states affirmatively that it "does not support" a duplicative ISO-administered and FERC-jurisdictional "carbon pricing-style mechanism in furtherance of state laws," citing the New England states' participation in the Regional Greenhouse Gas Initiative (RGGI), which prices carbon through an auction-based carbon market.  NESCOE also reiterates many of its additional concerns, but chief among them is the preservation of "state self-determination": "the states have no risk tolerance for a FERC order, whether initially or in response to a later complaint . . . that seeks to shift responsibility to ISO-NE or any other entity over the form and/or level of a carbon price to satisfy state laws." Without NESCOE's support, ISO-NE and its stakeholders face an uphill battle should they choose to pursue carbon pricing as a long-term solution. 

NYISO

NYISO cites FERC's upcoming technical conference in its decision to postpone The Brattle Group's commissioned study on carbon pricing in its markets, stating that the conference could provide "valuable insights" relevant to that study. Although the report was originally scheduled for completion at the end of Q1, NYISO will likely set a new deadline for the report soon after FERC's May 1 and 2 technical conference, thus pushing its release well into Q2 or early Q3. Despite this delay, NYISO is moving forward on an internal assessment of the "impacts of decarbonization goals on the current NYISO energy and capacity markets from the high penetration of low carbon or carbon-free resources." The final results of the assessment, together with The Brattle Group's study, will inform NYISO as to whether a market redesign is needed—and whether or not carbon pricing is the method to achieve it.

PJM

Unlike the formal carbon pricing proposals under consideration by ISO-NE and NYISO stakeholders, PJM is focused on the development of a subregional carbon price as one of three potential initiatives to address state energy policies. As President and CEO Andrew Ott explains in his pre-technical conference statement, "PJM believes states in the region coming together to design a common policy initiative that can be priced in the wholesale electricity markets is a preferable approach."3 Such an approach would entail a "willing subset of states . . . impos[ing] a cost on the emission externality," such as carbon, which would then "be reflected in offers from generators in the energy market and in so doing become an element in PJM's wholesale electricity prices."4 Ott additionally notes that PJM is looking into border adjustments in order to mitigate leakage and "isolat[e] the pricing impact of the policy choice to only those consenting states in the subregion."5 In doing so, Ott says, "resources can still competitively participate in the full market while the incremental costs of the particular policy attribute are paid only by those citizens of the state which has chosen to compensate that policy initiative."6 While Ott's statement offers a glimpse at a potential carbon pricing initiative, he notes that PJM is only in the "beginning stage" of a stakeholder process.7

FERC's May 1 and 2 Technical Conference

Given the technical conference's emphasis on the efforts under way in ISO-NE, NYISO and PJM, the conference will likely increase exposure to carbon pricing as a potential solution to reconcile the wholesale markets with state energy policies. The pre-conference comments filed by panelists also indicate that carbon pricing is likely to be a strong topic of conversation. For example, nearly 40 percent of the panelists, ranging from PJM's market monitor to the Vice Chairman of the Pennsylvania Public Utility Commission to Exelon's Senior Vice President of Competitive Market Policy, mention carbon pricing as a market-based, resource-neutral solution that preserves the wholesale market framework while also accommodating state decarbonization goals.8 Finally, speaking at an event last week on her goals for the technical conference, Acting FERC Chair Cheryl A. LaFleur—who has supported carbon pricing in the past9—identified the carbon pricing proposal under consideration by ISO-NE stakeholders as a "very market-friendly" "negotiated solution" that "builds on the existing" RGGI.10 LaFleur's comments do not reflect the overall view of FERC, but do provide limited insight as to how one commissioner might vote on a carbon pricing proposal should it land on FERC's doorstep in the future.

Footnotes

1 NEPOOL is the participant voting organization on all wholesale electricity market matters across the New England states.

2 ISO-NE Discussion Paper at 8 (citing its January 2017 memorandum to NEPOOL stakeholders).

3 Statement of Andrew Ott, President and CEO, PJM, Docket No. AD17-11-000, at 4 (Apr. 21, 2017). The pre-technical conference comments and statements of the panelists are available here.

4 Id. at 5.

5 Id.

6 Id.

7 Id. at 4-5.

8 See, e.g., Comments of Matthew White, Chief Economist, ISO-NE, at 2; Comments of David B. Patton, President, Potomac Economics, at 5; Comments of Peter Fuller, Vice President of Market and Regulatory Affairs, NRG Energy, Inc., at 3, n.1; Comments of Aleksandar Mitreski, Senior Director, Regulatory Affairs, Brookfield Renewable, at 4-5; Comments of Susanne DesRoches, Deputy Director of Policy, Infrastructure, City of New York, at 3; Comments of Bradley C. Jones, President and CEO, NYISO, at 3-5; Comments of Kathleen Barrón, Senior Vice President of Competitive Market Policy, Exelon Corp., at 4; Comments of Robert Irwin, General Counsel, Maryland Public Service Commission, at 5; Comments of Andrew Place, Vice Chairman, Pennsylvania Public Utility Commission, at 4; Comments of Joseph Bowring, President, Monitoring Analytics, LLC, at 5; Comments of Lathrop Craig, Vice President of ISO Operations, PSEG Energy Resources & Trade LLC, at 4; Comments of William Hogan, Research Director, Harvard Electricity Policy Group, Harvard Kennedy School of Government at 3; Comments of Lawrence Makovich, Vice President and Chief Power Strategist, IHS Markit, at 5; Comments of Samuel Newell, Principal, The Brattle Group, at 3-4; Comments of Roy Shanker, Independent Consultant,  at 5-6; Comments of Robert Stoddard, Senior Consultant, Charles River Associates, speaking on behalf of Conservation Law Foundation, at 2-3.

9 William Opalka, LaFleur Backs NEPOOL Market-Climate Collaborative, RTOInsider.com (Dec. 5, 2016), https://www.rtoinsider.com/lafleur-nepool-climate-change-34944/ .

10 Gavin Bade, FERC chair outlines three paths for power market reforms ahead of technical conference, UtilityDive.com (Apr. 19, 2017), http://www.utilitydive.com/news/ferc-chair-outlines-three-paths-for-power-market-reforms-ahead-of-technical/440777/ .

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