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Federal Energy Regulatory Commission looks favorably at US carbon tax

22 November 2020

The US Federal Energy Regulatory Commission (FERC) is moving ahead on the possible implementation of carbon pricing in wholesale electricity markets, as the Commission held a technical conference on 30 September and followed it with a draft policy statement that it opened for public comment.

"Today's proposal finds that regional market rules incorporating a state-determined carbon price can fall within the Commission's jurisdiction over wholesale rates. However, determining whether the rules proposed in any particular Federal Power Act (FPA) section 205 filing do fall under FERC jurisdiction will be based on the specific facts and circumstances," FERC said in presenting the draft policy.

The draft policy statement was published in the Federal Register on 21 October, and a comment period was open through 16 November.

"As states actively seek to reduce greenhouse gas emissions within their regions, carbon pricing has emerged as an important, market-based tool that has wide support from across sectors," added FERC Chairman Neil Chatterjee. "The Commission is not an environmental regulator, but we may be called upon to review proposals that incorporate a state-determined state carbon price into these regional markets. These rules could improve the efficiency and transparency of the organized wholesale markets by providing a market-based method to reduce GHG emissions."  

Specifically, FERC is seeking input on the design of a market-based program, how it can ensure price transparency, how that price will be reflected in marginal prices for power, and what effect a carbon tax would have on shifting power generation across states to avoid the tax.

The issue is politically sensitive in the US, as Democrats are generally supportive of setting a price on carbon, and many Republicans (not all) are opposed. Indicative of the prominence of the issue, President Donald Trump replaced Chatterjee as chairman of FERC on November 5, and in subsequent comments Chatterjee attributed his interest in market-based environmental issues as the cause of his demotion.

Technical conference

Leading up to the draft policy statement, FERC held a technical conference at which it brought together leaders of regional system operators (who manage power grids across multiple states) and power generators to give their perspectives on carbon pricing.

Below is a summary of key comments, first from three representatives of ISOs

  • Richard Dewey, president & CEO, New York ISO - "The NYISO firmly believes that its Carbon Pricing Proposal is the best option to maintain efficient competitive wholesale electricity market outcomes and to provide New York State with a powerful tool to achieve the [state Climate Leadership and Consumer Protection Act (CLCPA)] requirements…. Internalizing a state-determined social cost of carbon dioxide emissions in the NYISO's energy market pricing would send a meaningful financial investment signal to developers that identifies efficient ways to address State-mandated carbon emission reductions while more efficiently incenting resources to locate and perform according to the needs of the system." NYISO presented its carbon pricing proposal to stakeholders in June 2019 and is waiting for state approval.

  • Dr. Matthew White, chief economist, ISO New England - "From a practical standpoint, ISO-NE could certainly implement and administer carbon pricing across our footprint. In simplest terms, implementing carbon pricing involves two basic things: (1) measuring what power plants do, and (2) settling payments based on those measurements, at the applicable rate. Fundamentally, those are two data-intensive activities that ISOs are very good at doing." In the region, the current system, however, interferes with smooth operation of the wholesale electricity market, as FERC has allowed states to approve out-of-market price mechanisms.

  • Mark Rothleder, vice president, market policy and performance, California ISO - "In the West, various discussions are underway regarding how to evolve carbon pricing in wholesale electricity markets. For example, the CAISO has initiated a stakeholder process to explore extending its day ahead market to [Energy Imbalance Market (EIM)] participants. An element of that discussion will necessarily include how to evolve EIM market rules to account for greenhouse gas costs across participating entities in the day-ahead timeframe."

Power producers

Power producers offered a more mixed response. While reiterating their support for reducing carbon, they said they face reliability concerns as renewables increase their market share, and a carbon tax would not solve that problem. They also expressed frustration with different market rules and incentives in each state, and they said FERC has a role in standardizing regulations.

  • Paul Segal, CEO, LS Power Development LLC - "Price and competition will drive innovation as firms like ours search for the least expensive ways to provide carbon reduction. A durable mechanism for pricing carbon will reduce investment risk and drive down the cost of capital. The broader the market geographic footprint, the more distinct opportunities for finding the lowest cost/most efficient ways to reduce emissions. Affordability via innovation and competition will be critical to staying on the path to a cleaner decarbonized grid."

  • Thad Hill, president and CEO, Calpine Corp. - "As renewables and storage proliferate, under even the most optimistic scenarios, they cannot provide reliability in events like a winter storm in New England or a dry hydroelectric year in the West. So rather than looking at gas generation as a carbon emitter that must be eliminated, it should be seen as a necessary enabler of decarbonization."

  • Sherman Knight, president and chief commercial officer, Competitive Power Ventures - "Currently, 38 states, plus the District of Columbia, have identified the reduction of carbon emissions from the electric sector as a goal. This has led to 39 renewable portfolio or clean energy standards. That is, 39 different policies, with 39 different strategies and 39 different plans for implementation. Many are developed without considering reliability standards, indirect effects associated with dispatching plants from other states, or cost. We simply cannot afford to continue to have this disconnect."

  • Laura Beane, chief renewables officer, ENGIE North America (also representing American Wind Energy Association) - "Fortunately, FERC has a history of breaking down barriers to market competition. Just this month, the Commission issued an historic order to allow the participation of Distributed Energy Resources in the wholesale markets, but in a manner that recognizes retail-level authorities. For purposes of integrating carbon pricing into the organized wholesale markets, FERC can do this again."

  • J. Arnold Quinn, senior director, FERC-Jurisdictional Markets, Vistra Corp. - "I'd like to highlight that Vistra has established a set of carbon emission reduction goals, with aspirations of reaching net-zero carbon emissions by 2050, assuming necessary advancements in technology and supportive market constructs and public policy. We believe carbon pricing, specifically a national, economy-wide carbon price is one component of the needed market and public policy changes to reach that aspirational goal."

  • Travis Kavulla, vice president of regulatory affairs, NRG Energy - "Increasingly, states are acting in their sovereign role to price the externality of carbon emissions. Usually, these policies are not directly a price on carbon, but are less direct, such as through a requirement to procure emissions allowances in a cap-and-trade scheme, or to procure certain quantities of clean energy relative to a reference price that is sometimes tied to carbon. Like many companies, NRG supports the consistency that an economywide, nationwide price on carbon would confer on market participants. Absent that, we should expect the number of states adopting such policies and the magnitude of their actions to continue increasing. The diversity of state policymaking on this topic, when it directly affects the regional wholesale electricity markets, is an issue that this Commission must grapple with."

Based on article written by Barry Cassell, PointLogic Energy, 22 October 2020.

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