NYISO, PJM Release Papers on Carbon Pricing in Wholesale Electricity Markets

In August, two regional grid operators for the mid-Atlantic region—the New York Independent System Operator (NYISO) and PJM Interconnection, L.L.C. (PJM)—released papers analyzing the feasibility of pricing carbon emissions in the wholesale electricity markets they administer.

NYISO’s paper, Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals, prepared by the economic consulting firm The Brattle Group, analyzes how New York State’s aggressive clean energy policies could be pursued through pricing carbon emissions in NYISO’s wholesale electricity markets.  After considering market design options, the report analyzes the customer cost impact of adding a $40/ton carbon charge. The Brattle Group’s analysis suggests that imposing a $40/ton carbon charge would result in very small cost impacts to customers within the -$1.50/megawatt-hour to +$4.60/megawatt-hour range, translating to a total of -1% to +2% change in total customer electric bills.  The report explains that the customer cost impact is limited because, under the scenario it modeled, “although average wholesale energy prices would increase, about 50% of the cost could be offset by returning carbon revenues to customers[,] another 18% would be offset by reduced prices for [Renewable Energy Credits] and [Zero-Emissions Credits] in the presence of higher wholesale energy prices,” among other things.

The PJM paper, Advancing Zero Emissions Objectives through PJM’s Energy Markets: A Review of Carbon-Pricing Frameworks, suggests that development of a carbon-pricing framework that complements PJM’s markets would enhance the policy goals of states seeking to reduce carbon emissions, minimize the impact of those policies on states not pursuing emissions reduction policies, and more directly address concerns over emissions leakage.  To that end, PJM’s paper examines two potential carbon-pricing models:  a regional and a subregional carbon-pricing framework.

According to PJM’s analysis, a regional carbon-pricing framework would apply a uniform carbon price across the PJM footprint to create a carbon cost for each resource, equal to the carbon price multiplied by the number of tons of carbon a resource emits per megawatt-hour, which would be considered part of each resource’s energy supply offer during system dispatch. PJM explains that this model would:

  • Utilize PJM’s current market design (which PJM notes already permits pricing of emission costs in cost-based energy offers),
  • Treat all resources equitably,
  • Align with PJM’s current resource dispatch model, and
  • Eliminate emissions leakage concerns within the PJM footprint (these challenges would still need to be addressed to a lesser extent for energy transfers to and from regions outside of PJM.

PJM’s analysis shows that pricing carbon in this way would decrease total emissions by shifting dispatch away from higher-emitting generation resources. PJM notes that the regional framework is the preferred option because it maximizes market efficiency, but notes that it also requires all of the states in PJM to agree on a carbon-pricing policy—an inherently difficult goal.  In recognition of this challenge, PJM also analyzes a subregional carbon-pricing framework, which PJM believes will adequately accommodate states that have not chosen to price carbon.  Under this framework, the PJM footprint would be split into subregions which either price or do not price carbon into energy offers.  A resource in a carbon-pricing subregion would incorporate its carbon-compliance costs into its energy offer, while a resource in the non-carbon-pricing subregion would submit its normal energy supply offer, as well as what its carbon-compliance costs would be if it were located in the carbon-pricing subregion (used to address the situation where a resource in a non-pricing subregion exports its production to the carbon-pricing subregion and minimize leakage).  PJM notes that this model, while more accommodating of state policy differences, would not prevent regional pricing impacts due to incorporating carbon-compliance costs.

PJM notes that further study is needed to analyze the potential effects of pricing carbon into the energy markets on capacity markets, ancillary services, and transmission congestion, among other things.

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