NYISO Carbon Pricing Concept Proposal Translation

On December 7, 2018, the New York Independent System Operator (NYISO) released a draft for discussion purposes only for the Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force. This post attempts to summarize this proposal. I have translated the text of the overview of the concept for those outside of the process to date.

New York Carbon Pricing Proposal History

On August 11, 2017, NYISO and the New York State Department of Public Service (DPS) jointly initiated a process to engage with stakeholders to examine the potential for carbon pricing in the wholesale energy market to further New York State’s energy policy goals. This initiative began in the fall of 2016 as a project commenced by the NYISO through its stakeholder process. The NYISO retained The Brattle Group to evaluate conceptual market design options for pricing carbon emissions in the competitive wholesale energy markets administered by the NYISO. The Integrating Public Policy Task Force (IPPTF) was created to solicit stakeholder feedback for the carbon pricing proposal. The IPPTF meeting materials page lists all the documents produced by NYISO and stakeholder comments.

Over the past year the involvement of the DPS has steadily declined so now it is primarily a NYISO process. Over this time the stakeholder process has considered a straw proposal, draft recommendations, and this latest document “continues to build on these prior documents and represents continued refinements of the market concepts based on additional input received from stakeholders, both during IPPTF meetings and in writing and the analytical information provided to the task force.”

Overview of Carbon Pricing Concept

Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force, Page 4

The NYISO would incorporate the social cost of carbon emissions into the NYISO-administered wholesale energy markets using a carbon price in dollars per ton of carbon dioxide emissions. The NYISO would apply the carbon price by debiting each energy supplier a charge for its carbon emissions at the specified price as part of its settlement. Suppliers would embed these additional carbon charges in their energy offers (referred to as the supplier’s carbon adder or adjustment in $/MWh) and thus incorporate the carbon price into the unit commitment, dispatch, and price formation through the NYISO’s existing processes. In addition to charging internal emitting generators, the NYISO would charge imports and credit exports the LBMP carbon impact to prevent the carbon charges on internal generation from causing emissions leakage and costly distortions.

Because the carbon charges on suppliers would increase the variable costs of carbon-emitting generation dispatched by the NYISO, a carbon charge would raise the energy market clearing prices whenever carbon-emitting resources are on the margin (referred to as the carbon pricing effect on LBMPs, or LBMPc). All suppliers, including clean energy resources, would receive the higher energy price, net of any carbon charges due on their emissions. A carbon charge would also provide incentives for innovative low carbon technologies that may not yet be developed. Low carbon dioxide emitting New York resources, including efficient carbon-emitting units, renewables, hydropower, and nuclear generators, would benefit from higher net revenues. Load Serving Entities (LSEs) would continue to be charged the LBMP for wholesale energy purchases, which would account for the carbon adder of the marginal units. The NYISO would return the carbon charge residuals (Carbon Residuals), collected from carbon dioxide emitting suppliers and net imports, to LSEs.

Translation of the Overview (Indents are the translations of the Overview text)

The NYISO would incorporate the social cost of carbon emissions into the NYISO-administered wholesale energy markets using a carbon price in dollars per ton of carbon dioxide emissions.

The fundamental idea behind carbon pricing is that when carbon dioxide emissions cost money society will produce less of them. The carbon price will be set at the social cost of carbon (SCC) which will be determined by the DPS “pursuant to the appropriate regulatory process”. The choice of the carbon price provides the entire basis for this approach and that issue has not been considered in this process. I have commented on that problem (for example my comments on the April 23, 2018 ). The SCC value proposed was developed by a working group established by an Obama Executive Order to estimate the economic harm of CO2 emissions. My fundamental problem with that SCC value is that it does not accurately reflect the current state of the science relative to the probability of temperature being highly sensitive to CO2. As a result that value over-estimates the potential benefit of New York emission reductions. Ultimately the SCC relies on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions. Richard Tol testified that these connections are “long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.” In addition, the Trump Administration has proposed a different and far lower value for the SCC. For me the bottom line is that most of New York State ratepayers are aware of the ramifications of this value and the possibility that it could add a billion dollars per year to the rates of the state.

The NYISO would apply the carbon price by debiting each energy supplier a charge for its carbon emissions at the specified price as part of its settlement.

The carbon dioxide emissions from every energy supplier will be estimated for the same time period as the settlement prices by the NYISO.

Suppliers would embed these additional carbon charges in their energy offers (referred to as the supplier’s carbon adder or adjustment in $/MWh) and thus incorporate the carbon price into the unit commitment, dispatch, and price formation through the NYISO’s existing processes.

The carbon price will calculated as the SCC value times the tons emitted. It is very likely that the carbon price will set the clearing price for the settlements. New York is an unregulated electric market and the NYISO is the interface between the suppliers and load serving entities who provide the power to consumers. The price NYISO pays the suppliers is the Locational Based Marginal Price (LBMP). Each supplier submits a bid to provide power at a specific price. The NYISO keeps track of how much power is produced and who provides it. Suppliers get paid the highest price bid that provides power to the grid for each hour.

In addition to charging internal emitting generators, the NYISO would charge imports and credit exports the LBMP carbon impact to prevent the carbon charges on internal generation from causing emissions leakage and costly distortions.

This sentence suggest that this is simple but in reality this is much more complicated and could doom the entire plan. Not only does the NYISO have to estimate the carbon dioxide emissions from the sources in its control area where it has enough information to determine what was running and at what level now they have to make an estimate of the carbon emissions from imports where they do not have that information. This is outside my area of expertise but the experts who have commented on this do not seem impressed that the plan proposed will work. I am also uncomfortable because I suspect this complexity will lend itself to unintended gaming.

Because the carbon charges on suppliers would increase the variable costs of carbon-emitting generation dispatched by the NYISO, a carbon charge would raise the energy market clearing prices whenever carbon-emitting resources are on the margin (referred to as the carbon pricing effect on LBMPs, or LBMPc).

It is not unreasonable to assume that the increase in cost due to the carbon price will put CO2-emitting resources on the margin all the time because of the cost of fuel and CO2. I have estimated that if carbon pricing was in effect in 2015 the total cost to be $3.027 billion and in 2016 $2.985 billion which are both more than double the direct tax of Social Cost of Carbon (SCC) times the annual CO2 emissions ($1.321 billion in 2015 and $1.248 billion in 2016).

The NYISO analyses claim that there will not be any significant cost increase to the consumer. They assume that the actual carbon price costs will be completely returned to the consumers despite New York’s poor record in the past. Other cost increases are supposed to be balanced by decreases in other costs: lower subsidies to renewables from other state programs, lower subsidies to nuclear power from a state program, and an assumed shift of renewables to high load areas (Downstate NY) because of the price signal. The assumed shift of renewables is controversial because it ignores all the siting constraints that have so far reduced renewable development downstate.

All suppliers, including clean energy resources, would receive the higher energy price, net of any carbon charges due on their emissions.

One of the great ironies of this program is the fact that because different fossil-fired sources have different rates and the highest emitting rate sets the marginal price then all the fossil-fired sources with lower rates will get a windfall equal to the difference in the CO2 rates times the SCC. The NYISO has never quantified how the carbon prices monies will be allocated across source categories.

A carbon charge would also provide incentives for innovative low carbon technologies that may not yet be developed.

In theory this sounds possible but in practice this pricing signal will likely be so weak that development of new low carbon technologies due to this program is unlikely. There are so many incentives already in place the suggestion that this will drive development is implausible.

Low carbon dioxide emitting New York resources, including efficient carbon-emitting units, renewables, hydropower, and nuclear generators, would benefit from higher net revenues.

While this is true, as noted above the NYISO has never quantified how much of the higher net revenues would go to which of these categories. It is likely that it will significantly add to the revenues of carbon-emitting units.

Load Serving Entities (LSEs) would continue to be charged the LBMP for wholesale energy purchases, which would account for the carbon adder of the marginal units.

This is just noting that the existing revenue system will remain in place.

The NYISO would return the carbon charge residuals (Carbon Residuals), collected from carbon dioxide emitting suppliers and net imports, to LSEs.

All the cost estimates assume that all the carbon price money will be returned to the consumer. I think that it is unlikely that at least some of the money won’t be diverted to cover the cost of returning this money. In addition, New York does not have a good record investing proceeds from the Regional Greenhouse Gas Initiative (RGGI) as originally intended. New York lawmakers have twice diverted RGGI proceeds directly into the general fund. Moreover, as shown by the Environmental Advocates of New York, the Cuomo Administration has used RGGI funds to replace other funding sources for existing programs rather than funding the original intent which was for additional programs.

Conclusion

The ultimate question that must be resolved is whether carbon pricing can work in the wholesale electric market sector in New York State. I agree that the theory of a carbon price on the whole economy and all energy sectors lets the market decide how best to reduce carbon is attractive. However, in this application it would only apply to one energy sector in one region of the economy. I am not optimistic that this will work as advertised.

I attempted to translate the text for those outside the process. I also mentioned some of the issues with this policy in this post. The comments I submitted late last summer provide more details for my concerns. There are many implementation concerns that NYISO has glossed over that I believe are significant problems. Ultimately, I fear that this policy will be implemented with much hoopla and self-congratulations by the advocates of the program and the consumers of New York will be saddled with another program that increases costs without any tangible benefits to society.

My November 2018 Comment on NYS Carbon Pricing

New York’s energy planning process continues its efforts to meet the aggressive goals of a remodeled energy system that relies on renewable energy. The latest boondoggle in that effort is a plan to price carbon in the wholesale electric market. I have previously posted comments on this initiative and this post summarizes the latest comment I submitted at the end of the stakeholder process.

Introduction

I participated in the year-long stakeholder process for this initiative because I wanted at least one voice included from the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers for New York State energy policy. I was the only active independent citizen involved with this process. I submitted my comments as a private retired citizen. They do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

The question I addressed in my comments is whether the proposed program to price CO2 in the wholesale electric market is an appropriate response for New York State policy. Since the August 10, 2017 release of Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals (hereinafter the “Brattle Report”) there has been an active stakeholder process to examine that proposal for using carbon pricing within wholesale markets to further New York’s energy goals. The documentation for this policy is available at the New York Independent System Operator (NYISO) web site. My comments are in there but are also available at the NYS Department of Public Service (DPS) website.

This whole process exemplifies my problem with many of the climate change policy initiatives. The majority of NYS ratepayers are unaware of the ramifications of this proceeding or have any idea of the potential cost of a price on carbon emissions in NYS wholesale electricity markets. On the other hand, every advocacy group that likes the concept and every special interest who could benefit from this is not only aware of it but actively participating. Consequently, within this little echo chamber everything sounds great. Moreover, the momentum within NYS agencies is for leading the way on climate policy initiatives and a carbon price is near the top of the list of “must have” climate initiatives. Finally, the majority of the stakeholders and the parties who will vote in the next phase of the NYISO implementation process do not represent the interests of ratepayers so I fear that this flawed proposal will eventually be implemented.

To cut to the simplest summary, the carbon pricing initiative proposes to add the Social Cost of Carbon (SCC) to CO2 emissions from electric generators that provide power to the wholesale electric market in NYS. I have reviewed documents and provided comments for over a year. Based on my review and analysis I conclude that the original criteria for success defined last year are not met. The small CO2 reduction benefits estimated do not support implementation given the potential for significant costs to consumers, considerable implementation issues and likelihood of unintended consequences.

My comments used the criteria listed in the Brattle Report preamble. The NYISO and DPS agreed in the preamble to the Brattle Report that in order to be successful, “Any carbon pricing proposal must contribute to achieving New York State’s public policies, while providing the greatest benefit at the least cost to consumers while also providing appropriate price signals to incentivize investment and maintain grid reliability.”

New York’s energy policies are driven by Reforming the Energy Vision (REV) which is Governor Cuomo’s plan to “rebuild, strengthen and modernize New York’s energy system” in order to” build a clean, more resilient, and affordable energy system”. The 2030 goals for REV are:

  • 40% reduction in greenhouse gas emissions from 1990 levels;
  • 50% of electricity must come from renewable sources; and
  • 600 trillion Btu increase in statewide energy efficiency.

The REV 2050 emission goal is an 80% reduction in greenhouse gas emissions from 1990 levels.

Summary

My criteria for evaluating the success of the carbon pricing initiative are:

  • Will its CO2 emission reductions effectively help meet the REV 40% reduction goal;
  • Does the program incentivize renewable energy?; and
  • Does the program provide the greatest benefit at the least cost to the consumer?

The ultimate goal of this program is to reduce CO2 emissions. In order to meet the REV 40% reduction goal I estimate that the electric sector must reduce its emissions by 676,599 tons per year. The emission reductions projected by Brattle (0.3 million tons) and RFF (0.2 million tons) as a result of this policy fall well short of that level and are well within normal annual variation. New York State cannot replace existing programs with this initiative and hope to meet the REV 2030 goal.

This carbon pricing initiative proposes to set a price on carbon for one sector in one state whereas the ideal approach is to cover all sectors globally. That major shortcoming reduces the effectiveness of this policy to increase renewable energy development. I believe that there are existing programs in place that will be more effective incentivizing renewable energy.

In order to provide the greatest benefit to the consumer the cost of carbon reductions must be less than the social cost of carbon. This program fails to meet that criterion. With regards to cost, the modeling analyses claim minor costs to the consumer but there are significant uncertainties that I think all would tend to increase the final cost. This program is only more effective than RGGI investments if the offsetting benefits modeling results come true. I don’t have as much faith in the prospective cost effectiveness rates as the observed RGGI rates. Therefore, I think the risks of substantial consumer impacts make this a less attractive option than existing programs that can target economically-disadvantaged ratepayers who stand to lose the most with this regressive carbon tax proposal.

The potential for implementation issues and unintended consequences should also be considered. Examples of implementation issues include: border treatments, determining the RGGI price used, calculating emissions for the program, and addressing double payments. Unintended consequences include negative impact on beneficial electrification, the potential to game the system, and decreased economic viability of new fossil-fired generation that is likely needed to maintain system reliability.

In conclusion, I believe that the results of the stakeholder process indicate that this is a risky approach that will have high costs and could have unintended consequences that might hurt consumers and businesses in New York. As a result I cannot recommend implementing the policy as proposed.

Consistency with REV 40% Goal

Although one would think that there would be some place where there is a roadmap for how the state plans to meet the 2030 REV 40% goal I have been unable to find it so I made my own estimate. The NYSERDA report New York State Greenhouse Gas Inventory: 1990-2015 provides the data needed to quantify the REV goals.

Table S-2. New York State GHG Emissions, 1990–2015 (MMtCO2e) in that document lists values for 1990 through 2015 based on historical data. Table 1 New York State CO2 Fuel Combustion Emissions lists the 1990, 2015 and 2030 fuel combustion CO2 emissions (1000 tons) converted from those values in Table S-2. For the purposes of this estimate I assume that the REV 40% goal applies only to CO2 from fuel combustion. I am not sure what to do about emissions from electricity imports so I included those values too.

The baseline for REV is the 1990 total CO2 emissions or 222.2 million tons. If those emissions are reduced 40% the REV target is 133.3 million tons. The 2015 data show the status of CO2 emissions and it shows that the reductions from 1990 to 2015 are only 12.2%. On the other hand, the electric generation sector has gone down over 53% so they have already met their share of the 40% goal. If we assume that in order for the state to meet the 40% target all sectors have to come down equally from the 2015 level to meet the 2030 goal, then another 10,148,981 ton reduction in CO2 is necessary from the electric sector. If that reduction is apportioned equally across the 15 years between 2015 and 2030 then the annual average reduction needs to be at least 676,599 tons per year.

There are three independent estimates of future CO2 reductions expected from the proposed policy to price CO2 in the wholesale electric market:

  • The Brattle Group provided their latest estimate on 10/12/2018;
  • The Daymark Energy Advisors provided their latest estimate for NY UIU on 10/29/2018; and
  • Resources for the Future (RFF) provided their latest estimate on 9/24/2018.

There were subsequent updates but I did not incorporate them into Table 2 2025 CO2 Emissions Reductions.

The ultimate goal of this program is to reduce CO2 emissions. Frankly, the emission reductions projected by Brattle and RFF as a result of this policy are well within normal annual variation so if they are correct this policy is ineffective. On the 11/9/18 IPPTF conference call Daymark said that they predicted “no material change in CO2”. None of these projections satisfy the annual average reduction of 676,599 tons per year necessary if all sectors reduce emissions equally to meet the REV 2030 goal. As a result, New York State cannot replace existing programs with this and hope to meet the REV 2030 goal.

Incentives for renewable energy

The theory for carbon dioxide taxation is that when the cost of fossil-fueled energy reflects the social cost of carbon then the market will produce alternatives. Unfortunately there is a large gap between this theory and the proposal to set a price on carbon in the New York wholesale electric market. The first problem is estimating the external cost of CO2 to establish the rate. The NYISO process ignores that problem by simply relying on the state value. I have shown previously (here, here, and here) that the fundamental problem is that the Integrated Working Group SCC value that has been proposed does not accurately reflect the current state of the science relative to the probability of temperature being highly sensitive to CO2. Secondly, while the theory might work for an entire economy covering all sectors and all regions, this proposal covers only the wholesale electric sector and just the New York region. The most likely outcome is that emissions will simply relocate.

The New York public policy has a 2030 target for CO2 reductions.  This approach relies on an indirect incentive for renewable energy. There is a lag between the necessary carbon price market signal for the private investments and the availability of the new infrastructure. The question is whether other programs might provide more timely and effective investment signals. For example, the National Grid System Data Portal includes a “collection of maps to help customers, contractors and developers identify potential project sites. Each map provides the location and specific information for selected electric distribution lines and associated substations within the National Grid NY electric service area.”   The Joint Utilities of New York are working together to provide the same sort of information for all service territories. I don’t believe the vague signal provided by the carbon price proposal could ever provide more timely and effective investments than the site-specific signals provided by the Joint Utilities. As a result, there are existing programs that are more effective meeting the REV goals.

Cost Benefit Comparison

In order to determine whether the carbon pricing proposal provides the greatest benefit at the least cost to the consumer we have to consider costs. The Synthesis Report reported costs in two ways: changes in consumer costs and changes in system production costs. All three analyses claim that there won’t be significant cost increases.

For the changes in consumer costs the Synthesis Report notes:

Brattle and RFF both find aggregate customer costs would increase slightly in 2025 due to a carbon charge, increasing $0.7/MWh and $0.8/MWh respectively. Brattle finds customer cost impacts fall over time. Daymark does not report changes in customer costs.

For changes in the system production costs the Synthesis Report notes:

The Brattle study finds negligible changes in annual system production costs (+/- $10 million) due to a carbon charge. The RFF estimate is within this range and finds that the policy would increase production costs by $7.2 million in the Eastern Interconnect in 2025. Daymark similarly finds system production costs change by +/- $30 million through 2025, increasing to $148 million by 2035.

The ultimate measure of success for any carbon dioxide emission reduction program is whether or not the cost per ton of CO2 reduced exceeds the Social Cost of Carbon. According to the NYISO power trends 2018 document the 2017 annual energy usage in New York was 156,370 GWh. In order to estimate the total increase wholesale energy prices due to the carbon charge I assume 150,000,000 MWh and so the expected cost to the consumer will range between $105 million and $120 million. The Brattle Group predicts a 0.3 million ton reduction at a cost of $105 million for a $350 per ton of CO2 reduced rate. RFF predicts a 0.2 million ton reduction at a cost of $120 million for a $600 per ton of CO2 reduced rate. The cost of a ton of CO2 reduced by this program approaches an order of magnitude higher value than the SCC proposed for this program.

In order to evaluate effectiveness of the carbon pricing initiative we should compare it to other similar regulatory programs. The RGGI Report: 2016 RGGI Investments Generate Environmental and Economic Benefits, provides information that can be used for a comparison. According to the Executive Summary in this report:

Proceeds from the Regional Greenhouse Gas Initiative (RGGI) have powered a major investment in the energy future of the New England and Mid-Atlantic states. This report reviews the benefits of programs funded in 2016 by $436.4 million in RGGI investments, which have reduced harmful carbon dioxide (CO2) pollution while spurring local economic growth and job creation.

For this analysis I have included data from both 2015 and 2016. Although the RGGI report includes lifetime benefits I only provide the annual benefits because the REV target is an annual target. This report says there were $436.4 million in RGGI investments funded programs in 2016 as compared to $410.2 million in 2015. In both Proceeds reports (2015 and 2016), Table 1 Benefits of RGGI Investments list the annual reported benefits for energy savings, electrical use and CO2 emissions reductions. In Table 3 Comparison of 2015 and 2016 RGGI Proceeds Funding and Benefits I list that data and calculate the CO2 emissions reductions cost per ton.

Compared to RGGI investments the carbon pricing initiative appears to be more efficient. If we could confidently rely on the carbon pricing initiative model estimates of cost then there might be evidence supporting this approach because of the relative effectiveness despite the minor CO2 reduction benefits projected.

In Synthesis Report Table 1, Comparison of State-Wide Increase in Wholesale Energy Prices Due to Carbon Charge, the total wholesale energy cost ranges from $17.9 per MWh to $22.2 per MWh. In order to estimate the total increase wholesale energy prices due to the carbon charge I assumed 150,000,000 MWh so the expected cost of the will range between $2.7 billion and $3.3 billion in 2025. Table 4 in the Synthesis Report lists the collected carbon revenue.

Table 4 2025 Total Energy Prices Due to the Carbon Charge lists the total energy price increase, the collected carbon revenue, the energy price difference which is a windfall for the generators, the projected change to the customer and the residual after the change to the customer is subtracted out. The energy price difference is due to the high LBMP prices. This is the crux of my concern. The generator windfall is $1-2 Billion or about $15/MWH on average! So we end up with a fleet where the average subsidy from carbon price is $15/MWH, existing RECs get $20/MWH, existing Nukes get $17-$25/MWH, and who knows what the subsidies will be for new RECs.

The plan is that the collected carbon revenue will be returned to the consumers. The modeling results claim that the final customer costs (change to customer) will only be between $105 and $120 million. That leaves between $988 million and $1.68 billion in energy prices that the analyses model away because there are “offsetting factors that provide customer benefits”.   The CO2 reduction costs (between $350 and $600 per ton) calculated previously are only that low when you assume that there will in fact be offsetting factors that reduce those costs. On the other hand the upper bound, assuming no effective offsets to reduce costs, has CO2 reduction costs of between $3,600 and $9000 per ton. That order of magnitude difference concerns me.

Unfortunately there are issues with all three analyses that make me skeptical that the offsetting factors will indeed provide the customer benefits necessary to lower consumer prices to an acceptable level. They all rely on dynamic production cost models to evaluate the effects on dispatch, emissions, and LBMPs. In my opinion this kind of model is not well-suited to handle a major change to the electric system like adding a price on CO2. All three analyses ran a “business as usual” scenario and then one or more scenarios where the carbon price was added with various assumptions. My experience is that these models necessarily rely on averaged input that invariably do not reflect the range of input values. That is a problem because there are normal situations that are missed. For example, in the late 1980’s and early 1990’s when natural gas was usually a little more expensive than residual oil and both were not that much higher than coal, production cost model operating projections for the large oil-fired units in the state always under-estimated how much they would run simply because there were variations in price and those variations on occasion made oil economic. I have no doubt that similar unforeseen situations will occur so I think these modeling results have to be viewed with caution.

Even if you have more faith than I on the ability of these models to predict the future outcome for such a drastic change in the system, there are significant differences in the assumptions between the three modeling analyses. For example, even the price of RGGI allowances differs significantly. In 2030, NYISO and Brattle assume that a RGGI price of $24 per ton whereas Daymark assumes $12. That assumption makes a big difference in the amount of money that is supposed to be returned to the customer. Consequently, my confidence in the results is lowered. Furthermore, it is not only the assumptions but also the post-processing analysis that can lead to erroneous conclusions.

This program is only more effective than RGGI investments if the offsetting benefits modeling results come true. I don’t have as much faith in the prospective cost effectiveness rates as the observed RGGI rates. I think the risks of substantial consumer impacts make this a less attractive option than existing programs that can target economically-disadvantaged ratepayers who stand to lose the most with this regressive carbon tax proposal. In addition, existing programs can provide support for the electric system exactly where needed. Moreover, all the cost estimates assume that all the carbon price money will be returned to the consumer. New York does not have a good record investing proceeds from RGGI as originally intended. New York lawmakers have twice diverted RGGI proceeds directly into the general fund. Moreover, as shown by the Environmental Advocates of New York, the Cuomo Administration has used RGGI funds to replace other funding sources for existing programs rather than funding the original intent which was for additional programs.

Another major issue with all three models is how to handle the border. As noted previously, while the theory for pricing carbon might work for an entire economy covering all sectors and all regions, this proposal covers only the wholesale electric sector and just the New York region. The most likely outcome is that emissions will simply re-locate and the proposal has to address this issue. While this issue is beyond my area of expertise it is clear from the discussions that amongst the people who do understand this issue there is wide disagreement.   Moreover, my modeling experience has been that it is extraordinarily difficult to anticipate all the nuances of actual implementation and correctly incorporate them into any model for the future. As a result I have no confidence that the models will correctly handle what actually happens and because this has so much of an increased impact on cost I believe that however it turns out will be more expensive than the models predict.

In order to provide the greatest benefit to the consumer the cost of carbon reductions must be less than the social cost of carbon. This program fails to meet that criterion for even the State of New York SCC values proposed which I believe the significantly over-value the impact of today’s CO2 emissions on future society. With regards to cost, the modeling analyses claim minor costs to the consumer but there are significant uncertainties that I think all would tend to increase the final cost. As a result, even though this program appears to be more cost effective than RGGI investments, I think the modeled values are speculative whereas the RGGI values are based on reality. Also, the risks of substantial consumer impacts make this a less attractive option than existing programs that can target economically-disadvantaged ratepayers and provide support for the electric system exactly where needed.

 

Recommended Read: Global Warming for the Two Cultures

I have the education, background and experience to independently evaluate the constant drum beat claiming imminent and inevitable climate catastrophe if we don’t immediately reduce our carbon footprint. I am a luke-warmer who believes that the sensitivity of climate to anthropogenic carbon dioxide emissions is at the bottom of the Intergovernmental Panel on Climate Change range. At that level, climate catastrophe is a very unlikely possibility and the effect is much more likely to be benign.

Unfortunately it is very frustrating to hold my position because the media, politicians and advocacy groups have convinced many that we have to use renewables as a “solution” to what I think is a non-existent problem. As a result I am always looking for a good summary of the issues that I have with the imminent climate catastrophe narrative. The 2018 Global Warming Policy Foundation Annual Lecture: “Global Warming for the Two Cultures” by Dr. Richard Lindzen is an excellent summary that I recommend to those who believe that we need to transform the energy system to do “something” about climate change so that they will have at least heard the other side of the story.

Lindzen begins his talk by describing two cultures in society and the implication of that on policy decisions. Basically the two cultures are those that understand the “science” in general and physics in particular and those that don’t. He explains why this understanding gap is a problem:

While some might maintain that ignorance of physics does not impact political ability, it most certainly impacts the ability of non-scientific politicians to deal with nominally science-based issues. The gap in understanding is also an invitation to malicious exploitation. Given the democratic necessity for non-scientists to take positions on scientific problems, belief and faith inevitably replace understanding, though trivially oversimplified false narratives serve to reassure the non-scientists that they are not totally without scientific ‘understanding.’ The issue of global warming offers numerous examples of all of this.

One of my problems with the media climate change story is that the greenhouse effect is simple. His lecture describes the complicated climate system in enough detail to support my contention that the inevitable climate catastrophe is imminent story is an over-exaggeration.

I particularly like his description of the popular narrative we hear from the media and politicians:

Now here is the currently popular narrative concerning this system. The climate, a complex multifactor system, can be summarized in just one variable, the globally averaged temperature change, and is primarily controlled by the 1-2% perturbation in the energy budget due to a single variable – carbon dioxide – among many variables of comparable importance.

This is an extraordinary pair of claims based on reasoning that borders on magical thinking. It is, however, the narrative that has been widely accepted, even among many sceptics.

He then goes on to describe how he believes the popular narrative originated and de-bunks the evidence we constantly reminded supports the catastrophic narrative.

I encourage you to read the entire lecture. I believe it supports his concluding summary of the situation:

An implausible conjecture backed by false evidence and repeated incessantly has become politically correct ‘knowledge,’ and is used to promote the overturn of industrial civilization.

Investment of RGGI Proceeds in 2016

This is a post on the Regional Greenhouse Gas Initiative (RGGI) report: The Investment of RGGI Proceeds in 2016 . It is another in a series of posts on RGGI that discusses how RGGI has fared so far and a follow up to the 2015 investments proceeds report post. Although the press release, RGGI Report: 2016 RGGI Investments Generate Environmental and Economic Benefits, describes the benefits of the program in glowing terms the fact is that the reported benefits for these investments fall far short of what is necessary to meet the RGGI reduction goals.

I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. After years dealing with RGGI I worry that whether due to boredom or frustration, that there is very little dissent to the program. It may be because, contrary to EPA and State agency rulemakings, RGGI does not respond to critical comments and rebut concerns raised by stakeholders. After years of making comments that disappear into a void, industry does not seem to think there is value to making comments. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Summary

According to the Executive Summary in this report:

Proceeds from the Regional Greenhouse Gas Initiative (RGGI) have powered a major investment in the energy future of the New England and Mid-Atlantic states. This report reviews the benefits of programs funded in 2016 by $436.4 million in RGGI investments, which have reduced harmful carbon dioxide (CO2) pollution while spurring local economic growth and job creation. The lifetime effects of these RGGI investments are projected to save 30.4 million MMBtu of fossil fuel energy and 7.0 million MWh of electricity, avoiding the release of 6.4 million short tons of carbon pollution.

As a whole, the RGGI states have reduced power sector CO2 pollution over 50 percent since 2005, while the region’s gross domestic product has continued to grow. RGGI-funded programs also save consumers money and help support businesses. RGGI investments in 2016 are estimated to return $1.7 billion in lifetime energy bill savings to more than 182,000 households and 2,680 businesses which participated in programs funded by RGGI investments, and to more than 800,000 households and 100,000 businesses which received direct bill assistance.

The report describes how the RGGI investments were used 2016, a brief summary of cumulative investments, and then provides specific information for each state including an example of the programs.

Analysis

The claimed 2016 benefits are comparable to the 2015 report. This report says that $436.4 million in RGGI investments funded programs in 2016 as compared to $410.2 million in 2015. The lifetime effects of the 2016 RGGI investments are projected to save 30.4 million MMBtu of fossil fuel energy and 7.0 million MWh of electricity, avoiding the release of 6.4 million short tons of carbon pollution. The lifetime effects of the 2015 RGGI investments are projected to save 28 million MMBtu of fossil fuel energy and 9 million MWh of electricity, avoiding the release of 5.3 million short tons of carbon pollution.

In both Proceeds reports (2015 and 2016), Table 1 Benefits of RGGI Investments list the annual and lifetime benefits of the investments. Table 1 Comparison of 2015 and 2016 Proceeds Funding and Benefits lists the investment totals and the reported benefits for energy savings, electrical use and CO2 emissions reductions. I have also included the investment efficiency or $ per improvement.

Of particular interest is the cost per ton of CO2 reduced. The life time numbers ($64 per ton in 2015 and $82 per ton in 2016) are about twice the Obama era Social Cost of Carbon value of $36 for 2015 using a 3% discount rate. However, I don’t think using the lifetime values is appropriate.

The RGGI model rule updates agreed to by the RGGI States in December 2017 call for an annual post-2021 cap reduction of 2,275,000 tons per year. My question is how will the RGGI investments help meet that goal. In order to determine that you have to use the annual benefits of the investments. When you do look at the annual projections the results are pathetic. RGGI claims that its investments reduced CO2 emissions by 298,410 tons at a rate of $1,375 per ton in 2015 and 382,266 tons at a rate of $1,142 per ton in 2016. The 2016 investments fall short of the post 2021 cap reduction requirement by 1,892,734 tons.

How are the affected sources supposed to meet this reduction target? Although there have been significant reductions since the inception of the RGGI program most of those should be ascribed to economic fuel switching away from coal and oil to natural gas. As shown in a white paper submitted to RGGI by the Environmental Energy Alliance of New York the affected electrical generation units have made most of the cost effective reductions possible from their operations. As a result, future reductions will have to come from other investments such as RGGI. If the RGGI investments are the only way and the 2016 cost efficiency ($ per ton of CO2 reduced) is not improved then RGGI investments would have to be over $2.161 billion every year.

The RGGI model rule update caps emissions in 2021 at 75,147,784 tons. Trading program theory states that when there is allowance scarcity the price will rise and so you could expect that more money will be available for investments. The RGGI allowance price necessary to provide $2.161 billion for 2021 would be $28.75. There is a problem with this however. The RGGI model rule cost containment reserve trigger price (included to insure that allowance prices don’t go to high) is $13.00 in 2021. As a result, they cannot go that high.

The good news relative to this potential problem is that 2017 RGGI emissions were only 66,235,513 tons, well below the 2021 target. The question is why was there a 21.8% drop in emissions relative to 2015? If it was primarily weather related then emissions could go back up. Only time will tell but the point is that at least the emissions are close to the cap targets.

Conclusion

Ultimately these findings illuminate my problem with CO2 emissions trading programs. My particular concern is affected source compliance. Because there is no cost-effective add-on control system available for CO2 reductions, an affected source basically has to buy enough allowances to cover its planned operations. RGGI is hell-bent on reducing its caps despite the fact that its investments for emissions reductions fall far short of what the emissions reductions it has promulgated. There are many complications beyond the scope of this post that determine allowance availability but I believe that by 2025 the compliance entities in RGGI are going to have to pay exorbitant prices to get allowances that they need to operate and soon thereafter there won’t be enough at any cost. At that point, they will have no choice but to shut down.

Warning Signs from Germany for New York Reforming the Energy Vision

Germany’s Federal Audit Office has released a report that accuses the federal government of having largely failed to manage the German equivalent of New York’s Reforming the Energy Vision (REV). There are warning signs in the report because some of the issues raised are already prominent in the New York energy vision.

Germany’s program, Energiewende or energy transition, is the change from nuclear and fossil fuels to renewable sources of energy. Legislation for the Energiewende passed in 2010 and includes a Greenhouse Gas (GHG) reduction target of 80% by 2050 the similar to REV. The Federal Audit Office review of the program found that costs are high and the targets will likely be missed. “Over the past five years alone, at least 160 billion euros have been spent on the transformation of the energy system,” the report states: “If the costs of energy system transformation continue to rise and its targets continue to be missed, there is a risk of a loss of confidence in the ability of government action.”

In order to implement the transition Germany has had to develop a large bureaucracy to manage the programs and enact 26 laws and 33 regulations. The audit notes that there is “no place where everything comes together, no place that assumes overall responsibility”. This is what is happening in New York. There are over 40 REV initiatives but no single summary.

The audit states:

In short: “A lot of effort does not necessarily mean a lot”. For despite a great frenzy of data collection there is no overall view. “The Federal Ministry of Economics uses 48 different data sources to check the status of the Energiewende on the basis of 72 indicators, and yet “there is a lack of meaningful data that could be relevant for assessment and control”. Many data would have little control value or would be available too late, but often they would “simply draw the wrong conclusions”.

New York’s REV has no status indicators available.

My biggest concern with REV is cost. The German Federal Audit Office report notes: “there are no quantified targets, no measurable indicators” for the energy policy goals of affordability and security of supply. REV also fails to provide that critical evaluation information.

I believe that someday there will be a similar cost-benefit analysis audit of REV with the same results of extraordinary costs and failures to meet the ambitious targets. I predict that the response from New York State will be the same as from the German federal government:

The Federal Government explained its refusal to conduct a transparent cost-benefit analysis of the Energiewende by saying that these costs could only be compared with a “counterfactual scenario”. Because electricity grids and power plants would have had to be renewed even without the Energiewende, only a comparison of a world with and a world without the Energiewende would be meaningful. However, such a comparison could not be made because of the large number of uncertain basic assumptions.

Murphy Commentary in Syracuse Post Standard: Earth has a Fever – Public Policy has the Cure

On September 23, 2018, the Syracuse Post Standard published a guest commentary entitled “Earth has a Fever – Public Policy has the Cure” by Cornelius B. Murphy, Jr. SUNY Senior Fellow for Environmental and Sustainable Systems. As is typical in Dr. Murphy’s commentaries a list of disasters is trotted out, the climate crisis of global warming is blamed for them, and the sermon ends with a call to “improve the future of our planet”. I disagree with his arguments and his proposed policies.

Unfortunately, Dr. Murphy’s list of disasters are, in fact, only peripherally related to climate change and I am not in the mood to dissect each of his claims because “the amount of energy necessary to refute BS is an order of magnitude bigger than to produce it”, Brandolini’s BS asymmetry principle. Consider only the Cyanobacteria outbreaks in 55 lakes in New York State he claims are due to warm water column temperatures and nutrients. His attribution is correct but his emphasis is wrong. If there are limited nutrients it does not matter how warm the water is you will not get eutrophic algae blooms that lead to Cyanobacteria outbreaks.

I think that Dr. Murphy should read Roger Pielke Jr’s book on The Rightful Place of Science: Disasters and Climate Change to appreciate the actual problems associated with climate change. Dr. Pielke is reviled because he shows how the consensus of climate science does not support the climate crisis Dr. Murphy invokes as the reason to act now. As Ben Pile’s review of the updated version of the book notes “In other words, climate change may well be a problem, but the data sets consistently show that economic and technological development mitigate the worst problems that climate has always caused.”

 

Dr. Murphy says that Climate disruption is a social issue and that the “The least advantaged among us will suffer the most with limited access to air conditioners and cooling centers”. I agree that energy poverty problem is a social issue. I am sure that we disagree on the cure however. While Dr. Murphy would have us try to moderate extreme weather I believe that there is no evidence that the policies he espouses will prevent it. If anything we might be able reduce future frequency and severity but society is not where near resilient to existing weather so it makes sense to emphasize adaptation over mitigation.

 

My biggest concern is that the current New York State Energy Plan promotes the use of fossil-free technology that is so expensive that the least advantaged among us will have limited access to the energy they need for cooling and heating because they will be unable to afford it. Ben Pile explains:

Moreover, campaigners’ conviction that anthropogenic climate change is bringing disaster upon us overlooks the extent to which economic and social development has enabled us to cope better with extreme weather events. As Pielke explains, ‘societal change is underappreciated, overlooked, and part of that is politics’. ‘The climate-change issue’, Pielke continues, ‘has taken all the oxygen out of the room for vulnerability, resilience, natural climate variability, indeed pretty much everything else that matters. It is absolutely the case that overall being richer as communities, as nations, is associated with more resilience, less vulnerability to natural disasters, particularly when it comes to loss of life… The climate issue has become so all-encompassing that it’s hard to get these other perspectives into the dialogue.’

Oneonta New York Decompressor Station and New York Energy Policy

Last month I stumbled upon references to a decompressor station in Oneonta, New York. Firstly, I had no clue what a decompressor station and secondly I was born and raised in Oneonta, New York so I followed up on the story. It is a perfect example of New York State’s emotional rather than rational energy policy.

I was astonished to learn that there is a natural gas load pocket in Oneonta. This small city is located in the western Catskills in Otsego County SW of Albany New York. The natural gas pipeline installed when I was living there in the 1950’s is no longer adequate for all users on the coldest days of the year. As a result the local utility has to curtail natural gas to larger users so that the residential users have adequate supplies to heat their homes. The solution is to compress natural gas elsewhere, truck it to the curtailed facilities, and then decompress it for use.

Mr. Zakrevsky described the decompressor station proposal at the Oneonta Town Board meeting on August 8. He explained that there isn’t enough natural gas for heating on the 30-odd coldest days of the year from the existing pipeline to Otsego County so bigger users have to curtail their use so that homeowners do not have to maintain a backup heating system. Two hospitals, several manufacturers, and a college in Oneonta need energy-dense, constantly available fuel to supplement their natural gas use when that fuel is curtailed. They have considered setting up their own decompressors to replace higher-polluting, less-efficient fuel oil so the Otsego Development Authority submitted a proposal for a grant to explore the possibility of a single centralized decompressor station to provide the necessary natural gas.

The link listed above documents a hearing at the Oneonta Town Board meeting including comments from a crowd of folks who do not want new fossil fuel infrastructure. I did not listen to all the speakers who attended the Town Board meeting to protest the decompressor station because the arguments I did hear all seemed confined to emotional pleas for “cleaner, greener” alternatives. My problem is that I do not believe numbers or history support such alternatives. There were opponents to this project that proudly claimed victory for the permit denial of the Constitution natural gas transmission project nearby that would have provided all the natural gas necessary for everyone in Oneonta. Apparently that natural gas was from Pennsylvania and is fracked so it is evil and must be stopped. I think that all those who opposed the decompressor proposal and opposed the Constitution pipeline should explain how they propose to solve the specific problem of heating the city’s hospital on the coldest days of the year.

I do not think that the decompressor station and compressed natural gas (CNG) trucks is a particularly “good” solution.   From a pollution standpoint using natural gas is better than fuel oil so I agree that using natural gas is preferable and my experience with fuel switching is that process also has implementation risks which could cause heating problems so sticking with natural gas rather than switching to fuel oil is better. Clearly moving CNG by truck during the winter is risky and I understand why speakers at the meeting described them as “bomb trucks”. However, the safer solution is to have enough natural gas pipeline infrastructure in place to prevent curtailments. Because that is not available, the proposal to have a central station just off the interstate rather than decompressor stations at each location that faces curtailment requirements reduces transport risk and makes sense. I must point out that the Constitution pipeline would have solved this problem so the folks that claim that preventing that as a “victory” have to accept culpability for what I believe is a worse alternative.

I expect that the opponents will claim renewables can provide the answer to providing heat for the hospital. I would love to see quantitative support for a solution to the need for constant, dense energy for heating the hospital on the days when not having heat would surely exacerbate illness and maybe even cause deaths. Renewables are intermittent and diffuse. What kind of storage solution do they propose for this winter problem when the available solar energy is low and, on the really cold days, when winds are light? Heating the hospital without the need for outside electricity is necessary in case of a power outage – think ice storm. The hospital uses a heating plant with a boiler that provides hot water for heating and hospital use. The problem with renewable electrical energy is that there is no way to provide in-kind replacement for the boiler fuel. In order to provide heat with renewables the whole heating system would have to be replaced, probably with heat pumps. Those systems have their own problems on these cold days. Proponents of renewable energy have to provide a solution and costs to make their case that there is a viable and affordable alternative to the proposal.

When I was growing up in Oneonta during the 1950’s I missed the Delaware & Hudson Railroad steam engine era when there were over a hundred coal-fired locomotives operating out of the city. However, I do remember the excitement when natural gas came to town so that my family no longer had to deal with maintaining our coal-fired furnace fire, dealing with the ashes and having a coal bin in the basement. I am not aware of any records of the air quality in Oneonta when coal was the preferred heating source and the roundhouse had coal-burning locomotives but I am sure that it was poor. Since 1980 statewide average SO2 levels have decreased by 95%. When homes and the railroad were burning coal in the “City of the Hills” the SO2 concentrations must have been a couple of orders of magnitude greater than today’s levels. That improvement was thanks to oil and natural gas replacement of coal.

I think this is a good example of New York’s dysfunctional energy policy. Ultimately the opponents of the decompressor station must rely on emotional arguments because a rational analysis supports the proposal as a reasonable, albeit not “good”, solution to a problem caused by the lack of sufficient pipeline infrastructure. The better solution would be new pipelines to provide the necessary natural gas. The irrational fear of fossil fuel infrastructure in New York is causing poor decisions.