Analysis Group “Potential New Carbon Pricing in the NYISO Market” Presentation October 2019

After nine months without posting on the New York State Carbon Pricing Initiative some things have come up that have led to posts as the initiative relates to New York’s Climate Leadership and Community Protection Act (CLCPA).  I am motivated to submit comments and prepare blog posts on the carbon pricing initiative so that there is at least one unaffiliated critical voice that has an understanding of the basis of the rationale for a carbon price and understands some of the complexities associated with implementing such a program. New York State energy planning is trying to choose between many expensive policy options like pricing carbon in the electric sector while at the same time attempting to understand which one (or what mix) will be the least expensive and have the fewest negative impacts on the existing system. If they make a good pick then state ratepayers spend the least amount of a lot of money, but if they get it wrong, the State will be left with lots of negative outcomes and even higher costs for a long time.

At the time of this writing in October 2019, the New York Independent System Operator (NYISO) carbon pricing initiative is being addressed by internal working groups without the opportunity for public input.  On October 3, 2019 the Market Issues Working Group, Installed Capacity Working Group, and Price Responsive Load Working Group Meeting included a presentation by the Analysis Group entitled “Potential New Carbon Pricing in the NYISO Market”.  This post addresses that presentation.

Background

The Analysis Group was hired by the NYISO to examine potential economic impacts of the proposed carbon-pricing mechanism for NY’s wholesale power markets.  In the latest round of work conducted without the public input component, they were supposed to evaluate the latest round of modeling impacts and incorporate other economic considerations.  The enactment of the CLCPA in the summer of 2019 required changes to their approach and, in fact, the entire premise of the analysis.  It has changed from whether New York would pursue aggressive goals for reducing carbon emissions and do so through administrative and other mechanisms, to how New York will best accomplish its goals and meet the CLCPA mandates for reducing GHG emissions in the power sector and in the economy at large.

The report notes that the different premise fundamentally changed the nature of the study.  Now it examines “how NYISO’s proposed carbon-pricing mechanism can help the State meet its new statutory requirements for decarbonizing the electric system through efficient market design and at the lowest cost, and how New York’s wholesale competitive electric markets can help the state achieve its climate goals more broadly, efficiently, and effectively.”

Presentation

The presentation at this meeting was a typical power point slide deck.  The summary for policy makers, full report and technical appendix will be made available later this month.  The presentation itself included a list of fourteen key findings that I will address below.

1. New York has the strongest set of climate policies in the U.S

The basis for this finding is the passage of the CLCPA that includes “a requirement for the state to eliminate greenhouse gas (GHG) emissions from all man-made sources in New York by 2050”.  The CLCPA “codifies a mandate for the electric system to rely on renewables for 70 percent of supply by 2030 and on zero-emitting resources for 100 percent of supply by 2040”. To the extent that New York now has bragging rights I agree.  However noble the intent, the fact is that no one has proposed a plan to get to a 100% zero-emitting electric system supply by 2040.  This presentation glibly assumes that these goals can be met with no caveats about the difficulties of this task.

2. New York State has long been a policy leader

This slide is thinly veiled cheer-leading.  Their basis for supporting this leadership is this: “Considering that New York’s economy accounts for one out of every 200 tons of energy-related carbon dioxide (CO2) emitted anywhere in the world, the Act’s new commitments represent a significant action to reduce and mitigate the costly impacts of global climate change”.  Frankly, I was surprised at that number so I did some checking.  The World Resources Institute listed global CO2 emissions since 2010.   In 2016, the last year that the NYSERDA Patterns and Trends document has New York State total CO2 emissions data, the world emissions total was 35,700 million metric tons and NY’s emission total was 167 million metric tons which works out to one out of every 214 tons, close enough.  However, what was not mentioned was that between 2016 and 2017 global emissions increased 500 million metric tons – three times the NY total and between 2017 and 2018 global emissions increased 900 million metric tons – over five times the NY total.

3. This work will not be easy

This statement is certainly true.  The slide concludes: “To keep these costs as low as possible, New York will need to draw on the long and successful history of market-based policies and pursue every effective tool at its disposal”.  Here is the problem.  There is no consideration of why previous market-based policies were successful.  I believe that switching to a fuel that was not only lower polluting, but as cheap or cheaper, was the primary cause for the success of the EPA Acid Rain program and to whatever success can be claimed for the Regional Greenhouse Gas Initiative (RGGI).  The problem is that the opportunities for fuel switching are used up.  Reductions in New York’s future will have to increase the cost of energy because future reductions will have to displace a cheaper source of energy.  I should also note that the premise that carbon pricing is “an effective tool” is an assumption, particularly in the context of this proposal.  The theory of carbon pricing is that an economy wide program covering as many jurisdictions as possible will provide incentives to make the transition more efficiently than other approaches.  This proposal is for one jurisdiction and one energy sector.  It is not clear how the program can deal with all the interface issues that causes.

4. The CLCPA envisions using an array of measures

This statement is necessarily true.  The slide also notes that the CLCPA “anticipates putting measures in place as soon as possible”.  I think this is a prescription for problems.  This initiative is roaring ahead without the time and effort to develop a feasibility study, an implementation plan and outside critical review.  Given the scope and potential impacts to New York society that seems rash.

5. The CLCPA envisions a big role for the electric grid

“The provisions to expand the role of electricity into transportation and buildings will go hand in hand with the Act’s requirements that the state’s electric system eventually eliminate its carbon emissions by 2040.”  I cannot over-emphasize that the CLCPA is legislation that did not include provisions to develop a plan to see if this goal is feasible.  The Brattle Group recently released a report entitled “Achieving New England’s Ambitious 2050 Greenhouse Gas Reduction Goals Will Require Keeping the Foot on the Clean Energy Deployment Accelerator”.   That report expects that the New England electrical load will need to double to meet an 80% reduction by 2050 so that “beneficial electrification” will CO2 displace emitting sources.  I see no reason why New York should not expect an even bigger increase in load in order to eliminate GHG emissions from all man-made sources in New York by 2050.  How much renewable energy will be needed, where does it have to be located, and how much will all this cost are all reasonable unresolved questions.

6. New York has a home-grown policy proposal: a carbon-pricing mechanism

“NYISO can unleash the power and creativity of market forces through adoption of a carbon price in the state’s wholesale electricity market.  In fact, if NYISO were a state agency (which it is not), it would be obligated under Sections 7 and 8 of the Act to contribute to achieving the statewide GHG emissions limits, and adoption of a carbon price would be a natural response to such a mandate.”

The last I checked the NYISO was supposed to be independent.  Until such time as the NYISO or the State has come up with a feasibility study showing that the aspirational goals of the CLCPA can be met without endangering the goals of safe, adequate, and reliable service at just and reasonable rates, I think that it is premature to adopt a carbon price just because of this mandate.  Only when there is a plan can we really analyze how the carbon-pricing mechanism will work for New York.

7. A NYISO carbon price can help deliver NY’s clean-energy transition in faster, cheaper, more reliable, more efficient, and more creative ways

“NYISO and key stakeholders have already developed a carbon-pricing proposal that—once in place—can send positive signals to encourage early action, consistent with the Act’s intent.”  I do not dispute that the carbon-pricing proposal can send a price signal.  However, I have seen no evidence that price signal from the proposal will actually send a strong enough signal to provide all the benefits suggested.  For example, according to the NYSERDA Patterns and Trends document in 2016 the electric sector emitted 27.7 million metric tons of CO2.  At a social cost of carbon value of $50 the carbon price initiative revenues would be $1.386 billion.  At the same time the CLCPA was signed, Governor Cuomo “executed the nation’s largest offshore wind agreement and the single largest renewable energy procurement by any state in U.S. history – nearly 1,700 megawatts -with the selection of two offshore wind projects”.  According to the Electricity Market Module chapter of the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2019 the New York region cost per kW is $8,380.  This means that the “overnight capital costs” of the two announced offshore projects (1,696 MW) will cost $14.212 billion.  Is an indirect price signal that is less than 10% of the cost of just these two projects amongst the many more that will be required really going to spur investments?

The second slide with the same title goes on to say that the price will also “help retain existing generating units with zero or low carbon emissions in operation as long as safely possible”.  While it surely cannot hurt, I again wonder if this is strong enough a signal.

8. A carbon price will position private investment and operations in the direction of State goals

“Since 2000, private power companies and public power authorities have added nearly 13,000 MW of new power-production capacity (which now equals more than one-third of the capacity on today’s NYISO system). Most of these more-modern and more-efficient power plants have located in downstate New York where most of the state’s power consumption occurs, and where the operation of competitive and efficient markets minimizes production costs and investment risks for the state’s consumers of electricity.”  The report claims that the carbon price will incentivize even more investment where it is needed.  I cannot argue with that but the record shows that investment is occurring where it is needed anyway.  Is this untried theoretical approach needed?

9. A carbon price in NYISO markets creates synergy between the state’s wholesale electricity market design and the Act’s GHG-reduction targets

The presentation claims “Adoption of a carbon price would help to send efficient price signals to market participants about the value of clean energy resources, and would establish an electric system strongly aligned with the goals of the Act.”  I don’t question the theory and it makes sense that this is an added incentive.  The real issue is whether the social cost of carbon price adder provides a strong enough signal to create “synergy”.

10. A carbon price can work hand in hand with other policies to amplify innovation in clean-energy products and services, the control of air pollution, investment in advanced energy infrastructure, and improvements in public-health outcomes

I think this argument is weak.  The unresolved question is whether the social cost of carbon price indirect cost adder will be strong enough to provide more incentives for clean energy than direct subsidies.  I have analyzed the results of RGGI investments in New York and it appears to me that direct subsidies reduced emissions more effectively than indirect subsidies.  A carbon pricing scheme is the ultimate indirect approach.  If it covers the entire energy sector, I think this effect will be reduced but we simply don’t know.

11. There will be out-of-pocket costs to transition NY’s energy economy

“Certainly, it will be difficult to achieve the goals of the Act without incurring costs”.  This is a big understatement.  This is the biggest unknown for New York’s “strongest set of climate policies”. How can anyone know what the costs will be until we have a plan how the goals will be met.  The relevant question for the carbon pricing initiative is whether it is worth the risk trying to implement a theoretical solution at the same time all these other unresolved plans are developed.

The presentation goes on to say:

“New York policy makers have decided, at least implicitly in the findings of the Act, that the real costs of climate change are significant enough to warrant urgent, aggressive action to transition the state’s economy away from fossil fuels.”  The legislative approach ignores numbers.  If, as I believe is likely, the cost of this transition exceeds the social cost of carbon what is the value of urgent, aggressive action?  We won’t know until there is a plan.

“The Act is premised on policy makers’ recognition that New Yorkers are already experiencing hardships and real economic costs—in the form of air pollution, harm to public health (especially for vulnerable populations), damage to property and critical infrastructure, declines in fish populations, and injury to key industries like ‘agriculture, commercial shipping, forestry, tourism, and recreational and commercial fishing’.”  This is an emotional rather than quantitative argument because the potential economic costs and benefits have not been quantified.  I believe it is appropriate for an independent organization to make this claim.

“The Act seeks to reduce and mitigate even worse impacts from a changing climate by requiring the actions the state will undertake to reduce GHG emissions.”  The state has never quantified the expected reduction and mitigation of worse impacts.  The reality is that it is inappropriate to expect that there will be any alleged impacts when the reduction in global warming potential cannot be measured if the State manages to eliminate CO2 emissions.

12. The Act is still new.

“None of the prior studies that have modeled consumer cost impacts from a carbon price in NYISO markets reflects the timing and depth of changes that will be needed in NY’s electric system under the Act.”   At the risk of repeating myself again, if there is not plan then we cannot calculate consumer cost impacts.  The slide goes on to say “we observe that various studies to date indicate that a carbon price will lead to billions of dollars of positive economic benefits”.  Rather than argue about the value of the alleged benefits I will simply note that it is not clear why this report advocates for the rationale for the program.

13. A carbon price will help move NY’s clean-energy economy forward in ways that are hard to predict

“Just as we are unable to quantify the actual costs to consumers of New York’s transition to a lower-carbon electricity system and lower-carbon economy, we are unable to quantify the actual costs (or net benefits) of adding a carbon price into NYISO’s market.”  Even if the theory works out, there significant logistical implementation issues.  The possibility that there may be dis-benefits, unanticipated problems and negative unintended consequences is ignored.

“Yet we strongly expect—based on the efficiencies achieved in electricity pricing since the start of competitive wholesale electricity markets, and on the similarly successful history of SOx and NOx emissions pricing in electricity markets—that NY’s economy and consumers will benefit from the operation of a carbon price to internalize into market prices the costs of carbon emissions alongside the deployment of myriad other public policies aimed at advancing the state’s energy transition.”  Because of fundamental differences between control options the success of historical SOx and NOx emissions pricing is no guarantee of future performance of a different market approach for CO2.

14. Powering more of NY’s economy on electricity will help lower the costs of reducing GHG emissions from buildings and vehicles, compared to other approaches

In order to further justify their approach the report states: “This positioning of the electric system to help lower carbon emissions in the economy is consistent with the academic literature which strongly suggests that an electric system comprised of diverse, zero-carbon supplies coupled with an economy that is more reliant on electricity increases the possibility of significantly reducing GHG emissions at lower costs than other approaches.”  I agree electrification is probably the cheapest reduction approach for economy-wide GHG emissions.  The questions that remain are how much will the approach cost and how will it be implemented?

Conclusion

The report concludes with 14 outcomes that the authors believe provide incremental value for the NYISO carbon-pricing mechanism.  I don’t necessarily disagree with any of them.  The problem is the matter of degree.  I have seen no evidence that the price signal will be strong enough to drive investments.  For example, this initiative certainly will not be a dis-incentive for innovation but will it provide enough value to be worth the risks.

I describe a number of potential issues with the carbon pricing initiative in this post.   Among the implementation issues are the requirement to track CO2 emissions not only within the state but also from outside sources and reporting requirements that are incompatible with existing regulations. The carbon price will generate over a billion dollars.  In theory the money will flow where and reward who it is supposed to but there could be issues such as getting back the money so that it does not negatively impact consumers. The biggest unresolved question is whether the social cost of carbon signal proposed for this initiative will be strong enough to produce any of the claimed benefits.  No one has addressed that to date.

Finally, I believe that there is one over-arching issue that dictates caution and delay.  The regulations were written without a feasibility requirement.  Until such a study has been done so we have a planning scenario for the amount of renewable power needed, the amount of storage needed to back the intermittent renewable power up and the amount of transmission needed to move the diffuse renewable power to where it is needed, I don’t believe we should be assuming that a carbon price approach will be the best way to pay for it.  Therefore, it only seems logical to delay implementation until you know what you are going to do.