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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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?

  1. 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”.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

Can Carbon Pricing Support the New York CLCPA

It has been a long time since I have posted anything about the New York State Carbon Pricing Initiative.  A couple of recent events precipitated my desire to do another post especially as it relates to New York’s Climate Leadership and Community Protection Act (CLCPA).  This post describes my concerns with carbon pricing in general and the New York proposal in particular.

Reason to Post

I am posting because of two recent items.  According to Marie French in Politico’s New York Energy September 18, 2019 edition:

“The state’s top utility regulator said Gov. Andrew Cuomo’s administration continues to await evidence on whether carbon pricing offers a better way to achieve New York’s energy policy goals before offering a verdict on the proposal’s fate. Public Service Commission Chairman John Rhodes spoke to a gathering of energy industry executives at the Independent Power Producers of New York’s annual fall conference at the Gideon Putnam. He was asked head-on about the administration’s position on carbon pricing and reiterated the wait-and-see tack taken by policymakers thus far. “When carbon pricing was first proposed, we were interested and as it’s been shaped and subjected to analysis we have remained interested,” Rhodes said. “But from the very beginning we stated the basis on which we would be interested … which is as long as it’s a more effective instrument of state policy.” The New York Independent System Operator (NYISO) has been grappling with how to implement carbon pricing since a process was kicked off by Rhodes and then-NYISO leader Brad Jones in August 2017. NYISO has indicated it doesn’t plan to take a vote on the proposal without support from the Cuomo administration, and the state would have to set the price for carbon under the scheme.”

The other item is a video entitled How carbon pricing can help support the CLCPA posted by the NYISO on August 14, 2019.  The video features NYISO principal economist Nicole Bouchez who explains “how injecting a “social cost of carbon” into wholesale electricity markets provides an efficient dispatch mechanism for selecting energy resources with the lowest emissions. This offers the state another tool for achieving its aggressive carbon reduction goals.”

It sounds to me like the Administration is nervous about this approach and so won’t make a commitment.  Bouchez who has spent the last 18 months or so developing the proposal is lobbying for its use.  I have not been following the proposal this year because my comments to the NYISO during their development phase last year were ignored and this year it went to a different phase with a different committee that does not even allow comments from outside parties.  I have plenty of other things to do to so wasting my time commenting on this topic to an organization that ignores comments was not a priority. I will post once again on this topic for your edification.

New York Carbon Pricing

In its simplest form, the carbon pricing initiative would add a carbon cost adder to all electric generation sources in New York.  This is supposed to reflect the social cost of carbon dioxide emissions.  My last post on this initiative translated the Carbon Pricing Proposal Prepared for the Integrating Public Policy Task Force for an outside the New York Capital District energy wonk audience.  Upon further review of that post I still stand by all of my concerns.  There are significant logistical issues associated with implementation of the proposed scheme.  NYISO has consistently downplayed those issues.  I am concerned that implementation will be a logistical nightmare for the people who have to do the work but that is not my biggest worry.  There are so many unknowns in how this will work that I think it is likely that there will be inadvertent gaming of the system and the potential for intentional gaming that will not be in the interest of the public’s need for just and reasonable electric rates.

When I came back to this topic after stepping away from the nitty-gritty details of this initiative for eight months, I realized that my primary concern was not in the details of the application but in the theory.  For some reason my top viewed post at my blog is Academic RGGI Economic Theory of Allowance Management and there is a similar problem with the carbon pricing theory.  Economist theorize that the CO2 allowances in the Regional Greenhouse Gas Initiative are treated as storable commodities.  As such the current price and the plan for accumulation of allowances should depend on the expected long-run total supply compared to the expected long-run total demand.  However, in the real-world, allowances are not treated as storable commodities by the affected sources.  Instead, allowances are treated as compliance requirements with short-term horizons by sources who own the most allowances.  I am not about to disagree that they should not be taking a longer-term view but the reality is that for a variety of reasons it does not happen that way.  Eventually I predict that the departure from reality in the theory that has driven the RGGI plan will cause problems because the latest round of revisions to the rule depended on the theory more than the history of the program.

For the NY carbon pricing initiative, I have a similar concern rationalizing theory and practice.  The theory says that when the price of electricity is raised by pricing carbon, the increased costs at the higher CO2 emitting facilities will reward existing lower emitting units and will incentivize investment in new lower emitting facilities.  If the market is efficient then the most cost-effective reductions will occur and everyone will be happy.  I think that there are a number of practical reasons that this will not work as proposed in the New York market.

My most general concern is that the carbon pricing initiative is just for the electric sector in one market.  Ideally you want a carbon price on all sectors across the globe.  I don’t think that is ever going to happen because of the tradeoff between the benefits which are all long term versus the costs which are all short term.  I don’t see how anyone could ever come up with a cost scheme that equitably addresses the gulf between the energy abundant “haves” and those who don’t have access to reliable energy.  Trying to force fit this global theory into the New York electricity market will likely bring up many unintended consequences.  The biggest problem is simply leakage between New York and every other neighboring electric market.

I also don’t think that advocates for this approach have fully considered how reductions could be implemented.  Who is going to invest in the alternatives?  Existing fossil-fired generating sources in New York are on death row if we are to believe that the CLCPA target to eliminate CO2 emissions from the electric sector by 2040.  Even if there were cost-effective add-on CO2 controls for existing sources, I doubt that anyone would invest given that end date.  I don’t think that there are any existing power facilities with room for much in the way of diffuse renewable generation.  Solar cells could work but there isn’t enough room for much at existing facilities.

Ultimately, I think that the investment problem boils down to an indirect signal versus a direct signal. In a recent post, I analyzed NYSERDA’s investment of RGGI auction proceeds.  Comparing different programs, I concluded that the more there is a focus on direct investments in emission reductions the better the cost benefit ratio.  On one hand it could be seen as intuitively obvious but the point is that carbon pricing proposals rely on a completely indirect impetus for emission reductions.  As such those proposals, as theoretically appealing as they may be, may be much less cost effective than suggested.

That same post showed that RGGI investments are not very cost efficient.  New York will likely propose to use the Obama era Social Cost of Carbon value which is $50 in 2019.  The best NYSERDA investment program category cost benefit ratio is three times greater than that value.  The cost benefit ratio for all the NYSERDA investments is over nine times greater than the $50 SCC value.  If a mix of investments has this poor a record of cost efficiency then how could can an indirect price signal at that level trigger any response?  It may well be that the carbon price SCC value is not a strong enough signal to drive investment.

Before New York commits to this “bright and shiny object” that advocates can brag about, someone should do some analysis of market price signals for actual investments.  While the theory might sound grand, if the proposed signal does not actually drive investments the only thing this will do is raise electricity prices. Among the many logistical implementation issues is how the money collected will be equitably returned to ratepayers.  Even if there were a logical and equitable way to apportion costs back across the state, the Cuomo Administration has a record of diverting funds intended for climate mitigation to suit its purposes.

Layman’s Guide to My Rationale to Oppose the NYISO Carbon Pricing Concept Proposal

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. I recently published a post that translated the overview of the proposal for those outside the process. This post describes the reasons I oppose the proposal.

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 the 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.” Note, however, that the NYISO stakeholder has no obligation to respond to every comment and that they have repeatedly failed to even respond to my direct questions. This was not an inclusive stakeholder process and frankly I believe that they ignored several issues that could significantly affect the viability of the program.

Reasons to Oppose the New York Carbon Pricing Proposal

Reason #1: My first reason to worry about this proposal is because of the organizations who are in favor of it. According to a letter filed on December 17, 2018 by the Independent Power Producers of New York “We appreciate that the NYISO and DPS staff have kept this process moving to the best of their abilities, and the overwhelming, and near unanimous, NYISO stakeholder support for continued work on carbon pricing in 2019 proves that this effort continues to have momentum.” The stakeholders that speak for the ratepayer have not been very vocal in this process. To me the impression that there is overwhelming support from stakeholders is proof positive that there is money to be made and reputations to be enhanced by its supporters. I oppose this because my analyses show consumers will end up paying a lot more for nothing more than signaling virtue and lining the pockets of crony capitalists.

Reason #2: The ultimate question for this program is whether carbon pricing can actually 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 that 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 oppose this because I am not optimistic that this will work as the theory predicts because of all the complications that arise trying to address the complications introduced limiting the scope of the program to such a constrained part of the economy.

Reason #3: I do not believe that this policy represents the most efficient way to make reductions. New York has ambitious goals for CO2 reductions and has participated in the Regional Greenhouse Gas Initiative (RGGI) since its inception. I have analyzed the effectiveness of the investments made from RGGI proceeds and found that in 2016 there were $436.4 million dollars invested from the proceeds and those investments reduced CO2 emissions by 382,266 tons. The resulting rate for CO2 reductions is $1,142 per ton for proceeds invested for a direct reduction signal. One problem that is ignored by NYISO and proponents for further reductions is the fact that New York has already made most of the “easy” reductions. Consequently any further reductions will be more difficult than historical reductions. As a result the carbon pricing proposal that relies on an indirect incentive for renewable energy will have a difficult time actually making any reducitons. 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 RGGI and other existing programs. I opposed this proposal because there are existing programs that are more effective actually reducing CO2 emissions.

Reason #4: Clearly in order to have a carbon pricing program at some point the cost of carbon has to be established. In order to justify its CO2 reduction agenda the Obama Administration organized a working group to estimate the economic harm of CO2 emissions They developed a value for the Social Cost of Carbon (SCC) which is an estimate of the economic harm of a ton of CO2 emissions.   The NYISO carbon pricing proposal recommends that the DPS set the carbon price value and has suggested using the SCC as estimated by the U.S. Interagency Working Group (IWG) on the Social Cost of Carbon, starting at $43/ton CO2 today and rising to $65/ton by 2029[1].  My fundamental problem is that the IWG SCC value 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. Julian Morris critiqued the IWG SCC value and noted the effect of changing the following four assumptions:

  1. Change the emissions scenario to reflect more realistic assumptions regarding the relationship between emissions and economic growth;
  2. Change the time horizon from 2300 to 2100;
  3. Change the discount rate from 3% to 5%;
  4. Change the scope from global to U.S. only.

I want to avoid getting technical but two of these assumptions are simple to understand. Ultimately the SCC estimates rely on a complex causal chain from carbon dioxide emissions to social impacts that are alleged to result from those emissions. The Obama IWG considered impacts out to 2300, 282 years in the future. The idea that anyone could imagine what society will be like in 2300 and with a straight face claim their model reflects any social impacts from anything going on today strikes me as overwhelming hubris. Also note that the IWG claims impacts for the globe.   Richard Tol testified that the SCC 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.” I oppose this because as proposed New York State wants to price carbon to influence alleged impacts around the world that are well beyond the scope of any New York regulation. I also oppose this carbon pricing proposal because when these four changes to the SCC assumptions were combined, the effect was to reduce the SCC by 97%, from $43 to about $1.30. Obviously using a more realistic value for the SCC makes the program worthless.

Reason #5: One of the aspects of this process that I believe is not easily understood is the potential cost to consumer. In the first place, because the NYISO system prices work in terms of dollars per amount of energy (MWhr) all the costs are listed in those units. I have little grasp understanding what those values mean to the state as a whole so I present my costs in total dollars.

On November 7, 2018 NYISO posted a synthesis report entitled Brattle Group, Resources for the Future & Daymark Energy Advisors Analysis Synthesis that summarized the approach methodology, analyses and results for three independent studies of the proposed carbon pricing initiative. I have relied primarily on that report for data referenced in this post.

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 will range between $2.7 billion and $3.3 billion in 2025. Remember this program will increase those prices every year going forward.

However, the Synthesis Report reports the following changes in consumer costs:

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.

So how do billions eventually magically turn into no impact to the consumer?

The first component of the carbon price is the direct cost. In the carbon pricing plan each ton of CO2 emitted is charged the social cost of carbon. This depends on the total emissions but for this analysis let’s assume that would equal $1.5 billion leaving between $1.2 and $1.8 billion in 2025. I leave it to the reader to estimate how likely it is that the State of New York will actually return all the money collected without sneaking in transaction costs or some other politically driven fee but I assume, contrary to all previous NYS programs, that is the case.

It is important to understand that adding the cost of carbon drives up the overall wholesale electricity. I did my own static calculation using 2015 and 2016 load and marginal emission rate data to estimate the effect of the carbon charge. The carbon charge increases costs not only due to the carbon price itself but also increases generator net revenues. My analysis showed that in 2015 the total cost of the net revenues due to higher wholesale prices is $3.027 billion as compared to $1.321 billion calculated by applying the SCC to actual CO2 emissions. The increase in costs due to the change in market clearing price will not be returned to consumers. The impact of increases to energy costs as it relates to energy producers with costs lower than the clearing price has not been addressed. In particular, what portion of the increased wholesale price goes to the existing renewables, nukes, and all the fossil gens with costs lower than the clearing price? I cannot support this because I think those added costs will never offset consumer prices.

The NYISO synthesis report claims otherwise. One of the driving reasons for the carbon price proposal is that existing renewable subsidies are difficult to administer. The Synthesis report claims significant reductions in the cost of the Renewable Energy Credits and Zero Emission Credit subsidies will offset some of the wholesale electricity increase due to the carbon price. Frankly I think that there is regulatory agency support for this initiative simply because it will reduce their administrative responsibilities.

There are several other alleged consumer benefits. The NYISO analysis claims that the carbon price will induce renewable generation to be built where it is more profitable, that is to say in downstate New York. There is no consideration of increased siting difficulties downstate. However, if you believe in their hopeful assessment then they claim that there will be reduced transmission constraint costs.

Their cost analysis modeling also makes “market adjustments to the static analysis” and assumes that because this program is so successful that further renewable energy subsidies won’t be needed. Sum up all these modeling results and they claim there won’t be a significant consumer impact.

I don’t trust these modeling results. There are too many ways that input assumptions and modeling parameters can be tweaked to impact the final results. I do not support this proposal because no one has satisfactorily explained how all the increased costs of wholesale electricity that I calculated can be so easily offset. They did not do a sensitivity analysis to examine the impacts of a range of assumptions so we don’t know their impacts.

Reason #6: I think that all carbon reduction proposals should clearly state the potential impact of the proposed action on global warming. New York State has never provided an estimate of the effect of any of its clean energy programs or direct emissions control programs on global warming. In the absence of any official quantitative estimate of the impact on global warming from REV or any other New York State initiative related to climate change I did my own calculation. The Brattle analysis estimates that the change in CO2 estimates of reductions in system-wide CO2 emissions due to a New York carbon charge will be 1.5 million metric tons and Resources For the Future estimates 1.2 million metric tons. The impact of these reductions on projected global temperature rise would be at most a reduction, or a “savings,” of approximately 0.000022°C by the year 2050 and 0.000046°C by the year 2100. In order to give you an idea of how small this temperature change consider changes with elevation and latitude. Generally, temperature decreases three (3) degrees Fahrenheit for every 1,000 foot increase in elevation above sea level. The projected temperature difference is the same as going down less than half an inch. The general rule is that temperature changes three (3) degrees Fahrenheit for every 300 mile change in latitude at an elevation of sea level. The projected temperature change is the same as going south 44 feet. I oppose this because it clearly will have no effect on global warming.

[1] See New York Public Service Commission Order Adopting a Clean Energy Standard (2016) pp. 49, 51, and 131 http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId=%7B1A8C4DCAE2CC-449C-AA0D-7F9C3125F8A5%7D, and U.S. Government (2015) Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866. May 2013, revised July 2015.

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.

 

Setting a Price for Carbon in the NY Wholesale Electric Market for the Layman

This post discusses the New York effort to put a price of carbon on the wholesale electric market. I think New Yorkers deserve answers to the following questions:

  • What is this proposal going to do?
  • How is it supposed to work?
  • How much will it cost?
  • What impact will it have?

This post will attempt to provide my answers to these questions to summarize my concerns with the proposal.

I have been submitting comments throughout the process (here and here) and I have posted on this here.   My comments have been submitted 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 majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding and have never heard of the Social Cost of Carbon (SCC). I was motivated to submit comments and prepare these posts so that there is at least one voice of the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers. There are significant hurdles to implementing carbon pricing in general and as proposed in the straw proposal that should be considered. There are unintended consequences to the proposal that will result in enormous costs for a plan that will have Inconsequential tangible benefits to the environment.

Carbon Pricing

The fundamental idea behind carbon pricing is that when carbon dioxide emissions cost money society will produce less of them. Economists support the idea that with a carbon price the market efficiently cuts emissions. Note, however, in order to operate efficiently the carbon price has to be applied to the whole economy.

Not surprisingly, the devil is in the implementation details. A price has to be set for each ton of carbon dioxide emitted but what should the price be and how should the emissions be measured. The disposition of the money earned by the tax is another major issue. In order to minimize regressive effects and let the market efficiently decide how best to make reductions many economists favor a revenue-neutral approach where the carbon tax revenues replace other tax revenue streams and no investments are determined by the regulators.

New York Carbon Pricing Proposal

On August 11, 2017, the New York Independent System Operator (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. That report, Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals, (Brattle Report) forms the basis of the proposal.

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. Frankly, this is a frustrating process. This is illustrated by the fact that there are meeting agendas but no meeting minutes. For example, at the May 21, 2018 meeting emissions monitoring experts from the generating industry had a panel discussion on emissions reporting to explain how CO2 is measured and reported. One of the major points was that there is a significant timing issue between the needs of the carbon pricing initiative and regulatory requirements which mandate post-monitoring quality assurance adjustments. On July 16, 2018 NYISO presented its general recommendation for emissions reporting and the ensuing stakeholder discussion ignored the expert presentation discussion of the timing issue. If minutes were available then the timing issue would have been documented. More importantly, It is not clear if the NYISO final recommendation will incorporate the concerns of the experts.

In April 2018, NYISO posted a straw proposal that outlined a potential design for incorporating the cost of carbon emissions into the wholesale electricity market of New York State. The straw proposal recommends that the DPS set the carbon price value and has suggested using the Social Cost of Carbon (SCC) as estimated by the U.S. Interagency Working Group (IWG) on the Social Cost of Carbon, starting at $43/ton CO2 today and rising to $65/ton by 2029[1]. The straw proposal recommends that all internal suppliers participating in wholesale electric energy markets pay the carbon charge. Most of the affected sources already report hourly CO2 emissions but there remain difficulties integrating their existing reporting requirements and this new requirement (primarily timing issues) and there are some affected sources that do not report CO2 that will have to develop the necessary infrastructure to report hourly data. Further complicating the problem is the issue of how to deal with imported and exported power. Finally, there has been limited discussion of the disposition of the carbon price funds but it is noticeable by its absence that the concept of returning all the money to rate payers has not been suggested. Instead, it appears that portions of this will be an additional funding mechanism for the Governor’s Reforming the Energy Vision initiative.

Carbon Price

My first concern with this proposal is the choice of the carbon price (for example my comments on the April 23, 2018 addressed this). 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 is that the IWG SCC value 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.”

Potential Costs to Consumers

Table 1 Potential Costs of the Carbon Pricing Initiative is my best estimate of potential costs. The SCC column lists the annual values from 2015 to 2029. In order to know the costs we have to know the CO2 emissions. I used NYS Regional Greenhouse Gas Initiative (RGGI) historical emissions for 2015 to 2017 and then assumed that emissions would drop 1.5% per year from the 2017 values. At a minimum, ratepayers in New York will have pay the SCC value times the CO2 emissions from the affected New York generators (SCC Charge column in Table 1).

The Brattle Report proposes breaking the SCC charge into two components: the existing RGGI costs and the carbon price to the wholesale market. The RGGI allowance prices in Table 1 are the observed values from 2015 to 2018 and the value assumed by Brattle for 2025. The RGGI costs will equal the RGGI allowance price times the CO2 emissions (RGGI Charge column in Table 1). These are costs already committed to NY ratepayers albeit they are supposed to be invested for the benefit of consumers.

The IPPTF refers to the difference between the SCC Charge and the RGGI Charge as the Residual (Residual column in Table 1). The disposition of this money has not been finalized, but we know that a portion will be returned to the Load Serving Entities to offset ratepayer costs and the rest will be invested in carbon-reducing programs.

The Brattle Report analysis of the impact on customer costs uses average annual values and concludes that the carbon charge would have “approximately zero net impact on customer costs”. However, the point of my hourly analyses in my comments submitted on July 5, 2018 is that I think that the carbon charge will raise net energy costs. When I calculated the hourly impact I estimate that the total cost would have been $3,027,266,788 (Energy Increase column in Table 1). Importantly, none of the difference ($1,728,574,766) between this value and the SCC Charge (Energy Impact column in Table 1) will be returned to customers.

Impact

New York State has never provided an estimate of the effect of its clean energy programs on global warming. Governor Cuomo’s plan to “rebuild, strengthen and modernize New York’s energy system is called Reforming the Energy Vision (REV). The ultimate goal of REV is to change the energy system of New York to reduce greenhouse gas (GHG) emissions 80% from 1990 levels by 2050 (“80 by 50”).  In the absence of any official quantitative estimate of the impact on global warming from REV or any other New York State initiative related to climate change I did my own calculation.

The ultimate impact of the REV 80% reduction of 188.7 million metric tons on projected global temperature rise would be a reduction, or a “savings,” of approximately 0.0028°C by the year 2050 and 0.0058°C by the year 2100. In order to give you an idea of how small this temperature change consider changes with elevation and latitude. Generally, temperature decreases three (3) degrees Fahrenheit for every 1,000 foot increase in elevation above sea level. The projected temperature difference is the same as going down 18 inches. The general rule is that temperature changes three (3) degrees Fahrenheit for every 300 mile change in latitude at an elevation of sea level. The projected temperature change is the same as going south 0.4 miles.

My calculated values for temperature change are based on the “consensus” estimates of the Intergovernmental Panel on Climate Change which I personally believe over-estimate the impact of temperature changes caused by greenhouse gas emissions. My calculations show that REV and the carbon pricing initiative cannot claim that any observable impacts for the projected small change in temperature due to these emissions reductions.

Conclusion

This post did not delve into the many technical issues associated with implementing carbon pricing in general and as proposed in the straw proposal. Nonetheless, it raises basic questions. The increase in energy prices beyond the carbon price itself is an unintended consequence that will basically double the costs of the program. At the end of the day those enormous costs will have inconsequential tangible benefits to the environment. Even if you believe that we need to do something about climate change these numbers do not support this proposal.

[1] See New York Public Service Commission Order Adopting a Clean Energy Standard (2016) pp. 49, 51, and 131 http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId=%7B1A8C4DCAE2CC-

449C-AA0D-7F9C3125F8A5%7D, and U.S. Government (2015) Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866. May 2013, revised July 2015.

NYS Carbon Pricing: Implications of Observed CO2 on Peak Hour of 2017

New York’s energy planning process continues its efforts to meet the aggressive goals of a reformed 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 been following the process and submitting comments as an unaffiliated public party to the process. This post describes a vivid example of the difficulties of implementing economic theory related to carbon dioxide reduction programs.

 Introduction

I am motivated to submit comments in this process so that there is at least one voice of the unaffiliated public whose primary interest is an evidence-based balance between environmental goals and costs to ratepayers. There are significant hurdles to implementing carbon pricing in general and as proposed in the straw proposal that should be considered by the Integrating Public Policy Task Force (IPPTF). The questions in these comments are related to the total costs of the program.

This post is based on comments submitted 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 majority of New York State (NYS) ratepayers are unaware of the ramifications of this proceeding or have any idea of the ramifications of incorporating the cost of carbon emissions into New York State (NYS) wholesale electricity markets. The basis of this initiative is a Brattle Group analysis that outlined a scheme to incorporate a state policy defined cost of carbon in the wholesale market to improve the overall efficiency of the New York Independent System Operator (NYISO) energy and capacity markets.

As of the date of this post one thing that has been conspicuously absent from the discussions has been the total expected cost. In my latest submitted comments I argued that it would be beneficial for all stakeholders to have the NYISO provide an analysis of historical data that shows what would have happened to the markets if the carbon price were in effect. I illustrated the problem estimating this cost by considering one historical hour. It appears that there is a significant overlooked component to this initiative. One feature of a carbon price scheme is usually revenue neutrality where the carbon costs are returned to the consumers to make it less regressive. However, in the New York State wholesale electric market case it looks like in addition to the carbon price itself there will be a general increase in market clearing prices. There is no mechanism to make that component revenue neutral.

Input Data

In order to evaluate the emissions data I obtained data from the United States Environmental Protection Agency Clean Air Markets Division (CAMD) website for July 19, 2017 at hour 17. The CAMD website has hourly data for all emissions sources affected by national emissions trading programs. There are significant limitations to the data for this application but they should be indicative of the situation. I manually added the NYISO electric load control zones, made some guesses about whether some small units should be included or not, estimated CO2 emissions at some sources that are not required to provide that data, and revised some inconsistent numbers. There also is an inherent flaw in this approach because the EPA data set includes gross load whereas the NYISO loads are net loads. Also note that I excluded combined heat and power units and steam units from these calculations. My data are available upon request and the submitted comments describe the methodology in more detail.

Energy Markets

The NYISO manages the state’s power grid and de-regulated energy market. In order to understand the implications of carbon pricing on New York electricity market costs some background information is necessary. There is an overview of the price setting approach used in the NYISO document NYISO Markets:

The energy market provides a mechanism for Market Participants to buy and sell energy at prices established through a competitive auction process designed to meet energy demands, or “loads,” with the least-cost resources available; or, through contractual, bilateral transactions where quantities and prices are arranged directly between wholesale suppliers and “load-serving entities” (LSEs) such as utilities. For energy purchases arranged through the NYISO’s auctions, the NYISO administers day-ahead and real-time auctions, resulting in a two-settlement process that sets the price of energy based on market and grid conditions at specific times. Further, the NYISO’s auctions reflect geographic conditions , establishing “Locational Based Marginal Prices” (LBMP) for energy that reflect local demand and supply conditions as well as any constraints that may exist when moving energy across the grid to meet demand. The first settlement is based upon the day-ahead bids and the corresponding schedule and prices, or day-ahead commitment. The second settlement is based upon the real-time bids and the corresponding real-time commitment (RTC) and real-time dispatch (RTD). Market Participants may participate in the DAM and/or the real-time market. Roughly 94% of energy is scheduled in the day-ahead market, while the remaining 6% is accounted for in the real-time market. About 40% of the energy settled in the day-ahead market is scheduled through bilateral contracts.

CO2 Summary

The NYISO Zone CO2 Cost July 19 2017 at hour 17 table lists the gross load, heat input, CO2 mass, and CO2 rate in lbs per mmBtu and tons per MWhr for the entire state, by LBMP zone and aggregating Downstate and Upstate zones. The source data show that the hourly CO2 emissions range from 681 tons per hour at the remaining coal plant to 1.2 tons for a partial operating hour at a natural-fired turbine. More importantly the CO2 emission rate (lbs/mmBtu) data only lists three general emission rates corresponding to natural gas, oil, and coal fuels. If the results for this hour are generally consistent throughout the year then the efficacy of this program to lower CO2 emissions is questionable. There are slight differences within these rate categories but there are relatively minor. The New York Department of Environmental Conservation recently announced a new regulation that will for all intents and purposes ban the future use of coal so this program cannot be expected to shut down the use of coal. The oil generating units do not burn oil for economic reasons so this program cannot be expected to change the use of those units relative to natural gas units. The difference in CO2 emission rate for the natural gas units is so small that this program cannot be expected to lead to the use of lower emitting units. Therefore, this program will not likely cause fuel switching due to the price of carbon.

Carbon Prices

According to the NYSERDA Patterns and Trends report, in 2014 the electric sector CO2 emission rate was 39,406,671 tons per year. If the carbon price is $50 per ton then we can expect this program to generate a minimum of over $1.5 billion dollars per year. The hourly carbon price based only on emissions ($50 per ton times the total tons in the previous table) gives a state-wide cost of $440,373 with $173,995allocated Upstate and $266,978 allocated Downstate.

The Brattle report proposed that the only impact to consumers would be directly related to the carbon price. However, the NYISO has not done an analysis of the potential impact of the carbon price on the wholesale electric market to determine if there could be a general increase in market clearing prices. If that is the case then the consumers will be paying a whole lot more than just the carbon price and there will be no way to even to try to make any extra costs revenue neutral.

 I used the hourly data to estimate LBMP zone costs in theNYISO Zone CO2 Cost July 19 2017 at hour 17 table. I assumed that the zone cost equals the total load times the maximum CO2 rate (tons per MWhr) times the Social Cost of Carbon (Tab “LBMP”). Because of the magnitude of the carbon price I also assumed that the price of carbon sets the price of the most expensive unit in the zone. If that presumption is correct then the results are far different than the example estimate simply multiplying emissions by the cost of carbon. The total statewide cost is $773,644 and the Upstate portion is $209,394 and Downstate is $564,251. Note that most of the additional cost is due to a $306,048 increase Downstate because the Upstate cost only increases $35,999.

Conclusion

Based on this example I believe it is necessary and appropriate for the NYISO to provide estimates of the expected historic market response to the carbon price for an entire year based on hourly LBMP values. The NYISO knows the marginal economic unit and can use the USEPA data to show the marginal and maximum emission rates, CO2 mass/MWH and CO2 mass/mmBtu. At the proposed price of carbon that analysis could determine what would happen to the LBMP prices.

In addition to the financial impacts we can estimate what kind of impacts the carbon price will have on generation patterns. Based on the CO2 rates in the example hour it appears that we will find very small shifts in the marginal economic unit. Only when we have annual results can we verify whether this proposed program will have any effect on carbon emissions.

Finally, the analysis I recommend will not only estimate how the carbon price will affect LBMP prices but also provide information about where those revenues end up.  If my assumption that the LBMP prices are based on the maximum emission rate but the residual that goes back to the consumers is based on the actual rates for each generator then the only facility that fully pays its residual is the maximum emission rate unit. All the other units contribute less to the consumer. The NYISO should provide the analysis so that we can determine what portions of the LBMP price increases remain with which generator sectors and what residuals could be returned to the LSEs. Finally, we can estimate the portion of LBMPs that could be credited to new renewables.