RGGI Allowance Status March 2018

This is a post on an implication of two Regional Greenhouse Gas Initiative (RGGI) reports: the Report on the Secondary Market for RGGI CO2 Allowances – Q4’17 (Secondary Market Report) and the Market Monitor Report for Auction 39 (Market Monitor Report). It is becoming clear that timing for one unique aspect of the RGGI allowance market – the need for compliance entities to go to the open market to purchase allowances from non-compliance entities – is getting closer.

This is another in a series of posts on RGGI that discusses how RGGI has fared so far (see the RGGI posts page). I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. As a result, I have a niche understanding of the information necessary to critique RGGI. I am motivated to prepare these posts because most reports about RGGI are advocacy pieces with very few critiques. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Background

There is a difference in the Regional Greenhouse Gas Initiative (RGGI) cap and auction program relative to a cap and trade program that allocates all allowances to affected sources or compliance entities. In particular, when the allowances are allocated directly to affected sources in a traditional cap and trade program the allowance bank is either allowances held by affected sources for compliance obligations or those deemed surplus by compliance entities because of investments in controls to meet their compliance obligations under the cap. The success of cap and trade programs to date is related to the fact that this enables the market to develop a least cost control strategy.

In the RGGI program allowances are purchased for compliance obligations or as an investment so there are allowances that have not been deemed surplus in the bank. This makes a difference to the allowance bank because a significant fraction of the allowances are owned by entities without a compliance obligation. I have previously noted that at some point the regulated sources are going to have to rely on non-compliance entities for allowances necessary for compliance (as the cap tightens over time) and it is not clear how the market will react.

Analysis

RGGI provides reports that describe the status of the market but does not provide the information to easily estimate the number of compliance entity allowances in the allowance bank because there is no status report that trues up emissions, allowance surrenders and allowances. This analysis calculates the size of the compliance entity allowance bank on March 16, 2018 after allowances matching emissions from the third compliance period are surrendered, allowances from the first auction in the fourth compliance period are added, and the Market Monitor Report for Auction 39 lists the share of allowances owned by compliance entities. I also estimate what the compliance entity allowance bank will be at the end of the fourth compliance period in 2020, absent the addition of Virginia and New Jersey who appear committed to join RGGI.

RGGI’s Secondary Market Reports report on allowance status but do not include emissions status. According to the Market Monitor Secondary Market Report for Quarter 4 2017 updated on 2/22/18, at the end of the fourth quarter of 2017:

  • There were 255 million CO2 allowances in circulation.
  • Compliance-oriented entities held approximately 156 million of the allowances in circulation (61 percent).
  • Approximately 175 million of the allowances in circulation (69 percent) are believed to be held for compliance purposes.
  • According to Secondary Market Report there were 255 million allowances in circulation on 12/31/2017. That value is the sum of the allowances allocated in the first and second control periods less the allowances surrendered in those control periods and allowances allocated in the third control period less the allowances surrendered in 2015 and 2016 (50% of the emissions). This report could not include the number of allowances that had to be surrendered for the entire third compliance period because the 2017 emissions were not finalized until the end of January 2018.
  • This report does not account for the surrender of allowances at the end of the third compliance period and without that information it is not possible to calculate the number of compliance entity allowances.

RGGI lists the allowance allocations by control period but for some reason does not summarize the totals but that information is necessary to generate the necessary numbers. I downloaded the allowance allocations for each compliance period from the RGGI website to Table 1 RGGI allowance allocation 2009 – 2017 data extracted from individual period spreadsheets. (Note that I did not include all the footnotes and endnotes in Table 1.) RGGI emissions data are available on the RGGI CO2 Allowance Tracking System. I downloaded the control period emissions and summed the facility totals by compliance period to generate Table 2 RGGI Control Period CO2 Emissions.

Table 3 Compliance Period Allowance Allocations and Compliance Period Emissions combines all these data. In order to check my numbers I included the annual 2015, 2016 and 2017 columns with the annual emissions allocations, emissions and 50% of the emissions surrender values to calculate the number of allowances in circulation on 12/31/2017. I get 249 million allowances in circulation compared to the Secondary Market Report value of 255 million. Because that difference does not change my findings I did not try to reconcile the reason. The compliance period emissions and allowance allocations can also be used to estimate the size of the allowance bank. I estimate that there were 85,146,494 allowances in the allowance bank after allowances for the third compliance period emissions were surrendered.

The Market Monitor Report for Auction 39 dated March 16, 2018 notes that: After settlement of allowances sold in Auction 39:

  • Thirty-five percent of the allowances in circulation will be held by Compliance-Oriented Entities.
  • Forty-five percent of the allowances in circulation are believed to be held for compliance purposes. The number of allowances that are believed to be held for compliance purposes includes 100 percent of the allowances held by Compliance-Oriented Entities and a portion of allowances held by Investors with Compliance Obligations.

In order to get the current number of compliance purpose allowances we have to use that information and the 2018 allocation data as shown in Table 4 2018 CO2 Allowance Allocation. The number of allowances in circulation equals the allowance bank calculated above (85,146,494) and the number of allowances sold in Auction 39 (13,553,767). The current number of compliance purpose allowances is 45% of the 98,770,261 total or 44,415,118.

The ultimate reason for this analysis was because I wondered when compliance entities would have to start relying on the non-compliance share to get enough allowances to meet compliance obligations. In order to project when that will happen we have to guess at how many allowances will be purchased by compliance entities in the upcoming auctions and what future emissions will be like. Table 5 Current and Projected Allowance Status lists the current status of the number of compliance entity allowances in the top section. In the middle section, Projected End of 2018, I assumed that emissions in 2018 would be the same as 2017 but looked at three scenarios for compliance entities to purchase allowances: the % purchased in the first quarter of 2018 and the historical high and low rates. In all three scenarios compliance entities will not run out in 2018. However, in the bottom section I show that if there is a 5% reduction from 2017 CO2 emissions annually for the fourth compliance period then by the end of 2020 the compliance entity share will be negative unless compliance entities purchase at least 80% of the allowances.

Summary

Although there is an inconsistency between my calculation methodology and the RGGI reported total allowance bank at the end of 2017, these numbers show that the compliance entity share of allowances is getting smaller. This is truly unprecedented in any cap and trade allowance program so we do not know how the market will react.

If RGGI were static then this analysis shows that this issue could come to a head before the end of the current compliance period in 2020. However, both Virginia and New Jersey have indicated that they want to join the program. I have no idea how their allowances will be allocated relative to their emissions so cannot estimate any effect on this issue.

In addition to the changing relative share of compliance entity allowances the overall market is getting tighter relative to emissions and allowances available. Theory says that in a tight market the price goes up and I personally cannot imagine that not happening. This is especially troubling because the “easy” CO2 reductions in RGGI have already been implemented.

There are two potential problems looming. Advocates for RGGI claim that the RGGI allowance price costs to the consumer are offset by investments made by the RGGI states. However, when compliance entities have to purchase allowances from non-compliance entities the cost difference between the price that the non-compliance entities relative to the price they sell to the compliance entities is a cost that consumers have to bear. Even though there were investments using the original non-compliance entity price there are no offsetting investments for the cost differential. According to this analysis there are 54 million non-compliance entity allowances. If the market reacts strongly to the overall shortage and the price goes up, the resulting added burden to the consumer could be significant.

The other problem is that for CO2 compliance, power plants have limited options. For the most part fuel switching is the most effective. Eventually if you have the allowances you can run and if you don’t have them you either don’t run or assume that you can get the allowances on the market to cover your obligations. I have been involved in cap and trade compliance programs since 1993 and I can safely say that environmental staff in electric generating companies are universally opposed to assuming that allowances will be available. As important as a potential compliance problem is the fact that the power plant cannot estimate its cost unless it knows how much it paid for allowance obligation. That is impossible unless you have the allowances in hand. I worry that the logistics of getting allowances from the non-compliance entities for compliance needs could lead to problems in this regard.

NYS RGGI Operating Plan Expectations vs. Reality

This is a post on the New York State Operating Plan which is supposed to determine the best use the Regional Greenhouse Gas Initiative (RGGI) auction proceeds that accrue to New York State (NYS). It is another in a series of posts on RGGI that discusses how RGGI has fared so far (see my RGGI posts page).  This post shows how far the public face of RGGI is from reality relative to NYS emission reduction goals.

I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. As a result, I have a niche understanding of the information necessary to critique the operating plan. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Background

The responsibility for RGGI implementation is shared by the Department of Environmental Conservation (DEC) and the New York State Energy Research and Development Authority (NYSERDA). DEC set up the regulatory requirements for the affected sources and NYSERDA handles the money from the allowance auctions. The operating plan outlines how the money will be invested in programs to reduce emissions. The problem is that the budgeted program investments coupled with historic CO2e emission reduction benefits from those programs calculated by the agencies are woefully short of what is needed to meet the NYS emission reduction goals.

On December 20, 2017 the annual operating plan stakeholder meeting was held. You can see the operating plan documents, slides presented and access a recording of the meeting at the NYSERDA Use of Auction Proceeds website. In the opening remarks at the meeting the story from the agencies was that RGGI has been a rousing success and the investments have been a significant factor in that success. Alicia Barton, NYSERDA President, said that RGGI was “extraordinarily successful in driving positive environmental outcomes and fostering clean energy” and would be useful implementing a “cleaner, more reliable and more affordable future in the electric system”. Julie Tighe, DEC Chief of Staff, said that “emissions from the power sector in New York have fallen more than 50% since the states agreed to set the cap in 2005.” This post addresses the claim that RGGI investments have been an effective tool driving positive environmental outcomes. Tighe’s statement conflating the emissions reductions with setting the RGGI cap clearly implies that the reason the emissions went down was because of RGGI. I have already evaluated the actual impact of RGGI on emissions here that shows that her statement is wrong.

Analysis

Two documents released as part of the Operating Plan stakeholder process provide the information necessary to determine the potential effectiveness of the operating plan programs on reducing CO2e emissions. The calculated expected (CO2e) tonnage benefits to date are in RGGI Operating Plan (“2017 Operating Plan”) Table 1: Cumulative RGGI Benefits by Program. In DRAFT – 2018 RGGI Operating Plan Amendment (“Draft 2018 Operating Plan Amendment”) Table 1: Revenues and Program Funding Allocations, the proposed RGGI allowance revenue program investments for the next three years are listed. Multiplying the total budget amounts by the observed emission reductions dollars per ton benefits is all that is necessary to estimate how much CO2e is expected to be reduced.

Table 1 Comparison of RGGI Program Investments in this post combines information from both of those tables and a slide (Program Investments of $245M for FY 18-21 below) in the stakeholder presentation that describes the proposed program investments for the next three years. It was an interesting exercise to figure out how the categories meshed between the Draft 2018 Operating Plan Amendment and the Program Investments slide but I think the listings in my table are close. The total program investments budgeted in Fiscal Years 2018-2019 are $244.5 million. At the stakeholder meeting five investment strategies were described:

  • Building capacity for long-term carbon reduction
  • Energy Efficiency and Renewable Energy technologies
  • Empowering New York communities and transition to cleaner energy
  • Innovative financing
  • Stimulating entrepreneurship and growth of clean energy

Those categories are listed under Stakeholder Presentation in Table 1 Comparison of RGGI Program Investments. The specific programs from the Draft 2018 Operating Plan Amendment are listed opposite those strategies.

For each of the specific programs the $ per ton annual benefit calculated values presented in the 2017 Operating Plan was included in the table. Note that the category “Directed to the State – Environmental Tax Credits category did not have a $ per ton benefit calculated. I used the lowest of the three EE/RE cost benefit numbers to give the most CO2e reduction bang for the buck. Neither of the Empowering New York communities and transition to cleaner energy categories in the 2017 Operating Plan had emission reduction benefits calculated. The Directed Electric Generation Facility Cessation Mitigation Program provides payments to municipalities that depended on large fossil-fired generating plant property taxes when those facilities are closed down which certainly does not translate into reductions. Community Clean Energy programs “support the transition to sustainable and resilient communities” which apparently does not translate into direct CO2e reductions

Finally, the program 3-year investments are divided by the $ cost per ton benefit to determine how much CO2e reduction can be expected. For the $244.5 million investments the projected annual (how much is expected each year from the investment) emission reductions total is 268,595 tons of CO2e. The annual investment emissions reductions expected is one third of that or 89,531.

Let’s put those numbers into context. The RGGI model rule states:

The regional emissions cap in 2021 will be equal to 75,147,784 tons and will decline by 2.275 million tons of CO2 per year thereafter, resulting in a total 30% reduction in the regional cap from 2020 to 2030.

The New York share of the total allocations is 38.9% so New York’s share of the emission reductions necessary is 885,721 tons per year. The New York investments from the RGGI allowance auction revenues are expected to only reduce emissions 89,531 tons at an average investment rate of $81.5 million. In other words the RGGI investments are only expected to provide about 10% of the needed emissions reductions. If we back calculate to determine how much would have to be invested in these programs to get all 885,721 tons needed each year, it would take $731 million per year. That translates into a weighted average allowance price of $48 per ton, nearly nine times the assumed price.

Even more gob smacking is the NYS Reforming the Energy Vision (REV) goal of a 40% reduction of 1990 emissions by 2030. NYS 1990 emissions were 205.8 million tons so the 2030 goal is 123.5 million tons. In 2015 NYS emissions were 178.9 million tons so for the next 15 years annual emission reductions have to be just under 3.7 million tons per year to get to the target goal. It would take over $3 billion per year to be invested in these programs to get the 3.7 million tons needed each year to meet the 2030 REV goal.

Conclusion

Actually looking at the performance of the RGGI investments and determining the cause of electric sector emission reductions tells a completely different story than that presented by NYSERDA and DEC at the NYS RGGI operating plan stakeholder meeting. RGGI investments are not providing anywhere near the emission decreases necessary to meet the additional 30% RGGI cap reduction that New York championed. As shown elsewhere, fuel switching was the primary reason emissions dropped since 2005 and the problem is that there are limited opportunities for further reductions. Given that simply using their own numbers to determine the effectiveness of their investments tells a different story than the public overview does not portend well for the ambitious goals of Governor Cuomo.

RGGI 2016 Program Review Completion

This is a post on the announcement of the completion of the second program review process of the Regional Greenhouse Gas Initiative (RGGI). The RGGI states completed their first program review process in 2013, and in Dec. 2017 completed a second program review process resulting in the 2017 Model Rule. This is another in a series of posts on RGGI that discusses how RGGI has fared so far (see the RGGI posts page).

I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. As a result, I have a niche understanding of the information necessary to critique the operating plan. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

The 2016 program review page lists the following documents that summarize the results:

According to the announcement:

Overall, the RGGI program review has been a rigorous and comprehensive evaluation, supported by an extensive regional stakeholder process that engaged the regulated community, environmental nonprofits, consumer and industry advocates, and other interested stakeholders. The improvements arising from this process, now included in the updated 2017 Model Rule, will ensure RGGI’s continued success, cost-effectively reducing CO2 emissions while providing benefits to consumers and the region.

My biggest concern with RGGI is that the States seem to have convinced themselves that they have actually done a rigorous and comprehensive evaluation. Contrary to EPA and State agency rulemakings, RGGI does not formally and comprehensively respond to critical comments and rebut concerns raised by stakeholders.   On the other hand, the regulated community did not provide much in the way of critical comments. While RGGI claims engagement with the regulated community the fact is that comments from the affected sources are in the minority of the comments submitted. I believe that is because, after years of submitting comments and getting no, and I mean absolutely no, response or indication that the comments have even been read much less provide any feedback why the comments and recommendations have been ignored the regulated community has given up.

In addition there is a public relations concern. Advocacy groups, most of the media and many politicians constantly portray reducing CO2 emissions as an essential and noble objective. Any deviation from that goal can bring adverse publicity, accusations of denying the science, and, potential recriminations by the regulatory agencies for other projects. As a result there is a legitimate reason for affected sources to stay silent.

Importantly, however the proposed changes to the program are unprecedented in several ways that, in my opinion, have not been addressed in the program revisions:

  • Supporters of the tighter caps want the cap so low that it will be a constraint but I am not aware of any cap and trade program that has set the caps so low that they constrain operations.
  • This allowance program is different because in this allowance bank non-compliance entities that own allowances purchased them whereas in cap and trade programs the excess allowances enter the market because they were deemed excess by a compliance entity. At some point the regulated sources are going to have to rely on non-compliance entities for allowances necessary for compliance and it is not clear how the market will react (but my suspicion is that it will cost a lot more than we have seen to date.)
  • Arbitrarily adjusting the allowance bank because it is “too” big is unusual for cap and trade programs. Whether they got the adjustment right and how it plays out in this unique system are unknown.
  • The containment reserve provisions are another unique aspect of RGGI. This is particularly worrisome because the academic theory on how the program should work is not supported by the history of the program. This new adjustment certainly is another substantial uncertainty.
  • Finally, the analysis of the impacts of RGGI are determined using the Integrated Planning Model.  The problem with the model is that it has perfect vision so it predicts the power sector will react perfectly. This certainly is not supported by past history.

Because I have spent a lot of time with those comments that were not addressed, I want the record to show exactly what the regulated community and one retired guy who no longer has any ties to that community were worried enough about to submit relative to the following changes described in the summary of model rule updates. A reminder the issues highlighted below represent my opinion only and not necessarily the position of any RGGI-affected source or even the current position of the organizations that submitted the comments.

 Size and Structure of Cap and Allowance Apportionment (XX-5.1)

The regional emissions cap in 2021 will be equal to 75,147,784 tons and will decline by 2.275 million tons of CO2 per year thereafter, resulting in a total 30% reduction in the regional cap from 2020 to 2030.

  • One major concern of environmental staff in the regulated community is an environmental constraint that cannot be achieved by the actions of the affected sources. Ultimately this is the biggest worry about any CO2 control program because there is no cost-effective add on control option available to reduce CO2 so that limits what an individual affected source can do. The largest emission reduction option available is to switch fuels either directly by changing the fuel used or indirectly by running at higher emitting fuel units less and lower emitting fuel units more. There are some options available for increased efficiency but because fuel costs are a major cost driver most of the big impact efficiency possibilities have already been implemented. The ultimate compliance option for an affected unit in any cap and trade program is to simply stop running when the allowances run out.
  • As a result of this concern the Environmental Energy Alliance of New York (EEANY) submitted a White Paper in June 1, 2016. That analysis showed that of the observed emission reductions RGGI was only responsible for somewhere between 24% predicted by an econometric modelling analysis by Murray and Maniloff and 3%, assuming that energy savings estimated by RGGI are replaced entirely by natural gas. The primary driver of lower CO2 emissions since RGGI’s inception was fuel switching from coal and oil to natural gas and that was the result of lower relative fuel prices independent of RGGI. The problem that should be addressed is that future emission reductions will not be able to rely on fuel switching.
  • EEANY comments on 10/16/2017 pointed out that the Investment Status Report for the period ending 12/31/2015 claims that the annual benefits of 2015 annual investments avoided 298,410 tons of CO2 which is 13.1% of the 2,275,000 proposed annual reductions starting in 2021. The concern is that the investment reductions have not been very large and it is not clear what could be done to dramatically increase those reductions.
  • I also submitted comments on this problem that made the same points. “The proposed program revisions released last month for RGGI call for an annual post-2021 cap reduction of 2,275,000 tons per year. In the Proceeds Investment Report, Table 1: Benefits of 2015 RGGI Investments Program, it lists the annual benefits of 2015 investments and shows an annual CO2 reduction of 298,410 tons. As also shown in the white paper submitted to RGGI by the Environmental Energy Alliance of New York the affected electrical generation units have made most if not all of the cost effective reductions possible from their operations. As a result, future reductions will have to come from sources outside the affected units and RGGI has no track record providing any assurance that its investments will be sufficient to meet the targets proposed. The fact is that RGGI has not provided a roadmap for the 30% reductions that they have proposed so it is not clear how this will work.
  • The majority of the commenters during the program review claimed that even greater emission cap reductions were appropriate because of the observed reductions. The model rule reflects that position. RGGI never responded to the EEANY White Paper analysis of historical reductions and ignored their own analyses that showed that relying on past investments have provided relatively small emission reductions.
  • Therefore the most important uncertainty is where are the emission reductions going to come from?

Budget Adjustments (XX-5.3)

The Model Rule contains language to address the private bank of allowances through one additional, distinct budget adjustment.

The Third Adjustment for Banked Allowances, would adjust the base budget for 100 percent of the pre-2021 vintage allowances held by market participants as of the end of 2020, that are in excess of the total quantity of 2018, 2019, and 2020 emissions. The third adjustment timing and algorithm is spelled out in the Model Rule and would be implemented over the 5-year period, 2021-2025, after the actual size of the 2020 vintage private bank is determined.

  • Banked allowances are surplus at the time the bank is determined. Compliance entities bank allowances to provide margin for future operating variations and potential monitoring problems. Proponents for tighter emission limits seem to want the available allowances to exactly match emissions but that is unprecedented in all previous trading programs.
  • The EEANY White Paper noted that: “In cap and auction programs that distribute the allowances directly to compliance entities the allowance market consists primarily of surplus allowances from compliance entities that do not need them for compliance. In the RGGI auction scheme allowances are available to anyone willing to purchase them. In the worst case non-compliance entities could purchase all the allowances in the auctions then charge affected sources above market prices. That has not happened and is unlikely to happen in the future. Importantly we have no data to indicate what level of non-compliance entity holdings would adversely affect the market.”

Cost Containment Reserve (XX-5.3(d) and XX-9)

The Model Rule contains language for the continued use of a cost containment reserve (CCR) that will provide flexibility and cost containment for the program. The CCR would consist of a fixed quantity of allowances, in addition to the cap, that would be held in reserve, and only made available for sale if allowance prices exceed predefined price levels.

The Model Rule contains language for an annual CCR allowance quantity of 10% of the regional cap beginning in 2021 and each succeeding year thereafter.

Allowances from the CCR would be fully fungible.

The CCR allowances would be made available immediately in any auction in which demand for allowances at prices above the CCR trigger price exceeds the supply of allowances offered for sale in that auction prior to the addition of any CCR allowances.

If the CCR is triggered, the CCR allowances would only be sold at or above the CCR trigger price.

The CCR Trigger Price will be $13.00 in 2021 and rise at 7% per year, so that the CCR will only trigger if emission reduction costs are higher than projected.

 Emissions Containment Reserve (XX-5.3(e) and XX-9)

The Model Rule contains language for the creation and use of an emissions containment reserve (ECR) that will respond to supply and demand in the market if emission reduction costs are lower than projected. States will withhold allowances from circulation to secure additional emissions reductions if prices fall below established trigger prices. At this time, Maine and New Hampshire do not intend to implement an ECR. Allowances withheld in this way will not be reoffered for sale.

The Model Rule contains language for an annual ECR allowance withholding limit of 10% of the budgets of states implementing the ECR.

The ECR trigger price will be $6.00 in 2021, and rise at 7% per year, so that the ECR will only trigger if emission reduction costs are lower than projected.

Containment Reserve Comments

  • The RGGI states have relied on academics to evaluate their program. Dr.William Shobe at the University of Virginia can run allowance behavior simulations with students acting as affected entities and presented results of a Resources for the Future and University of Virginia ECR analysis in a RFF webinar on June 14, 2017. EEANY raised an important point about a misconception in the academic perception of allowance management. In particular, there is a potential disconnect between the economic theory of allowance management and the reality of compliance entity allowance management. Economic theory presumes that allowance management decisions depend on long-run future outlooks of allowance supply and demand whereas in reality most compliance entity allowance management is determined almost entirely by short-term requirements, particularly for the current compliance period.

 

  • In Dr. Shobe’s June 14th presentation he draws the analogy between allowances and commodities. In the commodity world the decision between selling and storing the commodity today is determined by the long run anticipated future price of that commodity. If it is expected that there will be less of the commodity available in the future then the price will likely go up over time and entities will stockpile now to sell at a later time when the price is higher. In putting forth this economic theory, Dr. Shobe postulates that if compliance entities know that the allowance supply is going to be reduced in the future then current behavior will reflect that and they will purchase additional allowances now to bank for future use. Clearly, this describes the motivation and analysis of non-compliance entities but it is not driving allowance-buying decisions by compliance entities.
  • This “allowances are like commodities” theory is highlighted on Slide 19 in the presentation which states that it is the long-run supply that counts. “In markets for storable commodities (like allowances, for example), the current price and the plan for accumulation of a stock of the commodity depend on
    • The expected long-run total supply compared to
    • The expected long-run total demand.”
  • The reality of compliance entity management is that there is rarely long-term planning on the time scale envisioned by Dr. Shobe. RGGI allowances are typically purchased by the compliance entities for the current compliance period. Compliance entities do not want to tie up capital in allowances because they have other more pressing needs for that money. As compliance entities have become familiar with the auction system and their operational needs their share of the allowance bank has shrunk. Simply stated, the analogy between storable commodities and allowances is not appropriate.
  • Compliance entities have long commented that the perfect foresight of IPM which predicts that affected sources will buy allowances in early years because there will be a shortage in the future is not representative of actual behavior. It appears that this is also an issue with academic theories of allowance management. At timestamp 44:10 of the June 14th webinar recording, Dr. Shobe states that “students understand the ECR and they make coherent inter-temporal decisions” in the allowance management lab. Intertemporal is an economic term describing the “concept of how the current decisions made by an individual can affect the options that become available to them at a future time.” The student behavior is consistent with Dr. Shobe’s expectation that current allowance purchases will be dictated by long-run perceptions of supply and demand.

Offsets (XX-10.2 and XX-10.5)

The Model Rule contains language that eliminates two offset categories, the “SF6 Offset Category (XX-10.5(b))” and the “End-Use Energy Efficiency Offsets Category (XX-10.5(d)),” and updates and retains three categories that some States may continue to implement. Any awarded offset allowances would remain fully fungible across the states.

Other critical comments not addressed

  • Constrained allowance market
    • EEANY comments July 17, 2017 : Presuming that the analysis in the last program review was correct, the number of surplus allowances available should approach zero by 2020. How the auctions and the secondary market will respond to the first-ever scarcity situation is an unknown.
    • The Alliance recommended that the RGGI States would be wise not to significantly alter the parameters of the RGGI market until this condition is fully explored in real-time.
  • Compliance entity share of the allowance bank
    • EEANY comments June 6, 2017: The compliance entity share of the market is an even more pressing concern. Table 1a shows that the compliance entity share of allowances could be less than 20% as soon as 2018 and Table 1b shows that even if the Cost Containment Reserve is triggered each year from 2017 to 2020 the compliance entity share of the allowances will be less that the recommended 20% by 2020.
    • This trend shows that compliance entities will have to go to the non-compliance entities to obtain enough allowances to operate. It is not clear how this will affect market prices.
  • Allowance management theory
    • EEANY comments August 3, 2017: Economic theory presumes that allowance management decisions depend on long-run future outlooks of allowance supply and demand whereas in reality most compliance entity allowance management is determined almost entirely by short-term requirements, particularly for the current compliance period.
    • The Alliance recommended that RGGI sponsor an allowance management lab test with Dr. Shobe that uses compliance entity allowance managers. We believe that it would be a learning experience for everyone and that the result would be a better representation of what could happen with an ECR and CCR.
  • Integrated Planning Model
    • EEANY comments June 29, 2016: IPM presents the best case scenarios to determine the viability of further reductions because it has perfect vision. Because it “knows” that the emissions have to be at a certain level by 2030 the model predicts that more renewables will be built sooner so that an allowance bank is built up for the later years when the cap is smaller. It also assumes that affected sources will purchase allowances and bank them for the smaller cap years down the road.
    • These flaws are related to the allowance management theory argument described above. As a result the Alliance suggested that it would be prudent to wait and change major parameters individually until the effects of each change are known.

Conclusion

The program changes in the 2016 RGGI review affect multiple moving parts at the same time. The result will be several unprecedented aspects of the program. Despite assurances from the agencies I remain unconvinced that the “rigorous and comprehensive evaluation” touted by RGGI will in fact preclude the possibility of significant problems. Rather than taking a measured systematic implementation approach RGGI has chosen to change everything simultaneously. I am not optimistic that these changes will all work out as planned and think there is a chance that the success of RGGI to date will be endangered.

 

My Comments on the RGGI September 2017 Stakeholder Meeting

When environmental rules and regulations are promulgated there are rules which include comment periods where interested parties can submit their suggestions about the proposals. This post describes the process, the comments submitted to the recent Regional Greenhouse Gas Initiative (RGGI) stakeholder meeting and includes the comments I submitted.

I have extracted my disclaimer from my comments for use here. I have been involved in the RGGI program process since its inception. In the final years before my retirement I analyzed air quality regulations that could affect electric generating company operations and RGGI was one of the regulations reviewed. The opinions expressed in these comments 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. I believe the majority of the stakeholder opinions expressed at meetings and in submitted comments are, in my opinion, very naïve relative to the actual burden implementing their preferred alternatives, overly optimistic about the potential value of continued RGGI reductions and ignore the potential for serious consequences if things don’t work out as planned.

Comment Process

Ideally the comment period enables stakeholders to suggest modifications to the rules or schedules that make the final rule better. Of course the definition of better depends on where you are coming from. Pragmatic environmentalists in industry generally comment on topics that they think will affect their ability to comply with the proposed rules or address issues related to compliance obligations, primarily related to reporting. Our comments depend on evidence so we are careful to provide evidence for our assertions.

I have never worked on the other side of the dynamic between regulators and the regulated community so I am not sure how responses to comments are handled. Generally agencies are required to address all comments submitted and if the responses are debatable the regulated community can litigate the rule to address that problem. It is not clear how regulators handle quality vs. quantity of comments. If there is one comment that makes a strong argument on a particular point and many comments that argue the opposite side of that point with weak technical or purely emotional arguments who wins? There is no doubt in mind however, that even in the most professional regulatory agency with the most educated and experienced staff, that ultimately most decisions are made by political appointees who can ignore the strongest technical arguments depending on the political agendas involved.

In this case the Stakeholder meeting presented the plan for the future of RGGI that includes tightening the emissions restrictions, extending the program beyond 2020, and tweaking some of the program elements. As of the date of this writing, October 19, 2017 there were 12 comments listed for the September 25, 2017 meeting in addition to mine. Eight comments from organizations and a combined into one comment total of 2,051 individual comments from members of the Sierra Club commended the states for their proposal to reduce the emissions cap after 2020. The NY Independent System Operator commented that the analysis used to justify the rule had not handled the New York electric system correctly and that should be corrected. The Environmental Energy Alliance of New York (EEANY) pointed out that substantive issues they had raised throughout the program review process had not been addressed so it was prudent to slow down the implementation schedule. The NJ Department of Environmental Protection submitted comments that seemed to be the issues RGGI needs to address before they would consider re-joining the program. Here is a summary of the comments:

  • Ceres
    • Commends the states for their proposal to extend and strengthen the program through 2030.
  • The City of New York
    • Supports the cap emission reduction and formation of ECR but notes that RGGI States must go further if they are to align with the goals of the Paris Climate Agreement.
  • Collaborative for RGGI Progress
    • Voices strong support for the states’ consensus draft program recommendations released August 23, 2017.
  • Dynegy
    • Voices strong support for the states’ consensus draft program recommendations released August 23, 2017.
  • EEANY
    • Reiterates prior comments that were not addressed
    • Recommends delaying implementation of the cap reductions until we see what happens when the effects of earlier revisions become effective
  • Joint Comments (4 Industry Organizations)
    • Overall, supports the proposed changes and the extension of the program through 2030. We believe that the base cap has been set at a reasonable level
    • Specific recommendations for tweaks for improvement
  • Joint Comments (35 Environmental Organizations)
    • Thanks for open, transparent and responsive process
    • Strongly supports reducing the emissions cap
    • Recommendations for further reductions and tweaks to program
  • Joint Comments (16 Environmental Justice Organizations)
    • Supports proposal
    • Recommends stronger caps and more restrictions
  • NJ Department of Environmental Protection
    • Requested specific information relative to NJ participation in RGGI
    • Offered some criticisms of the supporting documentation
  • NYISO
    • Requested corrections to NY electric system modeling for IPM analyses
  • Physicians for Social Responsibility (PSR)
    • As health professionals who recognize the adverse health impacts of climate change and the need to mitigate those impacts now, we support the governors’ decision to strengthen the Regional Greenhouse Gas Initiative (RGGI) by committing to further cut carbon pollution.
  • Sierra Club Members (2,051 Individuals)
    • These comments were form letters signed by Sierra Club members that thanked the States for protecting the climate, reducing pollution, creating jobs, and growing the economy by reducing the cap.

My recommendation is the same as EEANY. Because past reductions are not going to be as easy as in the past it would be prudent to delay further emission reduction requirements.

In my opinion, all RGGI policy decisions have been and were in this case made for political reasons. As such no amount of technical arguments are ever going to win the day. You might ask then why bother submitting comments. Frankly, the only reason I go through the motions because if the problems I have documented actually happen I want to be in a position to say don’t blame the affected sources because RGGI was told that this could happen and the comments were ignored.

My Comments

I am submitting these comments on the September 25, 2017 RGGI Program Review Meeting and the proposed revision to the emissions cap in light of the RGGI Investment Proceeds report that was issued after the meeting. Based on the CO2 reduction numbers claimed in the Proceeds report the revised emissions cap appears to be risky and threatens the credibility of the program. It would be prudent for RGGI to delay implementation of any cap reductions post-2020 to determine the feasibility of meeting additional reductions based on the actual rate of CO2 reductions produced by RGGI and other programs.

CO2 Reductions from RGGI Investments

Before I use results in the Investment of RGGI Proceeds in 2015 report I want to comment on a relevant issue with it. The Executive Summary notes that “the RGGI states have reduced power sector CO2 pollution over 45 percent since 2005”. There is no better example of the pervasive mis-direction in the reporting on the impact of RGGI in this document and the RGGI reports overall than this statement. The casual reader would certainly conclude that the RGGI program itself was responsible if not for the entire reduction at least a sizeable portion of the reduction. However, looking at CO2 reductions in the RGGI states that is not the case. In the first place, the program started in 2009 not 2005. As shown in Table 1, the reduction from the last year before RGGI (2009) was instituted was 31%, much less than the 45% claimed. (Note that my numbers don’t match the RGGI report which I believe is because I relied on the EPA Clean Air Markets Division database with the assumption that summing all the annual CO2 from the all programs that report CO2 was a good enough approximation. If RGGI only summed data from RGGI-affected units it could certainly account for the difference between numbers.)

However, it is even worse. CO2 emissions in 2015 were 41 million tons less than the 2006-2008 baseline so the investments that were projected to avoid the release of 20.5 million tons of CO2 could account for no more than 50% of the observed reduction. The 20.5 million decrease is only a 16.1% reduction from the 2006-2008 baseline. This is consistent with the white paper submitted to RGGI by the Environmental Energy Alliance of New York which showed that RGGI is only responsible for between 24% and 5% of the observed reduction.

Importantly, there is an implication to the RGGI investments “success” with carbon reductions relative to the proposed 30% reduction in the emissions cap. The proposed program revisions released last month for RGGI call for an annual post-2021 cap reduction of 2,275,000 tons per year. In the Proceeds Investment Report, Table 1 Benefits of 2015 RGGI Investments, it lists the annual benefits of 2015 investments and shows an annual CO2 reduction of 298,410 tons. As also shown in the white paper submitted to RGGI by the Environmental Energy Alliance of New York the affected electrical generation units have made most if not all of the cost effective reductions possible from their operations. As a result, future reductions will have to come from sources outside the affected units and RGGI has no track record providing any assurance that its investments will be sufficient to meet the targets proposed. The fact is that RGGI has not provided a roadmap for the 30% reductions that they have proposed so it is not clear how this will work.

I have personal serious doubts where the additional reductions will come from. There is a lot of hopeful reasoning if the presumption is that other state programs will provide the necessary energy changes needed to reduce CO2 emissions from the affected entities. Even though it has been said before, I will say it again: if a compliance entity has no allowances available to cover emissions their only compliance alternative is to stop running. If that happens then RGGI will have a whole lot of explaining to do in order to salvage any credibility as a template for a successful control program.

Potential Impact

RGGI has never quantified the potential impacts of their program on global warming. In order to address that shortcoming I have adapted data for RGGI emissions in Table 2 RGGI 30% Reduction Impact on Global Warming  from the analysis in Analysis of US and State-By-State Carbon Dioxide Emissions and Potential “Savings” In Future Global Temperature and Global Sea Level Rise. The original analysis of U.S. and state by state carbon dioxide 2010 emissions relative to global emissions quantifies the relative numbers and the potential “savings” in future global temperature and global sea level rise from a complete cessation of all CO2 emissions in the RGGI region as well as the proposed 30% reduction.

My analysis shows current growth rate in CO2 emissions from other countries of the world will quickly subsume any reductions in RGGI CO2 emissions. According to data from the U.S. Energy Information Administration (EIA) and based on trends in CO2 emissions growth over the past decade, global growth will completely replace an elimination of all 2010 CO2 emissions from RGGI states in 190 days. The proposed 30% reduction in the RGGI emissions cap will result in an additional reduction of 22.5 million tons but global growth will completely replace the expected reductions in 10 days.

Furthermore, using assumptions based on the Intergovernmental Panel on Climate Change (IPCC) Assessment Reports we can estimate the actual impact to global warming for a change to the cap. The proposed 30% reduction in the RGGI emissions cap will result in an additional reduction of 22.5 million tons which is projected to ultimately impact global temperature rise by a reduction, or a “savings,” of 0.00033°C by the year 2050 and 0.00069°C by the year 2100.

These predicted temperature savings for the 30% RGGI emission reduction have to be put in context to fully appreciate their insignificance. The National Oceanic & Atmospheric Administration’s Requirements and Standards for NWS Climate Observations states that: “The observer will round the entered data to whole units Fahrenheit”. The nearest whole degree Fahrenheit (0.55°C) is over 1600 times greater than the projected change in temperature so the impact will not be observed.

Another way to relate to the savings is to compare those temperatures differences to climatological temperature variation. Table 3 RGGI 30% Emission Reduction Temperature Savings  compares the projected temperature savings to the temperature climatology of Syracuse, NY. I chose Syracuse because I live there but using any location in the RGGI states would show similar numbers. On an annual basis the temperature range for the highest and lowest recorded temperatures in Syracuse was a 129 deg. F which is 214,000 times greater than the temperature difference that would result from the proposed 30% reduction in emissions. On a seasonal basis the ranges between the daily maximum, minimum and average are all listed and the lowest ratio is that the daily minimum temperature range over the year is 77,000 times greater than the temperature difference that would result from the proposed 30% reduction in emissions. There also is a range in temperature every day and the maximum, minimum, and average hourly maximum and minimum difference ranges are listed. The lowest ratio is for the minimum difference between the observed maximum and minimum temperatures and that is over 22,000 times greater than the temperature difference that would result from the proposed 30% reduction in emissions.

Unfortunately those numbers still don’t completely reflect the futility of claiming that the 30% RGGI emission reduction is anything other than a symbolic gesture. A more relatable context would be to consider them in relation to typical changes in temperature with elevation and latitude. Generally, temperature decreases three degrees Fahrenheit for every 1,000 foot increase in elevation above sea level. The temperature difference projected for the 30% reduction in RGGI emission is equivalent to a one inch drop in elevation. The general rule is that temperature changes three degrees Fahrenheit for every 300 mile change in latitude at an elevation of sea level. The temperature difference projected for the 30% reduction in RGGI emission is equivalent to going south 159 feet. Given that those changes are insignificant compared to everyone’s daily experience it is clear that no environmental impacts caused by global warming could possibly be affected with this emission reduction.

Summary

RGGI has been a success inasmuch as it has successfully demonstrated how a cap and auction program can be run, has contributed to the observed CO2 reductions and has provided worthwhile investments in energy efficiency, energy conservation, and ratepayer direct bill assistance. On the other hand, RGGI has no demonstrated success providing the magnitude of CO2 reductions necessary to meet the proposed post-2021 cap reduction of 2,275,000 tons per year. Therefore, it would be prudent for RGGI to delay implementation of any cap reductions after 2020 to determine the actual rate of CO2 reductions produced by other programs. As shown in my analysis of global warming impacts there is no pressing environmental impact rationale to implement reductions as proposed. The success and the credibility of the program itself is endangered by the reckless insistence on a further 30% reduction in emissions at this time.

Investment of RGGI Proceeds in 2015

This is a post on the latest Regional Greenhouse Gas Initiative (RGGI) report: Investment of RGGI Proceeds in 2015. It is another in a series of posts on RGGI that discusses how RGGI has fared so far (see posts labelled RGGI in the menu). Although the press release, RGGI Report: Investments Generating Consumer Benefits, describes the benefits of the program in glowing terms there are some unsettling numbers buried in the report.

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

Summary of the Report Results

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 2015 by RGGI investments, which have reduced harmful carbon dioxide (CO2) pollution while spurring local economic growth and job creation. The lifetime effects of these RGGI investments are projected to save 28 million MMBtu of fossil fuel energy and 9 million MWh of electricity, avoiding the release of 5.3 million short tons of carbon pollution.

As a whole, the RGGI states have reduced power sector CO2 pollution over 45 percent since 2005, while the region’s per-capita GDP has continued to grow. RGGI-funded programs also save consumers money and help support businesses. RGGI investments in 2015 are estimated to return $2.31 billion in lifetime energy bill savings to more than 161,000 households and 6,000 businesses which participated in programs funded by RGGI investments, and to 1.5 million households and over 37,000 businesses which received direct bill assistance.

The report describes how the RGGI investments were used 2015, a brief summary of cumulative investments, and then provides specific information for each state including an example of the programs.

Critique

The first step evaluating the claims of the RGGI states is to convert the pretty graphics to numbers. Chart 4 Cumulative RGGI Investments by Category is an example of the graphical data provided. In the table, All-Time RGGI Investments by Category %, I extracted the numbers shown for each analogous State graphic. In the State information sections the amount of money invested, received and diverted to the general fund for each state is listed. In the table, All-Time RGGI Investments by Category $Millions, I listed those numbers then multiplied them by the State category percentages to get total category amounts.

When you extract the numbers a less complimentary picture of the RGGI proceeds investments emerges. For starters, Chart 4 RGGI Investments by Category does not include the embarrassing raids of RGGI funds by New York and New Hampshire. In reality, the correct percentages are shown as the last row in the All-Time RGGI Investments by Category $Millions table. Similarly, the individual state category investments do not include the General Fund raids which would have shown that 10% of the New York “investments” went to political expediency.

There are some financial issues raised when the amounts are available for each state. Note the difference between the RGGI monies received and investments made and the column labelled “investments received %” which is simply investments divided by received. There is a huge range between the states. Vermont is the most efficient turning the money received into investments but six of the nine states all managed to invest at least 80% by the end of 2015. Delaware, Rhode Island and New York did much worse. It is probably no coincidence that the Administrative cost percentages for Delaware, Rhode Island and New York were among the highest four state percentages.

Administrative costs in general and the tithe to RGGI total over $100 million.   Coupled with the general fund raids there is clearly a cautionary tale for carbon tax advocates who suggest that returning those taxes revenues to the public will minimize impacts. In my opinion, whenever there is a large pot of money available there will be politicians abusing their power to the disadvantage of the public.

The cost effectiveness of these investments is not presented in the report. The report notes that the lifetime effects of the 2015 RGGI investments are projected to save 28 million MMBtu of fossil fuel energy and 9 million MWh of electricity, avoiding the release of 5.3 million short tons of carbon pollution. In Chart 2 there is a note that states that the RGGI states invested $410,158,329 in 2015. The lifetime effects cost $15 per MMBtu, $46 per MWh of electricity and $77 per ton of carbon. I am unfamiliar with the benchmark costs per MMBtu and MWh for comparison with the RGGI effectiveness. However, the common justification for carbon reduction costs is the social cost of carbon. At a 3% discount rate, EPA says that the 2015 social cost of carbon was $36. RGGI investments are reducing carbon at twice the rate claimed to value the climate impact of rulemakings so their investments are not cost effective in this regard.

There is one other aspect of this report that needs to be addressed. The Executive Summary notes that “the RGGI states have reduced power sector CO2 pollution over 45 percent since 2005”. There is no better example of mis-direction in the reporting on the impact of RGGI in this document than this statement. The casual reader would certainly conclude that the RGGI program itself was responsible if not for the entire reduction at least a sizeable portion of the reduction. However, looking at CO2 reductions in the RGGI states that is not the case. In the first place, the program started in 2009. As shown in the EPA CAMD Annual CO2 Trend Data table the reduction from the last year before RGGI was instituted to 2015 was 31%, much less than the 45% claimed. (Note that my numbers don’t match the RGGI report which I believe is because I relied on the EPA Clean Air Markets Division database with the assumption that summing all the annual CO2 from the all programs that report CO2 was a good enough approximation. If RGGI only summed data from RGGI-affected units it could certainly account for the difference between numbers.)

However, it is even worse. The 20.5 million decrease is only a 16.1% reduction from the 2006-2008 baseline. This is consistent with my previous post on CO2 reductions due to RGGI which showed that RGGI is only responsible for between 24% and 5% of the observed reduction.

There is one final implication to the RGGI investments “success” with carbon reductions. The proposed program revisions released last month for RGGI call for an annual post-2021 cap reduction of 2,275,000 tons per year. In the Proceeds Investment Report Table 1: Benefits of 2015 RGGI Investments Program the annual benefits of 2015 investments lists an annual reduction of 298,410 tons. As shown in a white paper submitted to RGGI by the Environmental Energy Alliance of New York the affected electrical generation units have made most if not all of the cost effective reductions possible from their operations. As a result, future reductions will have to come from other investments but RGGI has no track record providing any assurance that RGGI investments will be sufficient to meet the targets proposed. For the record if a compliance entity has no allowances available to cover emissions their only compliance alternative is not run. If that happens then RGGI states will have a whole lot of explaining to do.

 

 

Academic RGGI Economic Theory of Allowance Management

This is another in a series of posts on the Regional Greenhouse Gas Initiative (RGGI). The program includes periodic reviews to consider program successes, impacts, and design elements. In the current program review process one issue is the potential to add a new component to the program called the Emissions Containment Reserve. Resources for the Future (RFF) and University of Virginia (UVA) had a webinar on June 14, 2017 on the results of their analyses of that component and RFF followed up with comments submitted to RGGI on July 17, 2017. This post addresses what I believe is a fundamental problem with the academic theory of RGGI allowance management.

I have been involved in the RGGI program process since its inception. Before retirement from a Non-Regulated Generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Dr. William Shobe (UVA) and Dr. Dallas Burtraw (RFF) described their analysis of the effect of an Emissions Containment Reserve (ECR) in the June 14, 2017 webinar. RFF used a model to project future allowance supply, demand and cost. UVA did a laboratory experiment at the UVA Economics Laboratory using students as allowance managers.

I believe they both have the same perception of the economic theory of RGGI allowance management. The UVA theory is summarized in slide 19 of the webinar slide presentation. That slide states that it is the long-run supply that counts. “In markets for storable commodities (like allowances, for example), the current price and the plan for accumulation of a stock of the commodity depend on

  • The expected long-run total supply compared to
  • The expected long-run total demand.”

Similarly, in the RFF comments to RGGI it is noted that the allowance banking “propagates and adjusts the value of an allowance over time in light of the opportunity cost of holding the allowance as a financial asset (versus buying one at a later point in time).”

However, I believe that RGGI allowance management is different because the affected sources do not treat allowances as a storable commodity or a financial asset in the usual sense of the term. Instead allowance management is overwhelmingly driven by regulatory requirements for the current compliance period. i.e., do I have enough allowances to cover expected emissions? Financially it is simply another cost of operating and not a potential profit center. The important difference is that the academic economic theory holds that affected sources are looking years down the road but in reality there is no such long-term time horizon for affected sources. Their decision to buy allowances is driven by their expected operations in the period between auctions and at most the entire compliance period and to include a small margin for operational variations and regulatory compliance.

I have worked in New York for a long time and I have been unable to find a single company that will admit to long-run allowance planning. In the first place, allowance purchases cost a significant amount of money. New York electric generating companies are on a tight margin with little extra money available, so the idea that money could be available to purchase allowances for needs more than three years in the future is laughable amongst my sources. It is also important to note that in New York that the non-regulated generating companies have been in a constant state of change since de-regulation began before 2000. Very few facilities are still owned and operated by the same companies that purchased when de-regulation began. As a result of that turmoil there are few incentives to purchase allowances for future needs because the expectation is that facility ownership changes will continue going forward.

In addition, the RGGI cap and auction CO2 allowance program is different than a traditional cap and trade program for SO2 or NOx. In a traditional program, allowances are allocated proportionally to affected sources based on historical operations. When the cap is established the total emissions in the State have to be lowered to that level. On the basis of the cap level, affected sources can determine if it makes sense to install control equipment or purchase allowances to comply with their compliance obligations. As long as somebody can over control and generate surplus allowances to subsidize their control investments then allowances should be available on the market for use if control costs are not cost-effective at a particular affected sources.

In the RGGI cap and auction system, everyone has to buy allowances. Even if there were an option to control CO2 emissions (and there isn’t anything available for existing sources that is cost effective) a source installing controls has to buy allowances so there wouldn’t be an offset to the control costs. As a result of all these factors the affected sources have universally adopted an allowance management strategy with a short time horizon.

So how does this affect the analyses and what could be done?

I am not sure how this affects the modeling and the lab experiment for allowance management. I note, however, that the presentation and the comments both imply decisions should be based on future expectations of allowance costs. I believe that is an outgrowth of their mistaken RGGI allowance management theory. Instead I believe that the ECR should be based on observed allowance price behavior.

I would love to see the UVA allowance tests be repeated using actual industry allowance managers and industry allowance compliance staff. It would be educational for both the academics and industry staff and would confirm or blow up my perception of the differences between academic theory and actual allowance management practice. It would also confirm whether the conclusions based on the academic theory are consistent.

One final note relative to the economic analyses done by RFF and UVA. As far as I can tell they both presume future emission cap reductions (RFF modeled a 3.5% reduction). The presentation and comments both implicitly assume that the primary motivation for the ECR is because there is a potential that future emission reductions will be greater than cap reductions leading to an over-supply of allowances and lower prices than are deemed acceptable.

I believe the more likely scenario is that emissions don’t continue at the historical decrease rate and that an allowance deficit is more likely[1]. Consequently, I think that using the ECR to determine future emission reductions instead of arbitrarily picking a percentage reduction is less risky. The academic presumption that future reductions are “easy” also influences their recommendations relative to the ECR. At the very least they should consider a scenario where reductions less than expected.

[1] My rationale is that historical emissions decreases have been largely driven by fuel switching from a more expensive to cheaper and less emitting fuel. The potential for similar future reductions is largely gone. In an earlier post I showed that the experience so far of RGGI induced emission reductions is pretty low. The upper bound is an econometric model that estimates that emissions would have been 24 percent higher without the program. RGGI estimates that emissions would have been 17% higher than without a program. If you assume that all the savings in fossil fuel use only displaced natural gas use then emissions would have been only 5% higher.

RGGI Costs Relative to NYS Electric Supply Rate Requests

This is another in a series of posts on the Regional Greenhouse Gas Initiative (RGGI). The program includes periodic reviews to consider program successes, impacts, and design elements. In the current program review process one of the big issues is whether to set new lower caps after 2020. Ultimately however ratepayers will have to bear the costs of further reductions. This post compares the proposed costs relative to recent rate requests and approved rate increases by New York State (NYS) electric utilities.

I have been involved in the RGGI program process since its inception. In the final years before my retirement I analyzed air quality regulations that could affect electric generating company operations. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone. I am motivated to write these posts on RGGI because the majority of the stakeholder opinions expressed at meetings and in submitted comments are, in my opinion, overly optimistic about the potential value of continued RGGI reductions and ignore the potential for serious consequences if things don’t work out as planned. I am particularly disappointed that a bunch of government bureaucrats can simply decree additional costs to ratepayers without any substantive scrutiny by the respective State public service organizations or public knowledge.

Ratepayers in New York State have electricity bills made up of delivery and supply charges. The delivery charge is what is paid to transport electricity to the customer over power lines. The supply charge is what is paid for the electricity used. In order for the local electric utility to change the rates paid to transport the electricity delivered they have to go through a rate request process with the New York State Department of Public Service. On the other hand the price paid for electricity used is not directly regulated.

I think it is instructive to compare the indirect allowance costs with recent rate case costs for the delivery charge. I was unable to find a single summary of the most recent requested and granted rate case values for the delivery charge component of ratepayer bills. I searched for numbers and using a combination of news reports and rate case documents came up with an estimate. The NY total for the most recent rate requests for electric delivery for the investor owner utilities and LIPA is $1,282 million (Table 1, NYS Electric Delivery Rate Cases).

The cost of allowances eventually and indirectly works its way back to ratepayers. RGGI is a “Cap and Auction” program that caps electric generating unit emissions and then auctions permits to emit CO2 or allowances. The proceeds from the auctions are supposed to be invested in “strategic energy and consumer programs” but on two occasions New York Governors have raided the RGGI proceeds for other uses. The allowance costs are buried in the supply charge.

The RGGI states use the production cost model Integrated Planning Model (IPM) to analyze the impacts of air quality policies including emissions and allowance costs. This is a massive model that purports to estimate how the entire United States utility sector will react to changes in air quality regulations. In order to do that they have to model not only generator operations, fuel costs and control equipment strategies, but also the transmission system.  I think there are problems with the IPM results that will be addressed in another post but for this analysis I will just accept the numbers the RGGI states are using.

In the current program review analysis there are three draft policy scenarios for possible changes to the RGGI program after 2020. As it stands now there are no further reductions promulgated for the RGGI cap after 2020 but the RGGI states are considering and have evaluated three reduction scenarios: continuing the 2.5% reduction in place up to 2020 until 2030, a 3% reduction and a 3.5% reduction. The IPM model results for the scenarios are compared to a reference case so the results are consistent. In order to cover the full range of outcomes sensitivities are run for each scenario. In the high sensitivity cases assumptions are made for plausible reasons why emissions could be higher than the reference base case and in the low sensitivity the emissions are lower. In addition, sensitivity cases with and without a national program were run. As a result there were a total of nine policy case runs.

On the RGGI website in the 2016 program review documents the model output for each of the policy runs (June 27, 2017 Meeting Materials) and the reference cases (April 20, 2017 Meeting Materials) are listed in spreadsheets. Each spreadsheet lists the model estimates of capacity additions (what electric generating capacity the model and what the states tell the model to include because of regulations); generation (how much the existing and projected units will produce); prices (including firm power prices, energy prices, capacity prices, allowance prices, natural gas prices, and renewable energy credit prices); total CO2 emissions; fuel consumption for different fuel types; and transmission flows into and out of the RGGI power grids. Those results are presented by region and each state. Note that the model output does not include projections for every year. For the 14 years 2017-2030 there is model output for six years.

For this analysis I extracted and consolidated the projected emissions and allowance prices. I estimated annual emissions and prices by interpolating between model projections. The ultimate cost to the ratepayer should be equal to the total revenue at the auctions which equals emissions times the allowance prices. Table 2, IPM 2017 modeling of annual CO2 credit price, CO2 emissions and CO2 allowance auction, lists the results from 2017 to 2030 for all the reference case scenarios and all the policy case scenarios. The Key to the 14 different modeling runs lists the assumptions made for each run. RGGI compares the reference case to the IPM modeling results. The difference between the reference case, no national program and each of the policy scenarios is shown in Table 3. Depending on the changes made to the program, consumer costs for allowance revenues are projected to increase between $134 and $604 million in 2021 to between $254 million and $1,011 million in 2030 for the nine RGGI states. For each scenario the relative share of New York emissions is listed for 2030 along with the cost for just New York. The New York share of those costs ranges from $108 million to $391 million. Table 3 also compares the RGGI allowance costs to total electric delivery costs ($1,282 million).

My point is that completely outside of any DPS review and the glare of ratepayer advocacy scrutiny, government bureaucrats are contemplating additional costs of between 8% and 31% of the most recent rate requests. I think that it would be in the best interests of the State that there was more recognition of this process.