New Jersey Re-Joins RGGI

On June 17, 2019 New Jersey rejoined the Regional Greenhouse Gas Initiative (RGGI). If there ever was any doubt that participation in RGGI is primarily politically motivated this should clear that up. It is another in a series of posts on RGGI that discusses how RGGI has fared so far. In particular this post compares New Jersey’s issues with RGGI under the previous administration and notes that with a new administration the state joined without getting them resolved.

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. Because RGGI does not respond to critical comments and rebut concerns raised by stakeholders critical stakeholder comments have dropped off significantly. Nonetheless I have commented on the rules personally if for no other reason to be on the record. In this instance the New Jersey Department of Environmental Protection submitted comments for the record that should be publicized. 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.

New Jersey Comments on the 2017 RGGI Program Review

After the September 25, 2017 RGGI posted program review stakeholder comments and the New Jersey Department of Environmental Protection submitted comments. I will discuss a few of their comments.

The program review proposed to amend and extend a revised RGGI program out to 2030, with a goal of cutting CO2 emissions an additional 30% between 2020 and 2031.  The New Jersey comments pointed out that the cost of RGGI allowances under the new proposal may rise by a factor of 8 by 2030. Nothing changed when the plan was implemented,

Their review suggested that “the proposed RGGI program could result in significant increases in electricity rates for any participating RGGI state”. Quite rightly they pointed out that while energy efficiency (EE) can reduce the total amount spent on electricity and can offset increases in electric rates, there is a point where returns on EE investments diminish. RGGI never acknowledged that and they simply suggested that as more money is spent on EE, the savings will continue to rise proportionately.

The New Jersey comments asked RGGI to acknowledge and evaluate the impacts on individuals and businesses that will see increases in energy rates and little to no reductions in energy use. For those who have already invested in EE there is little opportunity for further reductions and they will have to bear the full increase in cost. This comment was ignored.

New Jersey noted that participating RGGI states already have some of the highest retail electricity rates in the nation, with six of the nine states in the top ten, and increased energy costs should be of major concern. If increased electric rates drive business and industry to other states or nations with less costly and more polluting electric power production, net increases in CO2 emissions would result, to the detriment of the environment as well as the local RGGI economies that have suffered the loss of business and industry. The proposed 8-fold increase in RGGI allowance costs will increase the difference in electric rates between RGGI and PJM states, causing a greater shift of electric production to PJM states. This is known as “Leakage”. RGGI did not address this in the final rule and this may result in a net global increase in CO2 emissions, even if the participating RGGI states reduce their own mass emissions.

These NJ comments show the downside if New Jersey were to join RGGI.

NJ spends the 2nd highest amount in the USA (after CA) and highest in the eastern USA on RPS compliance in 2016 (7.5% RPS costs vs 1.6% average for other states with RPS) with Massachusetts close behind. (Source: U.S. Renewables Portfolio Standards, 2017 Annual Status Report, Lawrence Berkeley National Laboratory, July 2017).  The 7.5 % of NJ electric bill that is dedicated to renewable energy and energy efficiency is high relative to the average state in the USA. Not further increasing the electric rates significantly is important in states like NJ that already have major EE and RE programs.

The New Jersey Board of Public Utility’s (BPU’s) energy efficiency program and Renewable Portfolio Standard (RPS) are well funded and effective. If NJ funded energy efficiency with RGGI allowance revenue, this would result in greater increases in the cost of wholesale power since the RGGI allowance value would be bid into the electricity markets. For every $1 in allowance revenue from RGGI NJ ratepayers would pay up to about $2 in increased electric costs. For every $1 invested in energy efficiency and renewable energy in NJ, the NJ ratepayers now pay about $1.

The societal benefit charge (SBC) which is used to fund energy efficiency in New Jersey, is placed on the retail use of electricity, not the wholesale production of electricity. Therefore, it has no direct effect on the wholesale price of electricity and does not cause a shift of electric production from clean NGCC units in NJ to much higher emitting coal units in non RGGI PJM states. While increasing retail electric rates, the SBC can also indirectly reduce wholesale electric rates because the energy efficiency financed by the SBC reduces the demand for electricity. That reduction in the demand for electricity reduces emissions of air pollutants. The reduction in wholesale prices of electricity may offset the price of the SBC.

The use of all SBC funds in NJ contributes to NJ’s economy. SBC funds do not flow to other states. Revenue amounts raised by the SBC and the effect on electric rates are predictable and certain compared to the revenue raised by selling RGGI allowances at an uncertain auction price. A dollar of ratepayer expenditure under the SBC results in a dollar of benefit to the NJ ratepayers. About half the ratepayer increase caused by RGGI would benefit the nuclear power industry.

Conclusion

In my opinion the New Jersey comments correctly identified several issues that were ignored when the final rule was promulgated. Moreover they also included comments that were good reasons for New Jersey to not join RGGI. As soon as there was a new administration these concerns were dismissed. Not because they were addressed or new analyses showed the problems were irrelevant.   They were dismissed because they were inconvenient.

RGGI in the Weeds

Tom Shepstone at Natural Gas Now has graciously re-posted several of my posts including this post Regional Greenhouse Gas Initiative on the Fast Track to Nowhere based on this post. Unfortunately, the arcane world of pollution control programs is difficult to understand without a lot of background and my posts presume more than a little background. As a result there are some things that need to be clarified with respect to Tom’s conclusions from my post.

Tom made the following four conclusions. My indented and italicized comments follow.

First a bit of background. The Regional Greenhouse Gas Initiative (RGGI) is a cap and trade program. In order to understand the point I was trying to make you need to understand the fundamentals of cap and trade. What you need to know about this pollution control approach is that there are two components: the cap and tradable allowances for the pollutant covered. The cap sets a limit on the total regional emissions that must be met over a trading season. The cap is set at a level such that the pollutant of interest will be reduced to levels that are supposed to improve air quality to the appropriate standard. Setting the cap level correctly is critically important: too high and the environmental objectives won’t get met and too low and the market mechanism won’t work.

 There is a wrinkle for RGGI. Instead of a traditional cap and trade program it is a cap and auction program. Normally allowances are allocated to the affected sources based on some past historical performance metric. In RGGI allowances are sold off in quarterly auctions. The affected sources universally consider this a tax inasmuch as they have to pay for the allowances they need to operate. Seriously, no one is claiming that RGGI is going to have any impact on global warming but proponents can claim that they use the auction proceeds to fund all sorts of feel-good initiatives that in some cases actually do reduce CO2 emissions. I described my thoughts whether RGGI was a success here, here, here and here.

Natural gas has reduced emissions faster than anyone thought possible, making it necessary to actually increase emission allowances in 2017 for the obvious purpose of giving renewables at least a chance to catch up.

When the RGGI program was being implemented the forecasts of future generation and emissions assumed much higher gas prices which resulted in high coal unit usage and high CO2 emissions. As a result the cap was set high but the natural gas revolution made those estimates inappropriate. As a result when RGGI started the auction price of allowances was so low that proponents of the program were not getting as much money as they wanted.

There is a scheduled program review component in RGGI and during that process the existing caps were lowered significantly and future reductions were incorporated that are more ambitious than I believe is warranted. The RGGI states and environmental organizations believe that RGGI was the reason for most of the reductions and argued that because reductions had been so significant to date that lower caps were appropriate. However, they missed the point that the reductions were mostly due to reduced operations in the RGGI states and fuel switching from coal and residual oil to natural gas. RGGI had very little to do with it.

Renewables are not catching up much, if at all, because investments in them are dependent on Federal subsidies and, therefore, their potential is limited.

RGGI auction proceeds are supposed to be used to reduce emissions or provide ratepayer relief. The fact of the matter is that the record of RGGI investments actually reducing emissions is poor.   As Tom notes the potential is limited for further reductions based on RGGI’s own data.

Because of these facts, the opportunities to achieve meaningful reductions in greenhouse gases by rewarding investment in “compliance” entities are dissipating like a sunset and faster than the wind dies down in severe cold.

I did not adequately describe the terms “compliance entities” and “non-compliance” entities. Compliance entities are those fossil-fired generating units that have the compliance obligation to surrender a RGGI allowance for every ton of CO2 emitted. Non-compliance entities are those organizations that have purchased RGGI allowances as investments.

This means the Regional Greenhouse Gas Initiative is headed nowhere in terms of the strategy the public has been sold by the politicians; it is approaching a situation (if not already there) where it will have to reward investment in non-compliance entities such as natural gas fired power plants or fine these entities, which will then pass the costs onto consumers who will never know what hit them.

I agree that RGGI is headed nowhere but the problem is different than Tom described. The problem is that the non-compliance entities (think Morgan Stanley and other investment companies) now hold the majority of the RGGI allowances. The RGGI states reduced future allowances allocated to the auctions and their cap presumes that further reductions are possible when the fact is that most of the fuel switching has already occurred. As a result, there are not enough allowances for compliance entities to purchase at upcoming auctions in order to operate. Therefore they will have to go to the non-compliance entities and purchase their allowances if they want to run. This shortage will increase the price and the non-compliance entities will profit. However, the public will not get any benefit from the increased price of the non-compliance entity allowance sales because they only get benefits from auction proceeds.  In other words, the non compliance entities have already purchased the allowances so the higher price of the allowances due to profiteering will simply be passed on to consumers. Worse if the compliance entities are not able to get the allowances they need to run their only compliance option is to not run which could lead to reliability issues.

My final point is that this is uncharted territory for RGGI. No one knows how the market will react or what the prices on the market relative to auctions will be when this allowance shortage hits. Consumers in the RGGI states will be the guinea pigs for this experiment.

RGGI Emission and Allowance 2018 Status

This is a post on the status of emissions and allowances in the Regional Greenhouse Gas Initiative (RGGI). It is another in a series of posts on RGGI that discusses how RGGI has fared so far and what might happen in the future. The fact is that RGGI is edging towards uncharted territory where affected sources that have to comply with the regulations are going to have to get the allowances they need for compliance from investors.

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.

Emissions

RGGI Annual CO2 Emissions lists the total CO2 emissions from the states currently in RGGI. After pretty consistent reductions over time last year there was a six million ton increase from 2017. Stay tuned to another post that looks into the emissions data in more detail. However, note that I have previously posted on the reductions to date which suggest that further reductions will be much more difficult than in the past.

Allowance Status

RGGI is a cap and auction program. Allowances are sold in quarterly auctions to anyone and the proceeds are supposed to be invested in programs that reduce CO2 or ratepayer impacts. RGGI states have modified the original auction allocations to reduce the number or bank of the allowances that have been purchased but not used yet because the original estimate did not account for the possibility that natural gas would supplant coal to the extent observed. Up to this point the affected sources or compliance entities have been able to purchase the allowances needed to cover emissions from auctions. This is going to change in the next couple of years.

RGGI relies on Potomac Economics to provide technical analyses. Frankly, my impression is that the purpose of those reports is to obfuscate and confuse rather than clearly show the status of the program. One of my biggest frustrations is that there is no summary status report and I have inconsistencies in my summary estimates. I have made a couple of guesses at the status of the number of allowances that are held for compliance purposes after the 2018 RGGI emissions are fully surrendered.

According to the Potomac Economics Secondary Monitoring Report for the 3rd quarter of 2018, there were 155 million allowances in circulation and 72 million were held for “compliance purposes”. According to the Potomac Economics Market Monitor Report for the fourth quarter of 2018 entities purchasing allowances for “compliance purposes” bought 77% of the 13,360,649 allowances sold. In RGGI Allowance Allocation Status End of 2018 I added the fourth quarter allowances to get 168 million allowances in circulation and 82 million allowances held for “compliance purposes”. RGGI-wide CO2 emissions were 72 million tons in 2018. Ultimately only 10 million allowances will be in the “compliance purpose” bank. In all of 2018 54 million allowances were auctioned and barring a major reduction in emissions the 10 million ton “compliance purpose” bank will be gone next year.

The Potomac numbers do not include other transfers to the allowance banks. I tried to calculate the allowance bank based on the RGGI allowance distribution reports. (Note that RGGI compliance periods are three years long.) In RGGI Compliance Period Allowance Allocations and Compliance Period Emissions I list the allowances in circulation at the end of 2017 (total allowances released less total emissions). Adding the allowances added this year gives a bank of 140.7 million. I used Potomac Economic’s estimate that 50% of allowances were for compliance purposes to get 70.4 million allowances. In 2018 CO2 emissions were 72.3 million tons so according to this approach compliance entities are already in debt to the non-compliance entities.

Conclusion

I cannot emphasize enough that RGGI is headed towards a situation where the affected sources will have to go to the non-compliance entities to get enough allowances to cover their emissions. If you recall the proceeds that RGGI receives from the auctions are supposed to be used to reduce emissions and provide ratepayer relief. Ideally, the added costs of this carbon tax are offset by those investments. Now, however, the investors will be able to charge whatever they want for the allowances and their profit will be covered by increased costs to the consumer. (In the interests of full disclosure I bought 11,000 allowances in 2018 and will profit from this situation.) In my opinion, affected sources should buy allowances as needed and never run without enough to cover current emissions.

 

If an affected source does not have enough allowances on hand to cover their current emissions they are faced with two issues. When a source bids into the market they prefer to know the price of allowances so they can price their bid appropriately but if they don’t have them they don’t know the cost. Worse would be the case where a facility assumes that they can get allowances but eventually find out none are available at any cost. In that case then they would be out of compliance and would face significant fines. The worst case scenario is that a facility does not have allowances in hand, cannot purchase what is needed and then declines to bid. While unlikely, that could lead to reliability issues because you cannot force an owner/operator to run knowing they are out of compliance without a whole lot of histrionics.

Finally, note that RGGI has closely guarded the ownership of allowances. The market monitoring reports name who has bid but does not list who owns what. Instead they list ownership by three categories:

  • Compliance-oriented entities are compliance entities that appear to acquire and hold allowances primarily to satisfy their compliance obligations.
  • Investors with Compliance Obligations are firms that have compliance obligations but which hold a number of allowances that exceeds their estimated compliance obligations by a margin suggesting they also buy for re-sale or some other investment purpose. These firms often transfer significant quantities of allowances to unaffiliated firms.
  • Investors without Compliance Obligations are firms without any compliance obligations.

In my opinion those categories are pretty broad. In a transparent program there would be examples of which company is in which category but we are left in a position where we have to hope they got the definitions right. Finally, note that investors without compliance obligations could also include those who want to hold allowances to prevent emissions. If that is the case for a significant fraction of investors, then the market is in trouble.

Investment of RGGI Proceeds in 2016

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

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

Summary

According to the Executive Summary in this report:

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

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

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

Analysis

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

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

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

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

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

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

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

Conclusion

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

Environmental Advocates of New York “RGGI at a Crossroads” Report

Environmental Advocates of New York recently released a report, “RGGI at a Crossroads”, that details the allocation of funds raised by the Regional Greenhouse Gas Initiative (RGGI) in New York State. I have previously posted on New York State’s RGGI Operating Plan which is supposed to determine the best use of RGGI auction proceeds and thought it would be instructive to compare the two analyses.

This is another in a series of posts on RGGI (see my RGGI posts page).  I have been involved in the RGGI program process since its inception. Before retirement I was actively analyzing air quality regulations that could affect electric generating 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. 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 overview for RGGI at a Crossroads states:

For the past seven years, the Cuomo Administration has used funding made available to New York through the Regional Greenhouse Gas Initiative (RGGI) for some authentic climate mitigation purposes as well as some highly questionable ones. While programs like Green Jobs – Green New York, 76West, and the Drive Clean Rebate owe their success to RGGI funding; the Governor has also diverted RGGI funds to subsidize power rates for Long Islanders and plug budget holes. These diversions are bad policy precedents that squander the opportunity to better the environment. An upcoming revision to state regulations offers the Governor an opportunity to take his hand out of the cookie jar and invest RGGI proceeds in a way that will propel New York to the forefront of climate justice.

I agree with Environmental Advocates that the Cuomo Administration has used funding for some highly questionable purposes. The Administration claims that climate change is an existential threat but still is not above taking money to mitigate that alleged harm to further political goals. The Environmental Advocates analysis does a good job uncovering a number of areas where RGGI funding decisions have deviated from the original intent of the program. I concur with their conclusion that RGGI’s purpose has always been to supplement and not supplant the state’s existing clean energy initiatives.

In my previous analysis I showed that 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. It turns out that, based on historical results, the RGGI investments are only expected to provide about 10% of the needed future emissions reductions mandated by RGGI. This is important because it means that supplanting existing programs that also reduce CO2 emissions are further contributing to a potential future problem meeting the RGGI allowance cap.

In general I agree with the RGGI at a Crossroads recommendation that a priority for RGGI proceeds should be investments that directly benefit low-income communities. I am firmly convinced that Cuomo’s clean energy plans will significantly increase costs to all ratepayers and it is important that we protect those least able to afford those increases. Unfortunately, the recommendations developed through a collaborative process involving the New York City Environmental Justice Alliance, UPROSE, PUSH Buffalo, New York Lawyers for the Public Interest, New York Working Families, and Environmental Advocates of New York include program funding for programs that only peripherally impact low income ratepayer rates. In my opinion, especially considering the fact that RGGI funded CO2 mitigation has not been particularly effective, the emphasis should be on energy efficiency and energy conservation for lower income ratepayers. If higher rates occur, funding should also be provided for

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.