The High Cost of New York’s Symbolic Environmentalism

In response to President Trump’s decision to withdraw from the Paris Climate Agreement, Governor Cuomo issued an Executive Order reaffirming the state policy to reduce greenhouse gas emissions by forty percent by 2030, and eighty percent by 2050 from 1990 levels, across all emitting activities of the New York economy. The Manhattan Institute recently published “New York’s Clean Energy Programs, The High Cost of Symbolic Environmentalism” by economist Jonathan Lesser that provides cost estimates for some of the programs referenced in the Executive Order which are clearly symbolic only. In this post I will summarize his findings but I recommend that you read his entire paper.

The Executive Order states that “New York has already committed to aggressive investments and initiatives to turn the State Energy Plan goals into action through its Clean Energy Standard (CES) program, the $5 Billion Clean Energy Fund (CEF), the $1 Billion NY-Sun solar program, the nation’s largest Green Bank, and unprecedented reforms to make the electricity grid more resilient, reliable, and affordable.” Dr. Lasser shows that meeting the Clean Energy Standard mandate could easily cost New York consumers and businesses more than $1 trillion by 2050. Amazingly he does not include all the costs so it is an underestimate. He does not include costs of Reforming the Energy Vision mandates that are buried in the rate case requirements, the recent changes to the Regional Greenhouse Gas Initiative or the cost to incorporate a carbon fee on generators. I will address those programs at some point on this blog.

Disclaimer: I am writing this series of posts on New York State (NYS)energy policy because I am concerned that this whole thing is going to end as an expensive boondoggle and drive electricity prices in particular and energy prices in general significantly higher without any appreciable improvement to global warming in general and certainly will have no effect on the purported impacts in NYS. It is a very sad commentary on this process that the State has not provided either an analysis of total costs or disclosed the actual impacts of these reductions. Before retirement from the electric generating industry, I was actively analyzing energy and air quality regulations that could affect 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.

Evaluation Summary

There are three sections in the analysis: The New York Clean Energy Standard, An Introduction to Cost-Benefit Analysis Concepts, and Evaluating the Benefits and Costs of New York’s Clean Energy Programs. The description of the Clean Energy Standard (CES) describes the focus of the report. The introduction to cost-benefit analyses review of key concepts that “provide the framework for evaluating the costs and benefits of the CES, identifying specific categories of costs and benefits relevant to the evaluation”. The last section assesses the costs and benefits of the CES, and two related components: the solar PV Programs, Cuomo’s January 2017 mandate to install 2,400 megawatts (MW) of offshore wind generation off Long Island by 2030, and Cuomo’s March 2017 “Drive Green” program that will subsidize purchase of electric vehicles.

The summary of the Clean Energy Standard includes an analysis of the required Greenhouse Gas (GHG) emission reductions which is a good overview of the planned reductions and the scale of the mandate. Notably he shows that the Clean Energy Fund mandates are not clearly defined and as far as can be determined are ambitious. For example, to meet the 600-TBTU savings mandate, the cumulative savings will have to increase by an average of 30% each year. He concludes: “The gulf between the 600-TBTU energy-efficiency goal and the optimistic projections by NYSERDA, to say nothing of the still-lower forecast of electric savings recently projected by NYISO, calls into question the ability of New York to realize anything close to that goal, apart from the costs of doing so.”

His analysis also looks at the feasibility of the 80 by 50 mandate. His first conclusion is important: even if NY electric generation was 100% fossil free, the resulting decrease in emissions will not even come close to meeting the interim 40% goal much less the 80% goal. Therefore, emissions will have to decrease from all end-use fossil fuel energy consumption: residential, commercial, industrial and transportation. The problem is that in order to reduce emissions in those sectors increased electrification is necessary. He concludes that “the generating mix would have to be about 63% renewables and 37% natural gas, assuming that no other higher CO2-emitting fossil generation, e.g., coal, was used. That means that by 2050, there would need to be sufficient renewable generation to provide 1,420 TBTUs of end-use energy, equivalent to about 400 TWh of electricity.” He then goes on to equate the amount of renewable energy needed, the land needed and the supporting requirements. Ultimately concluding that, given today’s technology, meeting the 80 by 50 mandate appears to be technologically impossible, regardless of cost.

One would think that his analysis could be compared to the state’s implementation plan for all these programs. However, this is NYS and the answer is no implementation plan has been provided. While I could find a couple of points that I think were stretches in his evaluation I also think that he missed some implementation issues vis-à-vis storage and transmission support requirements for the 63% renewable target. I agree that the plan is technologically impossible to implement with today’s technology.

I found his introduction to cost-benefit analysis fascinating. I have never taken a course on economics so this helped me better understand concepts I have “learned” from my work over the years. It confirmed my suspicions on several issues. After describing the alleged benefits for four analyses of green energy programs he explains “Claims of economic benefits arising from new investment and job creation are erroneous. Using subsidies to increase investment in low carbon energy sources and to create jobs is simply a transfer of wealth from electricity consumers and unsubsidized electricity generators to renewable energy and energy-efficiency providers.”

He goes on to say:

“When businesses and consumers pay more for electricity, they have less money to spend on everything else. Consumers have less money to spend on other goods and services; businesses have less money for investments that increase economic output. Goods and services whose production requires electricity also increase in cost, leaving less money to spend on goods and services, which cost more to produce. Thus, subsidizing electric generation—of any kind— effectively imposes two separate taxes on businesses and consumers: the first is a direct tax associated with higher electric bills; the second is an indirect tax in the form of higher costs for purchased goods and services that require electricity as an input.”

In the final section of the report, the benefits and costs of the New York programs are evaluated. He points out that to do a proper cost benefit evaluation you need to compare the proposed plans with how the future would evolve without them. For example, the pollution reduction estimates in all the State analyses include emissions from coal-fired power plants but the reality is that the cost difference between natural gas and coal drove NY coal plant retirements so including coal emissions in the benefits is improper.

He also discusses nonmarket cost in his evaluation. While the New York evaluations of the programs provide all the benefits they have not, to date, included the costs. For example, in order to install the large amounts of solar power proposed the land necessary cannot be used for agricultural crops. Displacing those crops takes money out of the economy that is not reflected in the State analyses.

Moreover, I believe that he has not included the nonmarket cost of fuel diversity. Proponents of renewable energy claim that it provides fuel diversity but that is only true if it includes the full cost of dispatchable electricity. Moreover, one of the strong points of the NY electrical system was that there was a wide range of truly diverse power: hydro, nuclear, coal, oil and natural gas. Even the diversity within the fossil fuels had value because if there was an interruption in supply to any fuel there were alternatives. NY is going to be dependent upon natural gas but what happens if the gas transmission lines get disrupted due to an earthquake?  Renewables will not provide any value in this regard.

The final, and most important aspect of his evaluation, is his discussion of the State’s use of the Social Cost of Carbon (SCC). The SCC is the present day value of projected future net damages from emitting a ton of CO2 today. In order to estimate the impact of today’s emissions it is necessary to estimate total CO2 emissions, model the purported impacts of those emissions and then assess the global economic damage from those impacts. The projected global economic damage is then discounted to present value. Finally, part of the future damage is allocated to present day emissions on a per ton basis.

The vast majority of benefits in both recent NY agency cost-benefit analyses are associated with the value of reduced CO2 emissions, which are, in turn, based on the SCC. The SCC values estimated by Obama Administration are not based on marginal CO2 emissions changes. Instead, the SCC estimates are average values, equal to the estimated impact of a large change in CO2 emissions in a given year, divided by the present value of lost economic output, as measured by a decrease in world GDP.

 However, when the increase in CO2 emissions is small, the marginal damage is not even measurable. Equivalently, the marginal benefit of a small reduction in worldwide CO2 emissions is also small. This will be the case with NY policies to reduce CO2 emissions. He notes that “Temperature changes that are too small to physically measure and impossible to separate from natural climate variability cannot be associated with changes in climate and economic output.” Thus, the benefits of equivalent CO2 reductions are effectively zero. Also note that even if there were a measurable impact, virtually all the benefits would, by definition, accrue outside the state. Nor does the NYS approach account for increases in emissions in the rest of the world.

 Key Findings

In conclusion, I recommend readers go directly to the source.  The report lists four key findings:

“Given existing technology, the CES’s 80 by 50 mandate is unrealistic, unobtainable, and unaffordable. Attempting to meet the mandate could easily cost New York consumers and businesses more than $1 trillion by 2050.”

“The CES mandate will require electrifying most of New York’s transportation, commercial, and industrial sectors. (In 2014, for example, fossil-fuel energy used for transportation was twice as large as all end-use electricity consumption combined.) Even with enormous gains in energy efficiency, the mandate would require installing at least 100,000 megawatts (MW) of offshore wind generation, or 150,000 MW of onshore wind generation, or 300,000 MW of solar photovoltaic (PV) capacity by 2050. By comparison, in 2015, about 11,300 MW of new solar PV capacity was installed in the entire U.S. Moreover, meeting the CES mandate likely would require installing at least 200,000 MW of battery storage to compensate for wind and solar’s inherent intermittency.”

“Meeting the CES interim goals—building 2,400 MW of offshore wind capacity and 7,300 MW of solar PV capacity by 2030—could result in New Yorkers paying more than $18 billion in above-market costs for their electricity between now and then. By 2050, the above-market costs associated with meeting those interim goals could increase to $93 billion. It will also require building at least 1,000 miles of new high-voltage transmission facilities to move electricity from upstate wind and solar projects to downstate consumers. No state agency has estimated the environmental and economic costs of this new infrastructure.”

“The New York Department of Public Service and the New York State Energy Research and Development Authority claim that renewable energy and the CES will provide billions of dollars of benefits associated with CO2 reductions. Not so. Regardless of one’s views on the accuracy of climate models and social-cost-of-carbon estimates, the CES will have no measurable impact on world climate. Therefore, the value of the proposed CO2 reductions will be effectively zero.”

Cuomo’s Executive Order 166: Part 3 Global Warming Effects

In response to President Trump’s decision to withdraw from the Paris Climate Agreement, Governor Cuomo issued an Executive Order reaffirming the state policy to reduce greenhouse gas emissions by forty percent by 2030, and eighty percent by 2050 from 1990 levels, across all emitting activities of the New York economy. I believe it is appropriate to ask how much is this plan to mitigate climate change going to cost and how much will the plan actually reduce global warming. This post sum estimates how much global warming would be prevented by the proposed reductions.

The Executive Order states that “New York has already committed to aggressive investments and initiatives to turn the State Energy Plan goals into action through its Clean Energy Standard (CES) program, the $5 Billion Clean Energy Fund (CEF), the $1 Billion NY-Sun solar program, the nation’s largest Green Bank, and unprecedented reforms to make the electricity grid more resilient, reliable, and affordable.” In order to make my analysis manageable I am breaking it up into three posts. The first post addressed costs of each the first four components. The second post estimated costs of for the “unprecedented reforms” comment which refers to the Reforming the Energy Vision component.

Disclaimer: I am writing this series of posts on New York State energy policy because I am concerned that this whole thing is going to end as an expensive boondoggle and drive electricity prices in particular and energy prices in general significantly higher. Before retirement from the electric generating industry, I was actively analyzing energy and air quality regulations that could affect 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.

How Much Will REV Affect Global Warming

In the absence of any official quantitative estimate of the impact on global warming from REV or any other New York State initiative related to climate change I did my own calculation. I simply adapted data for this emission reduction from the calculations in Analysis of US and State-By-State Carbon Dioxide Emissions and Potential “Savings” In Future Global Temperature and Global Sea Level Rise. This 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. All I did in my calculation was to pro-rate the United States impacts by the ratio of New York emissions divided by United States emissions to determine the effects of a complete cessation of all CO2 emissions in New York State as well as the REV plan for the 167.1 million metric ton reduction.

The first step is to quantify NY emissions. In 2010 the NY total was 172.8 million metric tons.  According to the Energy Information Administration total New York carbon dioxide emissions in 1990 were 208.9 million metric tons so the reduction to the REV goal of 80% is 167.1 million metric tons. The New York impacts were calculated by the ratio of the NY emissions reductions to the US reductions in the report. For example, the NY % of global total emissions equals the % of US global total (17.88%) times the 2010 NY emissions (172.8) divided by the US emissions (5631.3)

These calculations show current growth rate in CO2 emissions from other countries of the world will quickly subsume New York total emissions much less any reductions in New York 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 New York in 79 days. For the emissions reductions proposed in REV, global growth will completely replace the expected reductions in 76 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 REV. The ultimate impact of the REV 80% reduction of 167.1 million metric tons on projected global temperature rise would be a reduction, or a “savings,” of approximately 0.0025°C by the year 2050 and 0.0051°C by the year 2100.

These small numbers have to be put in context. First consider temperature measuring guidance. 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 one hundred times greater than the projected change in temperature.

Although this change is too small to measure I am sure some will argue that there will nonetheless be some effect on the purported impacts. However, if these numbers are put into perspective of temperatures we routinely feel then that argument seems hollow. For example, in Syracuse NY the record high temperature is 102°F and the record low temperature is -26°F so the difference is 128 °F or 71.1°C which is nearly 14,000 times greater than the predicted change in temperature in 2100. The annual seasonal difference ranges from the highest daily average of 71.6°F to the lowest daily average of 23.2°F, or a difference of 48.4°F or 26.9°C which is over 5,000 times greater than the predicted change in temperature in 2100. The average difference between the average daily high and average daily low temperature is 10.4°C or 2,000 times greater than the predicted change in temperature in 2100. In order to give you an idea of how small this temperature change is consider that temperature normally drops as you go higher in the atmosphere. The dry adiabatic lapse rate is the change in temperature with height when no energy is added or subtracted and equals 1°C per 100 meters. For a six foot man this temperature change is 0.018°C between his head and feet which is four times greater than the predicted change in temperature in 2100. Clearly claiming impacts for that small a change in temperature is a stretch at best.

 

How Much for Cuomo’s Executive Order 166 Part 2: REV

In response to President Trump’s decision to withdraw from the Paris Climate Agreement, Governor Cuomo recently issued an Executive Order reaffirming the state policy to reduce greenhouse gas emissions by forty percent by 2030, and eighty percent by 2050 from 1990 levels, across all emitting activities of the New York economy. I believe it is appropriate to ask how much is this plan to mitigate climate change going to cost and how much will the plan actually reduce global warming.

The Executive Order states that “New York has already committed to aggressive investments and initiatives to turn the State Energy Plan goals into action through its Clean Energy Standard (CES) program, the $5 Billion Clean Energy Fund (CEF), the $1 Billion NY-Sun solar program, the nation’s largest Green Bank, and unprecedented reforms to make the electricity grid more resilient, reliable, and affordable.” In order to make my analysis manageable I am breaking it up into three posts. The first post addressed each the first four components. This post speaks to the “unprecedented reforms” comment which refers to the Reforming the Energy Vision component. The final post will summarize the costs and estimate how much global warming would be prevented by the proposed reductions.

Disclaimer: I am writing this series of posts on New York State energy policy because I am concerned that this whole thing is going to end as an expensive boondoggle and drive electricity prices in particular and energy prices in general significantly higher. Before retirement from the electric generating industry, I was actively analyzing energy and air quality regulations that could affect 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.

Reforming the Energy Vision Costs

The Executive Order refers to “unprecedented reforms to make the electricity grid more resilient, reliable, and affordable” which is referencing the Governor’s Reforming the Energy Vision program. This comprehensive energy strategy for New York is supposed to help consumers make more informed energy choices, develop new energy products and services, and protect the environment. However, it does not have a comprehensive description of all the component programs, how they are supposed to work together, how much the programs will make the grid resilient and reliable or a description of the costs so it can be shown to be affordable.

There are seven general REV initiatives:

  1. Renewable Energy
  2. Buildings & Energy Efficiency
  3. Clean Energy Financing
  4. Sustainable and Resilient Communities
  5. Energy Infrastructure Modernization
  6. Innovation and R&D
  7. Transportation

There is a lot of overlap between the other commitments mentioned in the Executive Order and REV. In order to put a limit on the scope of this effort to estimate costs, I am going to only try to include those REV costs that directly affect electricity rates associated with energy infrastructure modernization. In part this is because I am also interested in how much of the current rate request for my electricity supplier is required by REV. According to the website:

60% of New York’s power generation infrastructure is over 35 years old. As we develop distributed energy resources statewide, it is critical for the safety and resiliency of our current energy system that we maintain—and in some instances enhance—the central grid. It is only by doing so that we can continue to meet the energy needs of New Yorkers and integrate clean and distributed power at scale into our energy system.

One of the sample initiatives listed under energy infrastructure modernization is the Energy Highway.

The 13 actions presented in the Energy Highway Blueprint (issued in October 2012) includes a wide range of measures to provide up to 3,200 megawatts (MW) of additional electric generation and transmission capacity and clean power generation—enough to serve about 3 million homes—through up to $5.7 billion in private- and public-sector investments.

For this analysis I am assuming that these costs are included in other initiatives and have already been counted elsewhere in this analysis. However I am pretty sure that there are projects that were it not for REV would be required so that means the total costs estimated are going to be low.

In addition to that initiative, the Load Serving Entities are required to do demonstration projects to implement the Governor’s vision. Those projects are buried in rate case requests so teasing out their costs is a monumental chore. What I have tried to do in the following is figure out what National Grid, my electric provider, is going to spend on REV demonstration and infrastructure projects.

In the National Grid rate case under Information Services capital projects and investments there are 22 projects listed under the NY REV/Grid Modernization program label for fiscal years 2018 to 2021. The total capital expenditures for those projects is listed as $161 million. It is not clear how exactly these modernization projects will actually affect REV goals. Consider that there are eight projects associated with Advance Metering Infrastructure (AMI) meters totaling $48.9 million. The idea for these AMI meters is that they incorporate two-way communication between the utility and the customer. The goal is to reduce peak generation charging for electricity by an hourly rate which will induce the customer to use less at those times. What is not clear is any quantitative estimate of the specific impacts of these projects nor how the results will be integrated into the plan. Specifically, will the results of the demonstration projects be evaluated relative to the goals to see if they provide the expected benefits and can be used as anticipated or is this simply a formality and implementation of the Governor’s executive order will proceed heedless of the results?

Back to the analysis of REV. In their Electric Customer Panel testimony, National Grid described six REV demonstration projects and listed a deferral balance of $3.283 million.

  • The Fruit Belt Neighborhood Solar demonstration project seeks to engage low to moderate income residential customers in the Fruit Belt neighborhood of Buffalo with solar photovoltaic (“PV”) installations and energy efficiency products and services. The project involves the installation of solar PV panels on the rooftops of 100 customers’ residences. The energy generated by the solar systems will be used to provide the Fruit Belt neighborhood with bill credits. Installation of the solar PV systems is scheduled to be completed in 2017.
  • The Potsdam Community Resilience project will examine the feasibility of building a community microgrid to add resiliency to the electric infrastructure in the area. The Company is partnering with Clarkson University to develop and test the microgrid through use of an underground distribution network, new and existing DER, and other utility services. The project commenced in early 2016 and design, outreach, and testing will continue in 2017. The Company anticipates final stakeholder decision whether to fully implement the community microgrid in late 2017.
  • The Distributed System Platform (“DSP”) project is aimed at testing how the Company can integrate customer-owned energy resources to manage system demands. As part of the project, the Company will partner with the Buffalo Niagara Medical Campus to incorporate customer-owned DER and other energy and ancillary services into the distribution system. The first phase of the project began in September 2016, with the technology development phase expected to continue in 2017 and field testing to begin in 2018.
  • The Clifton Park Demand Reduction project is aimed at reducing customers’ energy bills and peak demand through a combination of infrastructure upgrades and customer engagement. The project involves 2 the installation of Advance Metering Infrastructure (AMI) meters for residents of Clifton Park and other infrastructure upgrades to test whether price signals, tools, community outreach, and innovative rate design concepts, such as voluntary time-of use rates, will reduce electric demand. AMI meter deployment has begun and the Company anticipates that all offerings and services will be available by the end of 2017.
  • Linked to the already approved Clifton Park Demand Reduction project is the Smart Home Rate demonstration project. Under this project, customers in Clifton Park enrolled in the Company’s residential voluntary time-of-use rate will be provided with voice-recognition technology that will enable them to control home appliances via use of a phone application or other technology to reduce their electricity consumption when prices are high.
  • The DG Interconnection demonstration project seeks to test whether the Company’s upfront investment to make the system “DG-ready” combined with an alternative cost allocation methodology will enhance DG interconnections in Upstate New York.

National Grid was asked “Are the costs of the demonstration projects described above included in the revenue requirement?” The testimony response:

Yes, with the exception of the Smart Home Rate and DG Interconnection demonstration projects because they have not yet been approved by Staff. The Track One Order authorized utilities to defer the revenue requirement impacts of the incremental demonstration project costs until their next rate plan. The actual deferral balance at the end of the Historic Test Year (the 12 months ended December 31, 2016) for the four approved projects is $0.274 million and the forecast deferral balance through March 31, 2018 is $3.283 million, as shown in Exhibit ___ (RRP-7). Treatment of the deferral balance is discussed by the Revenue Requirements Panel. With respect to future costs, beginning in the Rate Year, capital and O&M expense for the four approved demonstration projects are included in the revenue requirements.

I assume a ratepayer cost of $3.283 million but trying to figure out the impacts of the demonstration projects is not nearly as simple. For example, the Fruit Belt Neighborhood Solar demonstration project is for 100 residential rooftop solar installations and the average reduction in CO2 tons per year is 0.5 so the total CO2 avoided is 50 tons. However, that is the only project that will have direct CO2 savings. The Potsdam Community Resilience project will determine if a microgrid is feasible, Distributed System Platform project will test ways to integrate distributed energy resources into the grid, the two projects in Clifton Park are associated with AMI meters as previously discussed and the final project will evaluate distributed generation interconnections.

The Transmission and Distribution Capital Investment Plan submitted to DPS on 1/31/2017 includes projects totaling $3,012 million. It is not clear how much of this plan is included solely to meet the Reforming the Energy Vision. As far as I can tell the REV costs are buried in three categories: the Customer Requests/Public Requirements spending rationale includes the Company’s Advanced Metering project, the Communications / Control Systems spending rationale includes costs associated with AMF communications and the DER – Electric System Access appears to be all REV. Table 1-2 in the Investment Plan notes that $147.2 million is needed for the AMF Investment Plan.

In conclusion I estimate that the REV costs buried in this rate case total $271.7 million dollars (Table 1 REV Costs in National Grid Rate Case). However, I suspect that I am double counting some costs and have neglected other costs.

Reflections

There are two inconvenient problems with the REV demonstration projects: ultimate feasibility and a funding death spiral. The requirement that each utility sponsor demonstration projects begs the ultimate question whether they would all ultimately provide cost effective savings. Working in isolation the utilities are not charged with overall feasibility and the State has been remiss in providing an overall summary of expectations and costs. Until the State provides a detailed plan how all the bits and pieces will work together an estimate of feasibility is not possible.  The reality of this problem is described very well in a post on An analysis of electricity system flexibility for Great Britain from November 2016 by Carbon Trust. The United Kingdom has legislation in place to make similar reductions as proposed by Cuomo. The post itself notes that “solving a problem requires understanding the scale of the problem and especially the hardest challenges – before you start on the main project.” I strongly recommend that you read this evisceration of the UK policy and think how similar the situation is to New York.

The death spiral is an overlooked component. The National Grid Fruit Belt demonstration project provides 100 low/moderate income residential customers with “the benefits of solar photovoltaic installations and energy efficiency products and services” paid for by the rest of the National Grid customer base. The problem is that to pay for all low/moderate income residential customers to get this benefit then costs necessarily increase such that more people become eligible for the benefit. In order to pay for those people fewer people are available to cover those costs so the increase necessary is larger and the death spiral kicks. Ultimately the question is whether this kind of program is feasible for everyone and if not who chooses who benefits.

 

 

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.

How Much for Cuomo’s Executive Order 166 – Part 1

In response to President Trump’s decision to withdraw from the Paris Climate Agreement, Governor Cuomo recently issued an Executive Order reaffirming the state policy to reduce greenhouse gas emissions by forty percent by 2030, and eighty percent by 2050 from 1990 levels, across all emitting activities of the New York economy. I believe it is appropriate to ask how much is this plan to mitigate climate change going to cost and how much will the plan actually reduce global warming. In order to make this post more manageable I am going to address only a portion of the plans proposed to implement these goals.

The Executive Order states that “New York has already committed to aggressive investments and initiatives to turn the State Energy Plan goals into action through its Clean Energy Standard (CES) program, the $5 Billion Clean Energy Fund (CEF), the $1 Billion NY-Sun solar program, the nation’s largest Green Bank, and unprecedented reforms to make the electricity grid more resilient, reliable, and affordable.” This post addresses each the first four components. The “unprecedented reforms” comment refers to the Reforming the Energy Vision component. The final post will summarize the costs and estimate how much global warming would be prevented by the proposed reductions.

Disclaimer: I am writing this series of posts on New York State energy policy because I am concerned that this whole thing is going to end as an expensive boondoggle and drive electricity prices in particular and energy prices in general significantly higher. Before retirement from the electric generating industry, I was actively analyzing energy and air quality regulations that could affect 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.

Clean Energy Standard

The CES creates two mechanisms to implement the clean energy goal. The Renewable Energy Standard (RES) requires every load serving entity to procure renewable energy for their customers. It has three parts: Tier 1 obligation for utilities and other Load Serving Entities (LSEs); Tier 2 obligation for older generators in financial risk; and a third, new program focused on offshore wind resources.

In Tier 1, those companies are required to procure renewable energy credits (RECs) associated with new renewable energy resources for their retail customers. If LSEs cannot demonstrate they are meeting the Tier 1 obligation through the possession of RECs, they may make alternative compliance payments.

In order to estimate the ten year cost of the program I had to make some assumptions. The Tier 1 obligation renewable energy credit cost in 2017 ($1.3 million) equals the 2015 EIA residential load (51,013,000 MWhrs) times the LSE annual RES requirement of 0.60% times the difference between the EIA March 2017 residential cost ($17.02 per MWhr) and the 2017 Tier 1 RECs purchased from NYSERDA costs of $21.16 per megawatt-hour. The LSE annual RES requirement increases from 0.6% in 2017 to 4.8% in 2021. I assumed that the RSE requirement increased at half the 2020 to 2021 increase of 1.4% so that in 2026 the LSE annual RES requirement would be 8.3%. I used the 2015 EIA residential load and the 2017 differential price for all years to estimate the total cost of Tier 1 to 2026 to be 98 million dollars.

In order to determine the effectiveness of these programs relative to the goal of reducing global warming, I also estimated CO2 reductions resulting from this program. Over ten years. I estimate that the LSE Tier 1 requirement will subsidize 23,670,000 MWhr of renewable generation. Assuming that were it not for this program that this load would be replaced by natural gas generation[1] at 1200 lb of CO2 per MWhr (an older combustion turbine rate) this displaces 1,420,202 tons of CO2 per year at a cost of $6.90 per ton of CO2.

Tier 2 of the RES provides support for existing run-of-the-river hydroelectric facilities of 5 MW or less, wind facilities, and biomass direct combustion facilities through maintenance contracts approved by the PSC and administered by NYSERDA. Resources in this tier must demonstrate that but for the maintenance contracts, the facility would cease operation and no longer produce positive emissions attributes. I was not able to find any cost estimates so for the purposes of this evaluation assumed no significant costs or CO2 reductions over ten years.

The third and final component of the RES is offshore wind. The PSC did not set forth any specific plans for the development of offshore wind resources. Instead, the PSC requested that NYSERDA identify appropriate mechanisms the PSC and State should consider to develop offshore wind resources. NYSERDA recently issued its Blueprint for the New York State Offshore Wind Master Plan, outlining the process, steps and timeline for developing the Master Plan, which is ultimately expected to be released later in 2017. That press release notes that “In the 2017 State of the State, Governor Andrew M. Cuomo proposed an unprecedented commitment: to develop up to 2.4 gigawatts of offshore wind by 2030, enough to power 1.25 million homes.” In order to estimate the costs of Tier 3 I assumed that 2 gigawatts are developed. The current lower bound estimate of land-based wind development capital expenditure is $1300 (2014 $/KW). For off shore wind I assumed a capital expenditure cost of $2400 per KW installed and estimate a Tier 3 cost of $4,800 million.

For Tier 3, I assumed that the 2 gigawatts of off-shore wind capacity have a 40% capacity factor so in a year they would generate 7,008 gigawatt hours of energy. If that displaces natural gas generation then the annual CO2 reduction would be 4,204,800 tons per year and the cost per ton of reduction would be $114.

The second component of the Clean Energy Standard is the Zero Emissions Credit (ZEC). A ZEC is a credit for generating one megawatt-hour (MWh) of electricity with zero-emissions (no carbon) attributes that is consumed by a retail customer in New York State. The ZEC requirement mandates the LSEs procure ZECs from NYSERDA. The number of ZECs is based on each LSE’s proportionate amount of statewide load, or energy demanded, in a given compliance year. I estimate the zero emission credit cost in 2017 ($463 million) equals the five year average MWh output from Fitzpatrick, Ginna, Nine Mile 1, and Nine Mile 2 nuclear units (26,400,000) times the 2017 NYSERDA ZEC Price of $17.5394/MWh. Assuming those rates for the next ten years the cost is $4,630 million and $5,556 million over the complete 12 year life of the program. Note, however, that others estimate the 12-year term cost to be $7,800 to $10,000 million.

Clean Energy Fund

This program has a ten year $5 billion commitment from 2016 through 2025. The latest quarterly Clean Energy Fund Performance Report has summary data listing budgets and spending and a summary of committed benefits progress to date. For the quarter ending March 31, 2017 the Market Development and Innovation & Research Portfolio Level expended funds to date were $62,979,562. The Market Development and Innovation & Research Portfolio Committed Benefits Progress to Date lists the grand total completed and pipeline projects benefits and claims 482,451 tons of CO2 reductions will be saved as the result of these investments. Based on their numbers this program is spending $131 for every ton of CO2 saved.

NY-Sun

NY-Sun aims to invest $1 billion to add more than 3 gigawatts of installed solar capacity in the State by 2023. At a 15 % capacity factor the total generation of 3,942,000 MWhr. Assuming 1200 lbs of CO2 per MW that amount of generation would save 2,365,200 tons of CO2 at a cost of $1 billion for a rate of $423 dollars per ton.

New York Green Bank

According to the New York Green Bank 2016 Business Plan “The $1.0 billion NY Green Bank was established to attract private sector capital to accelerate clean energy deployment in New York State.” As a key component of New York’s Clean Energy Fund, NY Green Bank is structured to be self-sustaining in that it must ultimately cover its own costs of operation.

As of June 17, 2016, Green Bank investments supported clean energy projects with a total project cost of $518.3 million in aggregate, based on an overall portfolio size of $121.0 million. Current portfolio estimated gross lifetime GHG emissions reductions as of June 17, 2016 of up to 2.9 million metric tons. Assuming the GHG emissions are all CO2 the aggregate total project $ per ton of CO2 rate is $162 albeit for New York’s investment the rate is $38 per ton.

Summary of Costs of Cuomo Executive Order 166

The Summary of Costs of Cuomo Executive Order 166 (Table 1) consolidates all these estimates in one place. The Renewable Energy Standard will cost just under $4.9 billion if it includes the massive buildout of offshore wind proposed by Cuomo. The Zero Emissions Credit program to support Upstate nuclear units I estimate at $4.6 billion. The clean energy fund is supposed to be $5 billion and NY-Sun another billion. The grand total is $15.5 billion over ten years. Importantly, note that this does not include any costs for the REV demonstration projects which will be discussed in a future post.

There are several estimates on the impact of some of these programs on ratepayer costs. Public Utility Law Project (PULP) has estimated the bill impact on residential ratepayers of the Zero Emissions Credit component. The estimated average monthly cost over all tranches (04/17 ‐ 03/29) was $2.48 compared to the Governor’s cost estimate of a $2 monthly increase in average homeowner rates. The Megawatt Hour blog estimates eventual costs from $4.56 to $5.70. The Empire Center published an Issue Brief also prepared a cost estimate of $3.40 per month in 2021.   However the PULP cost was only for the Zero Emissions Credits and the Megawatt Hour blog and Empire Center Issue Brief costs only for the Clean Energy Standard. The costs for the Clean Energy Fund, NY-Sun and REV are not included and it is not clear that all of those programs will be sufficient to meet the Executive Order target so there are even more costs lurking in the background.

[1] Only two facilities still burn coal in NYS and the Governor has a program in place to eliminate them and oil-fired generation is as low as it is going to go without retirements.

The Limits of Cap and Trade

This blog is my pragmatic view of environmental issues and, to be honest, goes way down in the weeds because most environmental issues are not simple. Spoiler alert this one is the worst yet.

The reason for this blog post is to document the possibility of a “bad thing” in New York that has a reasonable chance of occurring in late August and September of 2018 and possibly as soon as late this summer. I am worried about compliance and a potential threat to electric system operations with the Cross State Air Pollution Rule (CSAPR) NOx Ozone Season trading program. If the feces get entangled in the impeller remember you heard it here before it happened so you will know that the agencies were told that their plans were risky. Unfortunately in order to describe the “bad thing” you likely need some background information that may put you to sleep.

Before proceeding a disclaimer. Before retirement from the electric generating industry, I was actively analyzing air quality regulations that could affect 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.

Background

First off, you off to know about trading programs. EPA does a good job describing 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 such as a year or during the ozone season from May through September. 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. It is necessary to measure the emissions accurately and transparently because for every ton of pollution emitted affected sources have to surrender an allowance. EPA’s Acid Rain program is the poster child for a successful cap and trade program because greater than required reductions occurred, earlier than expected and with much lower costs than projected.

The key to cap and trade success is that sources that can implement the most cost-effective controls can install those controls, limit their emissions to less than their allocations and trade their excess allowances to sources with more expensive options. The result is that the cap is met in the most cost-effective manner. My particular concern with cap and trade programs in general, and this one in particular, is that in order for it to be successful somebody has to be able to over-control. The problem is if the cap is set so low that there are no options for sources to over control then there are no chances for generating excess allowances so no one has anything to trade. In the worst case affected sources will only run until they have no more allowances and then they will have to shut down.

Environmental NGOs have argued that cap and trade programs do not guarantee that all the sources reduce their emissions so they claim that it is not fair because some sources will not lower emissions and local air quality will not improve everywhere. However, there are national ambient air quality standards that cannot be exceeded for any pollutant that has a pronounced local impact so no sources should be over an emissions limit that causes those problems. Also the pollutants covered in cap and trade programs are related to regional problems such as acid rain and ozone where the local effects are small. Nonetheless, due to a court settlement, the CSAPR rules include a limitation on state emissions to limit interstate trading to prevent this, in my opinion, non-existent problem.

Updates to the CSAPR were proposed in 2015 and finalized in 2016 that included changes to address this problem. The feature that the CSAPR update rule added for this concern is called the compliance assurance mechanism. In addition to the cap a second level was set to limit interstate transfers. For each state in the trading program, the state’s allowance cap budget plus the newly defined variability limit constitutes that state’s assurance level. Each state’s assurance levels takes into account the inherent variability in the state’s baseline emissions from year to year. The intent is that emissions in states can exceed the assurance level due to natural variability (e.g., hot weather making units run more) but including this means that sources in states cannot rely on out-of-state allowances for routine compliance. In 2017, or any later year, if a state’s total emissions are greater than the sum of the state’s budget and variability limit the assurance provisions are triggered. In this case EPA’s rationale is that the state is using more allowances than necessary for inherent variability and is therefore relying on interstate transfers for compliance. When this provision is triggered, EPA determines which facilities exceeded their individual assurance level and requires them to surrender additional allowances equal to three times the excess over the assurance level.

Because the ozone limit has been racheted down over the years there still are many areas that do not attain the current national ambient air quality standard for ozone. The CSAPR NOX Ozone Season trading program is specifically designed to reduce interstate ozone transport that contributes to that problem. Note, that this is the fifth round of NOx reduction programs for New York. As a result, the easy, cheap and quick NOx control options have already been implemented. It is recognized that pollution control costs increase exponentially as the efficiency increases so any further reductions will be expensive and probably cannot be implemented quickly.

Because the cap level is so important I need to explain how EPA determines the cap size. I could easily double the length of this post and surely put to sleep anyone who has read this far if I were to explain in detail how EPA set this cap. Instead and briefly, they use the production cost model Integrated Planning Model (IPM) to analyze the impacts of air quality policies. 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. However, the transmission component has been critically flawed when it comes to New York. In particular, the largest load center in the state, New York City, is mostly on islands, there are limits to the transmission available and consequently there are limits to how much electricity can be transmitted to the City. In order to model the entire United States IPM over-simplifies the New York transmission grid. As a result, EPA IPM modeling projects that the least cost solution is to simply generate power elsewhere and significantly under-estimates the amount of power that has to be generated in the City and Long Island, the resulting emissions necessary to keep the lights on, and sets a cap too low to accommodate the New York City constraint.

The New York allocations from EPA in the draft CSAPR update rule had the same flaw as previous programs because of this short-coming. I was responsible for some comments on the draft and we had some success. The final rule changed the New York allocation for a different reason and raised the final allocation.  In 2016 the New York NOx Ozone Season budget was 10,157 allowances. Even with additional allowances, the final CSAPR 2017 NOx Ozone Season Budget is only 5,135 allowances which is close to a 50% reduction. The 2016 NOx actual ozone season emissions in New York were 6,521 tons which is a 64% reduction from the start of the last New York NOx Ozone Season program in 2008. On the face of it then if Ozone Season emissions in 2017 are the same as 2016, then there will be a 20% shortfall of 1,386 tons.

There is another complication. EPA allows banking, i.e. unused allowances are carried forward and can be used in later years. However, the final regulation for the CSAPR update rule included a reduction in the allowance banks. New York affected sources argued, in vain, that because we had already made significant reductions due to other state initiatives that it would be unfair to discount the banked allowances that were earned as a result of those control investments. EPA calculated that there was a bank of 350,000 allowances in the affected states at the end of 2016. EPA argued that the size of the bank would have precluded additional reduction investments until the bank was reduced considerably so they promulgated a reduction to the total of aggregated variability limits times 1.5. The resulting across the board three to one reduction with no consideration of individual interim state actions was a major hit to NY compliance strategies. If historical emissions remain constant, the affected New York sources only have a bank of 3,060 allowances to cover the shortfall of 1,386 tons.

The EPA allocations are to the state and each state has the right to determine how those allowances are allocated to the affected sources. In order to account for new sources the New York Department of Environmental Conservation sets aside 5% of the total allocation for any new sources that come on line during the year. Previously, any unused allowances eventually were returned to the affected sources. Unfortunately, the Cuomo Administration also had plans for the New York allocations. After the “success” of a new and outside the legislature branch revenue stream from the auction of CO2 allowances for the Regional Greenhouse Gas Initiative, the Administration got wind of these allowances and immediately thought they could do the same thing. However, auctioning this kind of allowance is a whole different ball game and they did not try to auction all the allowances. Instead they siphoned off 10% of the allowances to the Energy Efficiency and Renewable Energy Technology (EERET) account and required that any unused new source set-aside allowances would also go to EERET. So instead of the affected sources getting the full allocation of 5,135 allowances they were only allocated 4,362 allowances. Affected sources in New York begged the State to give them the right of first refusal to buy the allowances that were skimmed off but the language in the rule specified sale on the “open market”. Consequently the State refused to incorporate that request into the sale and, to add insult to injury, specified that all the allowances had to be purchased in one batch. The NY 2017 allowances went to Louisiana and the 2018 allowances went to Texas where because of the size of those state budgets they are a fraction of the variability limit so they will most likely be used there. As best as I can tell the sale of those allowances must have netted over $280,000 for the 2017 EERET allowances.

The final consideration in this tale of an obscure air quality compliance issue is the size of the allowance bank. Academics and environmental NGOs cannot abide large margins between allowances and emissions and, in the case of the RGGI allowance margin, are arguing that the margin should be very small. Their rationale is that if allowances are scarce for those sources that need them to run then they will have to buy them at higher costs which in the case of the RGGI will increase the cost of carbon and eventually influence behavior. On the pragmatic side of affected source compliance however, there are advantages to a comfortable allowance margin. Without delving even deeper into the mire of allowance compliance, there can be regulatory and financial implications in the event that there is an allowance monitoring error that increases emissions discovered after the compliance reconciliation deadline and the affected source does not have enough allowances in its account to cover the difference. Environmental staff associated with emissions monitoring generally recommend keeping at least a 5% buffer in the allowance bank for that contingency. Furthermore EPA acknowledges that there is inherent variability in year to year emissions as specified in their CSAPR variability limit of 21% so companies that provide power to the public like to have banks available to cover operational variations. In my opinion an allowance bank of under 5% is very risky and I would recommend a minimum of 25% to cover operational and monitoring contingencies. The key point is that except in rare instances this issue has only been a theoretical problem at most companies for almost all cap and trade programs.

After I completed the draft of this post I found a recent report on the CSAPR Ozone Season allowance market that may be of interest.

The “Bad Thing”

My congratulations if you have made it this far.

My particular concern is New York compliance with the CSAPR NOx Ozone Season limit. To date no New York cap and trade program has had to deal with a constrained market and I vaguely recall only one instance of a constrained market in any cap and trade program.

Because there is only one update of emissions during the ozone season (at the end of July when the May and June data are submitted), facilities will not necessarily know whether the state has triggered the state’s assurance level with its requirement to surrender additional allowances at the end of the Ozone Season. The result is that facilities will be reluctant to exceed their assurance levels because they will not know whether they only need allowances to cover just the excess or three times the excess because the state exceeded the assurance level cap. There is another aspect to this issue that should not be ignored. Electric generating companies have very strong compliance policies and are very reluctant to even give the perception that they have exceeded their emission limits. It is possible company policies will limit emissions to the assurance level and no higher.

My scenario for a bad thing is that New York will be unable to meaningfully further reduce NOx emissions in the near term. If the next couple of summers are warm that will exhaust the current allowance bank to de minimus levels. The ultimate problem with a cap and trade program is that if allowances are not available then the only compliance option is to not run. There is little question in my mind that CSAPR allowances will be available somewhere but that may not be enough to prevent localized operational disruption due to allowance compliance uncertainties. The cumulative effect of the EPA constraints on interstate trading, the uncertainty of the status of emissions relative to the compliance assurance mechanism, and the lower than appropriate cap on NY emissions exacerbated by the Cuomo administration’s unwillingness to give NY affected sources the opportunity to purchase the allowances taken by the State means that New York State affected sources could easily be in uncharted territory. It is not clear how they will react but risking a compliance penalty is not in their best interests.

So my perfect storm worst case scenario is two warm summers that pushes the state close to the compliance assurance limit and reduces the NY allowance bank for one or more affected-source companies to low levels after the June emissions data are known in early August (it takes a month for the data to get reported). Companies with the small number of allowances available find they cannot purchase enough allowances on the market to cover their emissions and possible CAM penalties or find that the costs are so high they don’t think they can recover the cost of purchasing allowances so they get to the point where they simply have to tell the system operator that their units cannot run. This will precipitate a controversy at best and, in an order of magnitude less likely worst case, could even threaten grid reliability. I don’t think the last possibility is very likely but I do think that bringing system reliability into danger because of the regulatory decisions by EPA and NYS that ignored industry recommendations in this instance is possible.