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FERC's carbon pricing statement draws criticism, cautious support


Some tout market-based approach

Others say FERC has impeded state policy

  • Author
  • Jared Anderson    S&P Global Platts and Zack Hale    S&P Global Market Intelligence
  • Editor
  • Rocco Canonica
  • Commodity
  • Electric Power Energy Transition
  • Topic
  • Energy Transition Environment and Sustainability US Policy

The Federal Energy Regulatory Commission's draft policy statement on carbon pricing in wholesale power markets was met with support from merchant generators and skepticism from states with individual clean energy policies.

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A draft policy statement issued last month by the Federal Energy Regulatory Commission encouraging carbon pricing rules in wholesale power markets has generated mixed feedback. Merchant generators and some industry trade groups urged the agency to move forward with the proposed guidelines for accommodating state-set carbon pricing in wholesale power markets, while environmental groups and states themselves signaled skepticism and, in some cases, outright opposition.

FERC issued the draft policy statement in October after hosting a technical conference (AD20-14) on carbon pricing following a series of orders aimed at countering the market impacts of states' clean energy policies, which in many cases include renewable energy mandates. During the technical conference, legal experts generally agreed that FERC has authority under Section 205 of the Federal Power Act to review proposals submitted by regional transmission organizations and independent system operators that incorporate a state-determined price on carbon emissions.

While the draft guidance is unlikely to be finalized under newly named Chairman James Danly, experts have speculated FERC could do so after President-elect Joe Biden replaces Danly with a Democrat.

RGGI already in play as NYISO crafts rules

In Nov. 16 comments, the PJM Interconnection and ISO New England noted that 10 of their member states already participate in the Regional Greenhouse Gas Initiative, or RGGI, the nation's first cap-and-trade scheme for carbon emissions from power plants. Virginia is also set to become a RGGI member next year and Pennsylvania is in the process of joining the program, as well.

While bids from generators operating within RGGI indirectly reflect their environmental compliance costs, embedding a carbon price directly within wholesale electricity markets "is possible," PJM said. However, PJM stressed that market-based emission reduction programs are most efficient when they are implemented on a large, regional scale.

In contrast, the single-state New York ISO – which has been working on a carbon pricing program since 2016 and is likely to be the first to file a proposal with FERC – said it "firmly believes" that its plan represents a "powerful tool" to maintain efficient market outcomes while achieving the state's clean energy requirements. New York's Climate Leadership and Community Protection Act mandates a 100% carbon-free electric grid by 2040.

Skepticism in New England

Meanwhile, the New England States Committee on Electricity, or NESCOE, pointed to a recently released six-state vision statement for the region's electric grid, confirming the coalition's opposition to a "separate carbon pricing-style mechanism" through ISO-NE's markets. NESCOE's vision statement was unveiled after governors from Connecticut, Maine, Massachusetts, Rhode Island and Vermont released a joint letter arguing that ISO-NE's market rules are "misaligned" with the states' ratepayer-funded investments in clean energy resources.

"To the extent the commission provides guidance on incorporating carbon pricing in wholesale markets through a policy statement, it is critical that such federal guidelines not impede state-led efforts to work with [grid operators] to develop and implement other mechanisms to support or advance state energy and environmental laws and objectives," NESCOE said.

The New England Power Pool, a voluntary association formed pursuant to the New England Power Pool Agreement, added that while carbon pricing might be an ideal solution for a single-state market like NYISO's energy market, it can be more complicated and perhaps less effective in multi-state wholesale power markets such as those run by the ISO-NE.

Environmental groups assert overreach

Environmental groups highlighted FERC orders for PJM, ISO-NE, and New York ISO that set administrative price floors for clean energy resources receiving material state subsidies. Critics have argued those orders impermissibly trampled upon states' authority over their own generation mixes.

"It is not the commission's place to evaluate the merits of state policy, or to discriminate between state policies based on its own judgement of the policy's efficiency," groups led by the Natural Resource Defense Council's Sustainable FERC Project argued.

The Edison Electric Institute, the nation's investor-owned electric utility trade group, also warned that FERC should not "predetermine" that carbon pricing is "the preferred market solution."

"If carbon pricing is of interest to the utilities, state regulators and RTOs and ISOs, then, as established in this proposed policy statement, there is a clear path for tariff and market rule changes to be presented to the commission as appropriate," EEI said.

Merchant generators, nuclear interests voice support

The Electric Power Supply Association, a trade group representing merchant gas-fired power plant operators and renewable generators, said that while a national carbon price would be preferred, it would also back a regional carbon pricing plan.

"FERC, with its statutory responsibility for overseeing the wholesale electric markets, is best poised to direct attention to these market-based mechanisms which should be developed at the regional level if a national economy-wide approach is not under consideration or is deemed to be infeasible," EPSA said.

EPSA also pointed to a recent study by the consulting firm Energy and Environmental that found the PJM Interconnection region can achieve deeper decarbonization by 2030 at a significantly lower cost to consumers by pursuing market-based policies such as carbon pricing "instead of continuing to rely on fragmented and restrictive clean energy policies and subsidies that are in place today."

Trade organization Nuclear Energy Institute also expressed support for carbon pricing in wholesale power markets. Without a carbon price or similar program to value the low-carbon attributes of nuclear power, nuclear generators' units will continue to retire before their licenses expire, thus making it more difficult for states to meet their decarbonization targets, NEI said.