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PJM power prices likely to rise less with rate-based approach to CO2 rule

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Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

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PJM power prices likely to rise less with rate-based approach to CO2 rule

Wholesaleenergy market prices will likely go up less in the if statesenforce emissions rate limits under the U.S. EPA's Clean Power Plan rather thantaking a mass-based compliance approach, according to new modeling from thegrid operator. But regional allowance trading will reduce compliance costsunder either scenario and bring power prices for rate- and mass-basedcompliance closer to each other, the grid operator said.

PJMreleased an economic analysis of the EPA's rule May 6. The report will befollowed by a complete transmission congestion analysis and compliance "pathways"economic assessment in June and economic and reliability sensitivities andcoordinated analysis with the MidcontinentIndependent System Operator Inc. in the second half of 2016. TheClean Power Plansets state-specific emissions limits for existing power plants and is expectedto cut U.S. power sector carbon emissions 32% from 2005 levels by 2030,assuming the rule survives court challenges and implementation are not pushed back asa result of the Supreme Court's stayof the rule in February.

Inits new report, PJM said making "apples-to-apples" comparisonsbetween the two main compliance routes was tough because unlike the mass-basedmethod, the rate-based approach does not include an explicit cap on emissions.But the analysis said a rate-based compliance program that includes trading ofemission rate credits between states "has a cost advantage" overother rate-based compliance methods because under that approach, coal-firedsources are only required to purchase credits based on their emissionsperformance relative to the fossil steam emissions target.

Inaddition, rate-based compliance will likely reduce plant retirements in PJMrelative to the mass-based option because the addition of energy efficiency andrenewable resources in the market can lower emissions rates even if total massemissions rise. Only 5,426 MW of coal-fired capacity in PJM will close between2018 and 2037 under a trade-ready, rate-based program, slightly more than 5,261MW in the report's business-as-usual reference case but less than half the11,059 MW that would close under a mass-based, trade-ready program.

"Lowerretirements and more zero-emitting resources in general implies higherinvestment and going-forward costs but lower production costs than mass-basedcompliance," PJM said.

Mass-basedmarket prices are even higher considering the EPA will regulate both new andexisting sources at the same time. In order to prevent the leakage of emissionsfrom existing to new sources, which have less stringent emissions limits, theEPA developed a "new source complement," or NSC, to its existingsource targets that represents estimated emissions from new sources needed tosatisfy incremental electricity demand from 2012.

Whenconsidering the NSC, PJM power prices could rise to almost $80/MWh in 2030under a mass-based compliance strategy — with or without trading — compared toaround $60/MWh under a state or regional rate-based approach, according to PJM'smodeling.

Butof the scenarios explored by PJM, CO2 emissions were lowest under a mass-basedapproach that also accounts for the NSC. Carbon emissions from PJM sourcesregulated under the Clean Power Plan fall to around 264 million tons by 2030with either state or trade-ready mass-based compliance that includes the NSC,the lowest of all PJM's considered outcomes.

Withoutthe NSC, CO2 emissions for those sources would stand at about 341 million tonsunder a state or trade-ready mass-based program, 351 million tons for atrade-ready rate-based program and a little over 300 million tons for a staterate-based compliance plan. Under rate-based compliance, emissions were lowestunder a trade-ready program that reduces energy efficiency emission ratecredits by 50%.

Whetherthrough a rate- or mass-based approach, PJM emphasized that trade-ready orregional programs have the greatest potential to reduce compliance costs.Broadening compliance programs beyond individual states can also allow theleast efficient and highest-emitting sources to cut their carbon output and letcoal-dominant states lower costs through the purchase of allowances and bypreserving the useful life of existing assets, the analysis said.