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NYISO-sponsored study advocates using carbon pricing to achieve CO2-free grid

New York state's power grid operator has released a new study on its proposal to embed the "social cost" of carbon dioxide emissions into the wholesale price of electricity. This study asserted that carbon pricing is the most cost-efficient and fastest way for the state to achieve a carbon-free power system by 2040, as sought by recently enacted legislation.

Conducted by the Analysis Group on behalf of the New York ISO, the study found that a carbon price in NYISO's competitive wholesale power markets "can help deliver New York's clean-energy transition in faster, cheaper, more reliable, more efficient, and more creative ways," than without it. The new analysis was presented to stakeholders on Oct. 3 for further review.

In a media briefing, Sue Tierney, senior adviser at the Analysis Group, said New York's July enactment of "the most aggressive climate policy of any state," the Climate Leadership and Community Protection Act, led her group to focus on how carbon pricing could help the state achieve its clean energy goals.

New York's "Green New Deal" envisions the state procuring 70% of its electricity needs from renewables by 2030, before achieving a carbon-free power system by 2040 and then net-zero emissions for the statewide-economy by 2050. However, the new law does not say carbon pricing could be used to achieve those goals.

Tierney said the Analysis Group calculated the cost to build out New York's power system to achieve a fully-decarbonized power system by 2040, including expanding transmission lines. The study did not reveal the cost to fully decarbonize New York's grid but Tierney said that it is an "astounding number," although "probably less than the cost of climate change." She also said that the undisclosed figure helped the study determine that carbon pricing will deliver New York's clean energy transition at a more affordable price by delivering $280 million to $850 million in consumer savings between 2022 and 2040.

"If the New York ISO were to not adopt a carbon price, in essence, you have a major engine of potential change not growing in the same direction as the rest of the system has to move in," Tierney said.

The study said carbon pricing would allow clean energy projects to enter the market more quickly by allowing them to be financed with market revenues reflecting carbon costs. Carbon pricing would also spur near-term price signals to spur investments in renewables, energy storage, combined heat and power, and energy efficiency and demand-side measures, the study said.

In addition, the study said carbon pricing would create incentives for companies to maintain well-performing existing facilities that produce little or no carbon emissions, such as New York's upstate nuclear power plants, and repower underperforming units while hastening retirements of less-efficient and uneconomic fossil fuel-fired generation units.

The study said carbon pricing would also incentivize entrepreneurs to find innovative ways to cut carbon emissions, build needed transmission and develop clean energy projects. Finally, the study concluded that carbon pricing proposal would prevent the "leakage," or shifting, of carbon emissions from New York-based generation resources to out-of-state resources in neighboring regions.

In a press release, NYISO President and CEO Rich Dewey said that the grid operator is pleased with the analysis showing that carbon pricing is the best way forward for the state to achieve its climate goals. "Competitive electric markets are a strong and proven platform from which to leverage innovation," continued Dewey, who stressed the need for collaboration with the state and between stakeholders.

In response to state policies to cut greenhouse gas emissions 40% from 1990 levels by 2030, the NYISO in the autumn of 2017 formed a stakeholder task force to study the impacts of carbon pricing in its power markets. In May 2018, the NYISO released a "straw proposal" that would price the "social cost" of carbon into the market by tacking on a charge onto supply offers of generators as measured by dollar-per-ton of CO2 emissions. Nonemitting generation, such as nuclear, conventional hydropower, wind and solar, would not incur a carbon charge and thus would reap the benefit of higher net revenues.

Carbon pricing would be implemented for New York no earlier than the second quarter of 2021 if the proposal is ultimately approved by NYISO's stakeholders, its independent Board of Directors and the Federal Energy Regulatory Commission. A May 2018 presentation by the NYISO envisioned a $40/ton carbon charge, as did an accompanying NYISO-commissioned study by the Brattle Group.