New York — The creation of a Forward Clean Energy Market could complement existing US wholesale power markets by adding a new market featuring a forward auction for clean energy attributes, an executive said Friday.
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As an increasing number of US cities and states enact policies to transition to 100% clean or renewable energy it will be difficult to affordably achieve those goals using traditional policy tools, consultant Brattle Group argues in a report titled "How States, Cities, and Customers Can Harness Competitive Markets to Meet Ambitious Carbon Goals," that was prepared for energy provider NRG Energy.
The classic economic approach is to price greenhouse gas emissions through a tax or cap-and-trade system, but this has failed to gain traction at the federal level and is politically challenging, according to the report.
"Optimally, you would have a nation-wide carbon price and let chips fall where they may, but we are not there, so a Forward Clean Energy Market could be the next best thing," Travis Kavulla, vice president for Regulatory Affairs at NRG, said in a phone call.
In the absence of a system that internalizes emissions costs into markets, the analysts propose an alternative that would pay clean energy resources for producing energy and displacing fossil fuel-fired generation instead of charging carbon emitters for their pollution.
The clean attribute product would be similar to unbundled renewable energy credits (RECs) that are used to track renewable energy generation today.
"There are a variety of existing models to track RECs and the idea here is to borrow on that and have a more liquid and central option that recognizes the increasing demand coming from municipalities and states," Kavulla said.
The marketable product would be a clean energy attribute credit (CEAC) in the form of a certificate for 1 MWh of clean energy attributes, not including the energy itself, which would perfectly complement existing wholesale power markets, according to the report.
"Traditional system needs are already rewarded through existing wholesale markets (for energy, capacity, and ancillary services), while the policy requirement to decarbonize will be rewarded through the new market (for clean energy attributes)," the report said.
Kavulla said he thinks a FCEM has fewer negative ramifications on existing energy and capacity markets than other approaches.
The market would also feature multi-year forward procurement through an auction design with a three-year forward period and the opportunity for multi-year price lock-in for new resources.
The FCEM would work by having state policymakers mandate a quantity of carbon-free power that they want to procure for all customers by a given delivery year, so a state's mandated clean energy standard would become the minimum quantity of carbon-free electricity.
"Any willingness to procure more CEACs at low prices, or desire to procure less at high prices, would be represented through the specific shape of each states' demand curve for CEACs," Brattle said.
Each market participant would translate its policy or corporate sustainability goals into a volume of clean energy and bid for that quantity in the FCEM. While on the supply side, generators who own or are developing resources that produce carbon emission-free power would offer to sell CEACs in the delivery year at a price they choose, the report explained.
"The forward auction would set the quantity and price of the CEACs procured for the given delivery year," with the delivery year being the period for which resources would commit to produce clean energy in the forward auction, similar to how existing capacity markets work.
Borrowing another page from the capacity market playbook, a FCEM would provide renewable developers access to a predictable revenue source, including multi-year commitments for incremental resources that help to mitigate investor risk and reduce financing costs, the report said.
Asked whether the large incumbent utilities would support it, Kavulla said that depends on whether they are "willing to walk the talk on a carbon emissions reduction and pricing."
He suspects some are willing to do it and added that there could be upside for "big players where they are the purveyors of clean energy attributes."
The FCEM would be run by a state agency, a multi-state organization, or an independent system operator or regional transmission organization.
"First we are shopping this idea to the RTOs, though we are indifferent on who hosts it," Kavulla said.
"Wherever it is run, that forum should not be controlled by a single market participant. There are certain existing state agencies like in Illinois or New York who could run a market like this," he said.
-- Jared Anderson, firstname.lastname@example.org
-- Edited by Gail Roberts, email@example.com