by Jeff St. John
October 11, 2019

For the past year, the New York Independent System Operator has been working on a first for a U.S. grid operator: a proposal to put a price on carbon emissions in its wholesale energy markets.

It’s a bold proposal with an uncertain outcome. NYISO will have to get buy-in from stakeholders ranging from utilities to independent power producers, Gov. Andrew Cuomo to the state’s Public Service Commission. And then it will have to win approval from the Federal Energy Regulatory Commission, which under the Trump administration has been putting roadblocks in the way of state-subsidized energy resources in interstate markets it regulates. 

But NYISO is also entrusted with enabling New York state’s energy policies, and those policies were kicked into high gear by this summer’s passage of the Climate Leadership and Community Protection Act. The law sets New York on a path toward getting at least 70 percent of its power from renewable energy by 2030, and moving to zero-emissions electricity by 2040. 

Hitting those goals will require a massive build-out of renewables, including statewide targets of 6 gigawatts of solar capacity by 2025, 3 gigawatts of energy storage by 2030 and 9 gigawatts of offshore wind by 2035. It will also require finding ways to incentivize low-carbon energy investments across the state’s economy, given its long-term goals of decarbonizing transportation, heating in buildings and other sectors by 2050. 

The CLCPA, then, puts NYISO's carbon pricing plan in a new light.

“This is not an attempt by the New York ISO to solve New York’s climate issues or achieve New York’s environmental policy,” NYISO President and CEO Richard Dewey said in an interview this week. “The state has made the decision that these assets will be deployed, they will be funded, they will be backed. We’re just trying to make the markets more effective, and just and reasonable for actions that are happening anyway.”

That’s the context for understanding the report on NYISO’s carbon pricing plan released last week by the Analysis Group. While it’s not the first analysis of the potential benefits and costs of the plan, it is the first to emerge since the CLCPA was passed in June.

Given the massively ambitious goals of New York’s climate plan, failing to put a price on carbon in the state’s energy markets would mean that “the signals that will flow through the wholesale market are completely inconsistent with the priorities established by the act — that carbon matters,” Sue Tierney, Analysis Group senior adviser and report co-author, said in an interview this week. 

On the other hand, “by putting this price into the market, it signals to investors, consumers [and] suppliers that carbon matters, and their actions will be influenced in myriad and unknown ways to take that into account when they make their decisions,” Tierney said. 

Costs and benefits of carbon pricing

Tierney, a former Massachusetts utility regulator and Energy Department assistant secretary for policy, noted that it’s still far too early to determine the precise cost-benefit of New York’s climate action plan. That’s because key variables in that equation — such as the state’s "social cost of carbon" calculation, which will inform the precise dollar per megawatt-hour value of the carbon adder in NYISO’s energy markets — haven’t been completed yet. 

Even so, the Analysis Group report has been able to build on its own and previous analyses of NYISO’s plan to make some reasonable assumptions, she said. For example, a previous study from the Brattle Group presumed a social cost of about $47 per ton of carbon dioxide emissions — a fairly industry-standard figure — and then translated that into a market price adder, based on the carbon intensity and efficiency of participating generators. 

Under NYISO’s scheme, every generator that emits carbon would have to add this “carbon charge” to their offers in NYISO’s energy markets. This will raise market clearing prices wherever those resources are providing the last marginal megawatts of energy needed, with prices varying from point to point in NYISO’s system based on location-based marginal price (LBMP). 

The effect, NYISO CEO Dewey said, will be to increase marginal prices in places more reliant on emitting resources, allowing carbon-free alternatives to earn more revenue, and hopefully encouraging more of them to be built.

It could also provide incentives for natural-gas-fired power plants to improve efficiency and gain more value for their contribution to the grid, even if state law envisions them eventually being shuttered. 

But New York’s energy consumers won’t see those price increases, Dewey said. That’s because utilities will receive a credit to offset the impact of these marginal price increases, paid through the charges collected from generators that emit carbon. “From the standpoint of the LBMP, we’re just putting more of the price signal in the market itself,” he said. 

As Tierney noted, this integration of carbon cost into market operations should lead to “the efficiencies you’d expect to see in organized markets, where the bids provided by buyers, the dispatch arrangements and the actual operational efficiencies, tend to lead to 1 to 3 percent efficiency gains,” she said.

Using this slight efficiency improvement as a starting point, Analysis Group projects that NYISO’s plan could provide “market efficiency savings” of between $280 million and $850 million between now and 2040, compared to allowing the market to develop without a price on carbon. 

Bridging the upstate-downstate divide 

This is a conservative estimate, she said, because it averages out some of New York’s most pressing market imbalances. In particular, it doesn’t fully capture the divide between the low-cost, low-carbon energy environment of upstate New York, and the fossil-fuel-heavy, congested energy market for New York City and downstate, she said.

This “tale of two grids,” as NYISO has dubbed it, is driven by the lack of sufficient transmission capacity between downstate, with its population density and preponderance of older fossil-fired generation, and the less populous upstate, which has ample hydropower and a growing share of wind power.

Earlier this year, NYISO’s board approved a new transmission build-out that’s expected to come online by 2023. But that may only be the first of many more transmission expansions needed to carry lower-cost carbon-free energy from north to south. 

Instituting a carbon price could help solve the conditions that have led to this split between upstate and downstate, Tierney said. That’s because the more fossil-fueled plants there are powering a local portion of the grid, the larger they will drive the difference between the carbon price and the non-carbon price of power — and thus, the revenue potential of clean resources. 

Today, it’s harder to build renewables downstate, largely because land is more expensive and the costs of doing business are higher than they are upstate, she said. But if there’s more money to be made, “that’s a powerful driver for things to happen downstate,” whether through investing in more renewable energy, or in energy efficiency improvements. It could also create an economic case for building even more transmission to carry clean energy from upstate to the market where it can earn more. 

Potomac Economics, NYISO’s market monitor, applied this more sophisticated analysis to NYISO’s carbon pricing plan to determine what the market effects could be for three test years over the coming decade, Tierney said.

The Analysis Group used that Potomac Economic data to calculate what the overall economic benefits of these enhanced effects could be through 2036. The result was a net present value of between $1.72 billion and $3.25 billion — a lot more than the report’s initial findings that didn’t take New York’s unique split-state characteristics into account. 

A mechanism for the long haul 

Adding a carbon price to energy markets could help spur much-needed new renewable development. But it could also support existing zero-carbon resources with a market mechanism that’s far more durable than New York’s primary method today — its renewable energy credit (REC) program for renewable power, and its zero-emissions energy credits (ZEC) programs put in place to support its large nuclear power fleet. 

Today, RECs and ZECs account for about 20 percent of the energy traded in NYISO, Dewey said. But if New York is going to hit its massive new clean energy targets, that percentage would have to grow to more than 50 percent by 2030.

That would require REC prices to continue rising, and out-of-state investors to bankroll much of the new development. In a future energy market where zero-marginal-cost generators are shaving away at energy prices, it may prove untenable for REC and ZEC prices to keep climbing make up for the difference. 

A carbon price solves that imbalance very neatly, and in the long run, can be expected to replace the RECs and ZECs as a primary source of long-term revenue certainty needed to build renewable projects, Dewey said. “If the state can get the carbon price right, we can just eliminate the subsidies."

On New York utility customers’ bills, this shift would be seen as a line item for RECs and ZECs slowly being replaced with a line item for carbon pricing, hopefully at a lower overall cost, he said. 

The billion-dollar question

That brings us to the looming question of just how much New York’s climate law is expected to cost and how much NYISO’s carbon pricing plan could defray those costs. In simple terms, the Analysis Group report didn’t try to answer that question, because “nobody knows what the numbers are going to be,” Tierney said. 

“There will be enormous benefits,” she said. “There may be some costs.” A previous report commissioned by NYISO projected that its carbon pricing plan could cost about $20 per year for the average New York customer, but the new climate law has rendered that analysis moot. 

Cost projections also rely on assumptions about the share of New York’s carbon reduction efforts that will rely on clean electricity, Dewey noted. Compared to transportation, heating buildings, industrial processes and other emission sources, electricity generation produces about 17 percent of New York’s carbon footprint, he noted. 

But if New York is to hit its long-term goal of decarbonizing transportation, buildings and other sectors of the economy by 2050, it will likely have to turn to electricity as a replacement energy source. That could drive the demand for carbon-free electricity far beyond the more conservative projections in the Analysis Group report — and “with the price embedded in the market, it will happen much faster,” he said.