Can Carbon Pricing Help Align Energy Markets and State Policy?

The Federal Energy Regulatory Commission recently led a two-day industry discussion that could come to represent a turning point in how we address carbon reduction by energy producers.

The technical conference brought together state regulators, generators, economists, consumer watchdogs and environmental advocates to discuss the effect that state renewable policies are having on competitive energy markets.

These two things can be at odds. FERC called for the conference in March after widespread concern from generators that state energy policies, like nuclear subsidies and renewable portfolio standards, are slowing investments and interfering with competition. The concern is that subsidies for specific resources depress the clearing price in energy markets, making it difficult for other resources to recover their investments.

Absent a solution, FERC is worried that investors will hesitate to build new generation or upgrade existing plants and grid reliability will suffer. Acting FERC Chair Cheryl LaFleur opened the meeting with a challenge for the different parties: Find a solution that integrates state policy goals with wholesale market competition.

Not surprisingly, the discussion at the conference was tense at times. This is a difficult subject without an easy or obvious answer and there’s a great deal at stake in addition to grid reliability — the future integrity of energy markets, consumer costs, and important environmental goals.

I was privileged to participate in the conference on behalf of the New York Independent System Operator, one of nine grid operators in North America whose job it is to reliably integrate a diverse mix of power resources onto the system and run efficient energy markets.

We spend a lot of our time at the NYISO focused on maintaining the reliability of the system. We also work hard to incentivize competition because that creates efficiencies and innovation in the markets, providing lower costs for consumers.

At the same time, FERC’s job is to ensure just and reasonable rates. LaFleur said numerous times during the conference that she respects the rights of states to determine their own power mixes, but the rapid spread of state generation subsidies is putting pressure on the organized market model.

Meanwhile, states see the low cost of natural gas and a growing lack of fuel diversity as reason to take matters into their own hands and provide incentives that support their environmental and renewable energy goals.  Generators participating in the market, however, view this as undermining price signals, which can have a chilling effect.

So, what’s the answer? One noteworthy area of consensus did emerge from the diverse stakeholder group — the need to price carbon in wholesale power markets.

This was good news to come out of the conference because the NYISO is already hard at work on this subject. We’ve brought in the renowned Brattle Group to study the feasibility of integrating the social cost of carbon into the NYISO-run competitive power markets.

One concept we’re considering is placing an additional value on “clean” or renewable electricity. That value would be reduced or withheld from dirtier plants and returned to customers. Structured carefully, this approach could incentivize cleaner generation, provide proper price signals in the competitive markets, and help achieve state policy goals.

We recognize that reaching a consensus and finding a solution can only be achieved in harmony with state policymakers. That’s why we’re working in close partnership with the New York State Public Service Commission as we complete our analysis and examine viable options for the way forward.

FERC has said if there is a solution to be had, it’s in New York: We are a single-state ISO, avoiding difficult multi-state negotiations; we have a study already underway; and, the PSC has expressed a willingness to consider options. At the end of our study, we may not find a solution that works for everyone — or we may.  But we feel a responsibility to work with all parties and try our best.

We are clear about the challenges before us, and we know that time is of the essence. The urgency felt at the FERC conference was palpable. Yet, the NYISO markets have a proven track record of adapting to change and we are confident that whatever the outcome New York can lead the way.

Brad Jones is the president and CEO of the New York Independent System Operator.

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