The Federal Energy Regulatory Commission explored questions of regulatory authority, market design and implementation related to carbon pricing in a daylong conference Sept. 30.
Featuring nearly three dozen panelists, the event also considered questions of market fairness and technical issues within multi-state regional transmission organizations (RTOs) and independent system operators (ISOs). PJM Interconnection Senior Market Strategist Anthony Giacomoni testified about carbon pricing market design considerations that PJM has been analyzing with its stakeholders.
The conference explored how RTOs and ISOs, absent a unifying federal clean energy standard, are challenged to foster fair, efficient and competitive regional markets amid a checkerboard of state-led decarbonization policies.
Competitive Markets Is Main Goal
As FERC regulates those markets, the agency’s focus must remain on its narrow statutory authority to ensure just and reasonable rates established through fair, competitive markets, FERC Chairman Neil Chatterjee said during opening remarks.
“Competitive markets are the smartest path forward for this energy transition. It is evident to anyone who has watched over the last several years as we have grappled with thorny issues arising with the intersection of state policies and our markets, we are at a pivotal point,” Chatterjee said.
Stating that “FERC is not an environmental regulator,” Chatterjee asked panelists to address the “narrow question” of jurisdiction.
“We have neither the expertise nor the authority to weigh in on how best to curb emissions. We do have the expertise and the mandate to ensure just and reasonable wholesale rates,” he added.
The utility sector accounts for about 27% of carbon dioxide emissions in the U.S., said Roy J. Shanker, an energy markets consultant.
Consensus Forms on Benefits for Markets & Resource Adequacy
Many participants – from academic, regulatory and business sectors – said that a uniform carbon price offers significant competitive benefits. It would also reduce existing complexities associated with reconciling varying state policies, they said, with the added benefit of helping to ensure there are enough resources to meet future electricity demands.
At issue is the patchwork quilt of state-led carbon pricing mechanisms within multi-state ISOs and RTOs. Higher prices on carbon-emitting generation in one state can shift dispatch to benefit generation in states without such regulatory frameworks, working to shift emissions from one state to another rather than reducing them overall.
This phenomenon, known as “leakage,” results in a competitive advantage for carbon-emitting generation in states without a carbon price. In some instances, leakage may then limit or nullify the environmental attributes that state-specific carbon pricing was designed to achieve. Leakage is an issue within ISOs and RTOs as well as between regions.
As renewable generation grows, resource adequacy remains a market issue. A uniform carbon price can provide powerful market signals to not only incentivize development of renewable resources, but to also ensure revenue for balancing attributes of nuclear generation to support resource adequacy, experts added.
The authority to regulate the outcomes of RTO or ISO wholesale markets that may incorporate carbon pricing is well established within the Commission’s jurisdiction via the Federal Power Act, a fact which panelists unanimously agreed upon during the first panel devoted to discussion of jurisdictional issues.
The Commission proactively directing the implementation of carbon pricing within RTO/ISO markets, or nationwide as a “regulatory tool” to reduce barriers to competition, is feasible but may present significant jurisdictional considerations, panelists suggested.
Beyond jurisdictional issues, panels at the FERC conference also covered carbon pricing mechanisms and interactions with power markets, and considerations for market design, followed by a roundtable discussion led by utility industry leaders.
PJM Evaluates Carbon Pricing
Since 2019, PJM’s Carbon Pricing Senior Task Force has offered education about, and studied the effects of, a wide range of carbon pricing scenarios within its 13-state footprint.
Because carbon-reduction policies vary among states within its footprint, PJM also studied the impacts of several border-adjustment mechanisms to reduce carbon pricing leakage, Giacomoni said during the third panel on market implementation considerations.
Indeed, as a result of some states’ participation in the Regional Greenhouse Gas Initiative (RGGI), “carbon pricing has been reflected in market outcomes in PJM for well over a decade,” he said.
PJM research shows a uniform carbon price is most favorable for competitive market outcomes, he said.
“Individual states can try to take the lead by implementing a high carbon price in their states. But if you look at what is in the best interest of consumers, RTO-wide programs result in lower costs for all consumers and greater reductions in emissions,” he said.
“Even if a carbon price is not the eventual solution, competition – especially on a large, regional scale – can drive innovation and cost efficiency in meeting clean energy goals.”
Ultimately, he added, “market-based programs are the most efficient and cost-effective means to achieve emissions reductions.