Attributing greenhouse gas emissions in a regional wholesale energy market

Oct 27, 2016

Wara and Cullenward submitted a comment to the California Independent System Operator (CAISO) and California Air Resources Board (ARB) on regional greenhouse gas emissions accounting and energy market design proposals presented by CAISO in an October 13 technical workshop, and by by ARB in a October 26 workshop. The comment letter covers issues that arise in the Energy Imbalance Market (EIM), many of which also apply to the question of whether and how to expand CAISO’s real-time and day-ahead energy markets in the context of a regional ISO.

We believe that successful resolution of these issues is important to maintaining the environmental integrity of California’s suite of climate policies. Our comment letter focuses on five issues:

All of the market design concepts under consideration assume a price on carbon, but CARB only has clear legal authority to price carbon through the end of 2020. If CAISO markets were expanded without clear legal authority to continue pricing carbon after 2020, this development would put California’s climate leadership in jeopardy. We therefore urge stakeholders to condition CAISO expansion discussions on the successful legal authorization of post-2020 carbon pricing policy in California—and, if necessary, to delay CAISO expansion discussions until that time.

Policy and legal considerations for the EIM can and should be considered separately from those related to full integration of day-ahead and real time regional energy markets. We note that while CAISO’s overall process focuses on the integration of regional energy markets, both CAISO and CARB staff presentations address concerns with respect to potential EIM reforms. We respectfully ask CAISO and CARB staff to clarify the extent to which their proposed solutions for the EIM are also intended to apply to the full regionalization discussion. Our view is that the carbon prices needed to achieve California’s post-2020 policy targets will be much higher than current prices. Put another way, the relatively low carbon price as applied in today’s EIM is not representative of the likely market impacts and dynamics in the post-2020 period. Accordingly, we believe it is a mistake to combine the discussion of potential EIM reforms with regionalization of the core energy markets.

Both proposals for Option 3 involve differential treatment of resources depending on their location and/or contractual arrangement with California load-serving entities (LSEs), raising new dormant commerce clause risks that require analysis. CARB has proposed using dynamic average emissions factors to calculate the greenhouse gas compliance obligations associated with energy transferred into California territory. This will result in higher emissions factors for out-of-state renewable energy resources and potentially for natural gas combined cycle units located in areas where the average regional emissions factor is higher than that of natural gas. CAISO’s preferred implementation of Option 3 contemplates retaining the source-specific emissions accounting in the current EIM, but supplementing this approach with a system “hurdle rate” that applies to resources imported into California. Both approaches consider exempting certain out-of-state resources that have bilateral contracts with California LSEs. CAISO proposes that any resource with such a contract would avoid the hurdle rate. In turn, CARB would give renewable energy resources with California contracts source-specific emissions factors. Both approaches raise significant new dormant commerce clause risks that require additional analysis.

The potential for post-2020 carbon prices to raise nondiscrimination concerns under the Federal Power Act requires additional analysis. Equal, non-discriminatory access to the transmission system for all generators is a central ordering principal of both the Federal Power Act and FERC Order 888. CAISO has not yet assessed the impacts on dispatch of realistic post-2020 California carbon prices under any of its proposals. These proposals also envision differential treatment of otherwise like resources in regional ISO-wide dispatch. We are concerned that differential treatment that may seem reasonable and not unduly discriminatory at a carbon price of $12.73/tCO2 might not be within the zone of reasonableness at a price of $50 to $100 per tCO2. Thus we believe that all proposals require further evaluation at much higher carbon prices than presented in the staff presentations.

CAISO’s and CARB’s proposals for Option 3 would place merchant generators at a disadvantage relative to out-of-state resources that contract with California LSEs. Both the CAISO and CARB proposals for Option 3 would attribute emissions to resources with bilateral contract paths differently from those without them. At the high carbon prices expected after 2020, merchant zero-carbon resources—a crucial element in the CAISO analysis of the net benefits of a regional ISO—would face differential treatment that could significantly affect their economic competitiveness. CAISO should analyze this issue as it considers the question of non-discriminatory treatment under higher, post-2020 carbon prices.

Disclaimer: we are writing in my personal capacities only, not on behalf of our employers, affiliates, or any other organizations.

submitted to the California Independent System Operator (CAISO) and California Air Resources Board (CARB)

Michael Wara * and Danny Cullenward †§

* Stanford Law School

Near Zero

§ Carnegie Institution for Science, Department of Global Ecology

photo credit: Andrea Boldizsar via Unsplash