Greenhouse gas accounting and market design for electricity market regionalization

Michael Wara and Danny Cullenward submitted a comment to the California Independent System Operator (CAISO) on the Straw Proposal concerning regional greenhouse gas accounting and market design mechanisms.

We write today to express our strong support for the two-pass solution CAISO has developed in the Straw Proposal.

Although the proposed two-pass solution offers a viable market design that would preserve California’s ability to lead on climate policy in partnership with states whose generating resources and policy priorities differ from California’s, we urge CAISO staff and stakeholders to perform additional modeling exercises to explore how the two-pass solution would operate in a post-2020 carbon pricing environment. As detailed in our previous comment letter, the carbon prices discussed thus far are significantly lower than should be expected in a post-2020 California climate policy regime. Rather than carbon prices constituting a small fraction of energy prices, we believe that state carbon price component of bids will likely be on par with—and could well exceed— the current energy component of wholesale bids, assuming the price on carbon reflects the economy-wide costs of complying with California’s 2030 climate target.

Confirming that the two-pass solution functions in a high carbon price environment would provide additional confidence in CAISO’s Straw Proposal. One approach would be for CAISO to ensure bid adder functionality at the estimated auction floor and allowance price containment reserve prices for the California cap-and-trade program presented by CARB in its recent regulatory amendments package for the program. While these estimates are not necessarily representative of the costs of achieving California’s 2030 climate target, they nevertheless offer a better proxy than the low costs included in CAISO’s examples to date (i.e., CARB’s estimates are more representative of likely post-2020 prices than the carbon price implied by a $6/MWh greenhouse gas bid adder).

In addition, we urge CAISO staff and stakeholders to recognize that the two-pass solution—like all other regional market mechanisms discussed to date—requires California to maintain a price on carbon that reflects state climate policy goals. As we have explained elsewhere in detail, California currently has this authority only through the end of 2020.4 Thus, while we support the proposed two-pass solution, its successful implementation is contingent on California securing the authority to price carbon in the post-2020 period. Due to the requirements of Proposition 26, however, this likely requires a 2/3 vote on new enabling legislation.

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