Four present and former regulators told the National Association of Regulatory Utility Commissioners last week they are skeptical that carbon pricing and mandatory capacity markets would achieve decarbonization goals.

Instead, consultant Rob Gramlich, who served as an aide to former FERC Chair Pat Wood III, touted the energy-only market his former boss helped design in ERCOT. Former Montana regulator Travis Kavulla cited the simplicity of a clean energy credit market, saying it could save PJM billions annually. Rhode Island regulator Abigail Anthony warned against mixing clean energy goals with economic development, while Kentucky regulator Talina Mathews predicted the role of PJM’s capacity market would diminish.

Judith Jagdmann, a three-term member of the Virginia State Corporation Commission, moderated the general session discussion on clean energy and the markets at NARUC’s Annual Meeting and Education Conference. The session Nov. 10 came less than a week before Monday’s deadline for comments on FERC’s proposed policy statement inviting states to introduce carbon pricing in wholesale electricity markets (AD20-14). (See FERC: Send Us Your Carbon Pricing Plans.)

Don’t Mix Economic Development with Energy Goals

Anthony, who was appointed to the Rhode Island Public Utilities Commission in 2017, opened the session by listing the criteria she said were needed for a wholesale market design to meet state clean energy objectives: It should deliver incremental carbon reductions; allow clean energy projects to secure financing; include penalties for facilities that fail to deliver; and internalize externalities that are associated with the markets.

What the market should not attempt to do, she said, is “deliver on policies that are not direct externalities of power generation,” including economic development.

“It’s going to take many billions of dollars in investments to mitigate climate change and achieve our states’ greenhouse gas reduction targets, and we risk not having the means to meet those greenhouse gas-reduction goals when we make economic development and local jobs the primary purpose of clean energy,” she said. “So, I think that for our own good — kind of to save us from ourselves — we need markets that are designed to deliver maximum carbon reductions at the least cost.

“I think that [ISO-NE] can certainly design a market that internalizes carbon externalities. The Forward Clean Energy Market seems to be a good example of a market structure that internalized the carbon value of clean energy and provides the stable medium- or long-term revenue stream that allows projects to be financed,” Anthony said. “But to realize cost savings over current practice, states would have to cede control and allow the market to deliver the most efficient projects.”

Carveouts for in-state resources would make the market less efficient, she said. “States have a lot of policies, and very few of them should be reflected in wholesale markets.”

Similarly, the market should not attempt to internalize externalities such as concerns about the land-use impact of solar generation, Anthony said. “The loss of farmland, or pollinator habitat — those are externalities of land development, and the externality needs to be internalized via the price of developing land so that those additional costs flow to whatever development goes on that land, whether it’s solar or condominiums.”

Asking Markets to do More than they Can

Mathews, who joined the Kentucky Public Service Commission in 2017, said markets are best at security-constrained economic dispatch: “The megawatts get to the customers at the least cost available.”

But she said their success depends on a large footprint and a uniform commodity. “I think when you start to carve out the footprint and then you start to change [to] green megawatts, blue megawatts, red megawatts, black megawatts, then you’ve suddenly started segmenting that market and it becomes less efficient.”

That, she said, is PJM’s problem: dealing with a patchwork of state laws and executive actions, including goals for renewable energy, clean energy, carbon and energy efficiency.

“You’re kind of asking the market to do more than it was designed to do or that it can do efficiently,” she said. “I think fundamentally you will get to a point in an RTO like PJM where there will be state policies that get promoted at the expense of other state policies, and I think you’ll see then either [state] commissions making the decision to pull their utilities out [of the RTO], or maybe in other states, they’ll tell their utilities they have to [use] fixed resource requirements … to acquire their own resources to meet their load, and the capacity market will just be residuals.”

Clean Energy Credit Market, not Carbon Pricing

Kavulla, vice president of regulatory affairs for NRG Energy, noted that 30 jurisdictions have adopted clean energy standards (CES) or renewable portfolio standards and a quarter of the U.S. population is in areas that have declared 100% clean energy goals. But only a handful of them, such as members of the Regional Greenhouse Gas Initiative (RGGI), price carbon.

“For PJM, which has both CESes, RPSes and carbon pricing, the market for [renewable energy credits] is about four times as large as the market for emission allowances within RGGI. … So, if FERC and states are really going to be speaking the same policy language here, it really needs to center around that trade in credits — renewable energy credits or something hopefully more technology-neutral so you can fulfill Commissioner Anthony’s mandate for the same value for the same increment of carbon reduction.

“I think states and FERC alike would be well advised to consider setting up state-led, RTO-facilitated markets for these clean energy credits,” continued Kavulla, who served as NARUC president during his term on the Montana Public Service Commission. “The Forward Clean Energy Market is one type of market design that could facilitate that; there are real efficiencies to be wrung out of the system now.”

RPS and CES programs are often targeted toward particular technologies or include locational requirements, he said. And they are usually secured through long-term contracts that undermine RTO markets’ shift of risk to generation owners like NRG, he said. “So, that same basic model that’s worked fairly well for restructured jurisdictions is something that I think can apply to a trade in clean energy credits to get it to look a little bit more like a competitive market where investors have to take risk.”

Kavulla cited a study published last month by Energy and Environmental Economics that found an efficient regional CES could save $2.5 billion annually in PJM. The study also said that existing state carbon policies and subsidies will increase electricity costs by more than $3 billion in 2030 and achieve less than half of emissions reductions that could be achieved through a competitive, market-based approach. (See Study Recommends Carbon Price for PJM.)

“That study shows that a regional, efficient CES can also rival the efficiency of a regional carbon price” without concern over the kind of carbon leakage seen in RGGI, Kavulla said. “In a regional carbon price configuration, in order for it to really work, you need price uniformity across an entire region. And it’s going to be hard to achieve that in a mix of states as diverse as West Virginia and Maryland, to use two neighbors.”

In contrast, a CES market would provide “a lot more flexibility for the states, as well as more of a seat at the table in terms of governance and market design oversight, simply because they ultimately control the spigot of demand.

“I think a more voluntary market like a regional clean energy standard or a clean energy market is probably a more politically appealing way to go, simply because a lot of states have voluntarily expressed the quantity they want as well as the reserve price — the price ceiling. And you don’t have to worry about FERC playing carbon referee on leakage,” Kavulla continued. “I think it’s worth FERC considering carbon pricing … but they really need to be considering alongside that a policy for a regional clean energy standard. Because without it, I fear, states and FERC are still going to end up two ships passing in the night.”

ERCOT Model

Gramlich, president of Grid Strategies and executive director of Americans for a Clean Energy Grid and the WATT Coalition, said he was confident the U.S. can achieve more than 80% renewable penetration and up to 95% carbon-free generation with existing technologies.

“But you operate that system differently, and so, we’re going to have to think about how do we not only get the long-term procurement for the carbon-free, clean renewable resources … but also the flexible and firm resources, because we need to acknowledge there will be three-day periods where there isn’t a lot of wind or sun.”

Gramlich said he supports ERCOT’s energy-only model, which makes competitive retailers responsible for resource adequacy. “Of course, if a state has more ambitious clean energy objectives, they can pass a CES or carbon price and do that if they wish. If a state is not interested in that much retail competition … they can do a New Jersey-style [basic generation service auction] under that same market structure, where … you still get the benefit of competitive generation.

“Right now, it’s really unclear between a lot of different entities who has the responsibility” for resource adequacy, he said.

Commissioner Jagdmann noted that Texas has shown reserve margins as low as 3%. “Are you comfortable with that?” she asked Gramlich.

“Every year is another test of the ERCOT model, and every year it works,” Gramlich replied. “And then every skeptic or every fan of central capacity markets says, ‘Oh well, there was something unique about last year. We’ll see how it goes next year.’ You know, we’re in Year 20. … It’s been working great every year. I don’t think reserve margin is necessarily the right metric of reliability; it will be different in the future if you get that active demand-side” response.

“Texas isn’t perfect,” Gramlich continued. “They need more dynamic retail rates, like most states do — some type of real-time, time-of-use [pricing] or some other type of pricing on the retail end.

“We all need to get used to scarcity pricing in any RTO. I think all of them should have prices that go … well into the four digits, because there are times when the accurate wholesale price in terms of the value of energy is up there. Now the key from a consumer protection standpoint … is you want to make sure nobody actually has to pay that. And you do that by making sure there is forward contracting or hedging. And that basically is what happens in Texas. You get to $9,000[/MWh] prices, but you look around and pretty much everybody is hedged. So, it’s sort of like: You don’t want to get the speeding ticket, but you didn’t have to speed.”

Pricing Carbon in Electricity but not Heating, Vehicle Fuel

Anthony said the focus on carbon pricing in wholesale power markets alone is myopic.

“What we’re really, really going to need if we’re going to achieve our goals is an economy or energy sector retail carbon price, which theoretically would be a much more efficient tool to achieve the New England states’ goals around transportation and heating electrification.

“If we continue to price carbon in electricity like we do through RGGI and all of our other clean energy goals and continue to ignore it in the price of natural gas and heating oil and transportation fuels, we’re going to fail at our electrification efforts because we’re just going to keep driving up the price of electricity even more relative to its substitute fuels.”