By Michael Kuser

RENSSELAER, N.Y. — NYISO on Monday proposed using an estimated fuel cost to help determine the carbon component of locational-based marginal prices (LBMPc), while the state’s largest waste energy producer called for carbon offsets to be included in the ISO’s final carbon pricing plan.

The ISO’s fuel cost proposal is intended to improve stakeholders’ ability to estimate the LBMPc, carbon charges and credits and the carbon residual allocation. It would use the real-time LBMP divided by an estimated marginal fuel cost to provide an approximate heat rate in MMBtus, which would be applied against a “conversion factor” for calculating tons of emissions per megawatt-hour.

“We propose using the lowest-cost fuel on the system, on an MMBtu basis, given the varying costs of natural gas and oil,” Ethan D. Avallone, NYISO technical specialist, told the Installed Capacity/Market Issues Working Group.

The ISO will determine the conversion factor from MMBtus to tons of carbon emissions and will post the factor and the fuel indices used, he said.

The ISO initially proposed calculating the LBMPc using a system of equations to determine binding transmission constraints and the characteristics of marginal resources, but staff found in many cases they could not solve the system of equations or could not determine a system of equations for a given market interval, Avallone said. (See NYISO Looks at Carbon Charge Tariff Impacts, Residuals.)

The new method will calculate the LBMPc in dollars per megawatt-hour by multiplying the tons of carbon emissions per megawatt-hour by the social cost of carbon.

Bias and Accuracy

“How do you determine a statewide lowest-cost fuel given the varying access to pipelines?” asked Howard Fromer, director of market policy for PSEG Power New York. “There’s quite a variation among major pipelines for natural gas prices under peak conditions.”

Avallone said one benefit of the new approach is that it captures price variations among different load zones.

Couch White attorney Michael Mager, who represents Multiple Intervenors, a coalition of large industrial, commercial and institutional energy customers, asked about levels of accuracy and whether the ISO is “comparing the former equations-based approach and this heat rate approach.”

“Any approach we use is going to be an estimate, so we will be looking at accuracy factors,” Avallone said.

David Clarke, director of wholesale market policy for Power Supply Long Island, was concerned about the potential for the new fuel-cost method to overstate the carbon component.

“You might end up dividing a high cost by a lower carbon component,” Clarke said.

Mark Reeder, representing the Alliance for Clean Energy New York, agreed with Clarke.

“If you’re using the lowest-cost fuel, and if it turns out the plant on the margin is really using a higher-cost fuel, then you would be overstating the carbon component,” Reeder said. “This method seems a bit biased toward the high side. I recommend the NYISO, when judging the quality of any approach, give significant weight to the goal of a lack of bias and not just to the goal of accuracy. There is often a tradeoff between these two goals.”

In the NYISO market, certain carbon-free resources able to store energy structure their bids to achieve schedules during the most profitable periods of the day. When energy prices are low, the bids from such resources include an estimated opportunity cost of profit relative to intervals with higher prices.

“The proposed LBMPc methodology we just walked through will incorporate carbon adders that are the result of bidding opportunity costs,” Avallone said, noting carbon-free opportunity cost resource bids are also likely to increase as a result of carbon pricing in some hours.

He also said internal generators would be charged for carbon based on their actual emissions — not the LBMPc — and the LBMP used to calculate LBMPc will include the impact of resources’ bidding opportunity costs when such resources are marginal, making any additional adjustments unnecessary.

Referring to an instance when a California gas-fired generator installed batteries as part of its facility, Couch White attorney Kevin Lang, representing the City of New York, asked how NYISO’s carbon pricing would impact carbon resources able to store energy.

“I think you’d have the same treatment … the LBMP would still incorporate the costs of that generator,” Avallone said.

Reeder said he found the ISO approach “an elegant way to determine opportunity costs.”

Waste to Energy

Michael E. Van Brunt, director of sustainability for Covanta Energy, which owns or operates most of the state’s waste-to-energy (WTE) plants, addressed a different challenge his industry faces regarding the carbon pricing scheme.

New York’s 10 WTE plants employ nearly 1,400 people and convert 3.2 million tons of solid waste per year into electricity, with a combined installed capacity of 285.1 MW. Van Brunt said while New York state policy values WTE over dumping in landfills, the facilities do not qualify for renewable energy credits under the Clean Energy Standard (CES) appendices, while landfill methane conversion does.

Landfills are required by state law to capture methane beyond a certain volume and use it to run generators. The latest figures from the state’s Department of Environmental Conservation show landfill methane generated 782,500 MWh of electricity in 2015.

In the voluntary emissions market, the WTE industry generates and sells offset credits from new capacity but “faces a significant penalty under the current NYISO proposal that will directly impact communities using WTE,” Van Brunt said, displaying a slide that shows the industry in New York having a net greenhouse gas factor of -0.8 ton CO2/MWh.

“I think a rational carbon pricing policy has to account for carbon offsets,” said Clarke.

Nicole Bouchez, the ISO’s principal economist, said state policy is “conflicted to some extent” and the CES does not cover WTE, requiring NYISO to have state approval to exempt WTE facilities from carbon pricing.

“The ISO plays an important role as arbiter on policy, and, in this case, where there are policy distortions,” its voice could count, Van Brunt said.

“Are you looking to be held harmless, as if the [carbon] program didn’t exist … or do you want to keep all the incremental revenue from carbon pricing?” asked Fromer.

“We look for equal treatment with landfills from the state,” Van Brunt said. “If landfills are going to be exempted, so should WTE.”

Bouchez said the ISO will soon announce a date for a second presentation by Analysis Group, which last month revealed the outline of a new study to provide additional insight into pricing carbon in NYISO’s wholesale electricity markets. (See Analysis Group Presents NYISO Carbon Pricing Study Plan.)