Exhibit 1: 2022 Average Projected NYISO LBMP
Under the proposal, the carbon costs paid by generators would be re-allocated to load-serving entities and refunded to retail customers. The IPPTF also expects that higher wholesale prices will reduce the cost of renewable energy credits (RECs) that will need to be issued to meet the state’s renewable procurement goals, and that the cost of zero emissions credits (ZECs) paid to nuclear generators, which are linked to wholesale price levels, will also fall.
While these effects are intended to offset the impact on consumer bills, the proposal would almost certainly result in an increase in total net revenues in the NYISO market, potentially creating opportunities for asset owners and developers. Although we expect that carbon pricing at the levels suggested would not be large enough to guarantee a boom in new development, at the margin it would help tip the scales in favor of new renewables and efficient thermal generators such as CCGTs. Our recently released white paper analyzes the magnitude of the revenue opportunity for renewables and thermal generators.
How likely is the proposal to be adopted?
The proposal will proceed through the NYISO committee process in early 2019. The NYISO has stated that the earliest possible implementation would be in late 2021. Adoption of the proposal is highly uncertain, and it most likely faces an uphill battle. Stakeholder opposition to the proposal is expected, and if filed at FERC, challenges are foreseeable given the far-reaching market and asset impacts of the proposal and likely debate over ratepayer impacts. The complexity of implementing the proposal, including the re-allocation of carbon costs to load-serving entities and the determination of charges at external NYISO interfaces, also poses a significant technical challenge.
However, the market is already beginning to react to the possibility of a carbon charge in the early 2020’s. The graph below shows forward energy prices traded between January 1 and December 6, 2018, for 2022 delivery for NYISO Zone J and neighboring ISOs. Forward prices for 2022 delivery jumped in mid-2018, following the publication of the straw proposal on April 30, and have remained at elevated levels. Notably, the same trend is not observed in forward prices of neighboring ISO-NE and PJM, suggesting that traders began to incorporate a development specific to NYISO—likely to be the potential adoption of the carbon pricing proposal—into their outlook. The increase in forward price of approximately $7/MWh since April, relative to an expected price impact in the $20/MWh range if the proposal is adopted, suggests that market participants view the proposal as possible but far from certain.
Source: EOX forward price data
Implications for the broader electricity sector.
The proposal represents an attempt at addressing a critical issue in today’s restructured electricity markets: the reconciliation of a competitive wholesale market structure with state support for preferred resources. Recent years have a seen a proliferation of state-level subsidy programs and mandates in the electricity sector, including renewable portfolio standards (RPS), procurements of solar, offshore wind and energy storage, and support for nuclear facilities. These actions have led to concern that such “out-of-market” payments will disrupt the role of the restructured market framework in reliably supplying electricity at low cost, and that they represent a path towards re-regulation in which states will increasingly direct market outcomes administratively. Recent proposals to account for sponsored policy resources in capacity market rules of the PJM and ISO-NE markets, among others, reflect this anxiety.
New York’s proposal attempts to address this dilemma by directly incorporating the key attribute targeted by many out-of-market programs—carbon dioxide emissions—into the wholesale market. Unlike most U.S. regional transmission operators (RTO), NYISO encompasses only one state and is thus likely to have an easier path to such an outcome than an RTO covering many states with diverse policy agendas, such as PJM.
Regardless, a successful carbon pricing mechanism in NYISO could provide an example of compromise between market advocates and state energy goals. Success would ultimately depend on consumer reaction and whether market outcomes under the scheme—for example, if the economics favor efficient gas-fired units—are accepted by the state.