Chatterjee hints at FERC role for carbon pricing

Source: By Jeremy Dillon and Arianna Skibell, E&E News reporters • Posted: Sunday, October 4, 2020

Federal Energy Regulatory Commission Chairman Neil Chatterjee hinted yesterday that a carbon price better matches his market-based approach compared to other state policies to meet climate goals — while stopping short of a pledge to take up the issue.

“The fundamental premise is that the markets need to work and are working efficiently,” Chatterjee said on a call with reporters yesterday recapping a closely watched FERC conference on carbon pricing. “In a nutshell, my focus has always and remains on markets.”

Chatterjee said a carbon tax would put power resources on equal footing as they enter electricity capacity markets, which are aimed at ensuring that regional power grids have enough generation available to meet future demand.

Chatterjee’s position on carbon taxes — typically imposed at the state level — stands in contrast to FERC’s controversial intervention last year overriding state subsidies for energy resources bidding into the PJM Interconnection LLC capacity market, the nation’s largest. FERC last year passed an order called the minimum offer price rule, or MOPR, which enraged opponents who said the move hampers renewable and nuclear energy resources’ ability to compete in PJM’s 13-state territory.

In his comments yesterday, Chatterjee sought to draw a line between the independent agency’s MOPR — aimed at balancing out-of-market state policies like zero-emission credits for nuclear plants or renewable portfolio standards for solar and wind resources — and carbon pricing set within markets through state initiatives.

“We directed an expanded MOPR to protect the effective functioning of the market in the face of state subsidies, which are not a market mechanism,” Chatterjee said. “They are not transparent. They distort price signals. And they hamper competition.”

Chatterjee’s effort to distinguish between FERC’s limits on state subsidies and its possible openness to carbon pricing could shape how major electricity markets react as states across the country shift to policies that promote clean energy sources.

Chatterjee has not taken a stance on carbon pricing. He said the discussion at the technical conference Wednesday “was all about carrying forward our market-protective work as the landscape evolves. So we are looking to what’s next.”

The chairman also hinted at the potential for a carbon price to replace the MOPR as the commission’s overarching clean energy market structure.

“Some panelists indicated that reflecting state carbon pricing in our markets could help ensure efficient and transparent energy market compensation for resources, and that could change the role of capacity markets and the need for mechanisms like the MOPR to address out-of-market payments,” Chatterjee said. “I thought that was a useful discussion to help frame how our markets could evolve to continue to deliver for consumers.”

At the core of the debate is a mismatch between new state zero-carbon targets and long-standing market mechanics.

Historically, “market fundamentals and public policy have aligned to yield reduced emissions without explicit coordination,” said Sherman Knight, president of Competitive Power Ventures.

But as states pass their own emissions reduction goals, electricity markets are struggling to catch up, he said.

“You’ve got 38 states and the District of Columbia that have different clean energy standards,” Knight said at Wednesday’s virtual conference. “That’s 39 different policies and an overarching federal policy or lack of a federal policy. So trying to create a more coherent policy to address climate change gets increasingly more difficult.”

Matthew White, chief economist with ISO New England Inc., said the MOPR rule does not align well with state policies within wholesale markets. Many experts view the policy as a temporary, rather than systemic, fix.

“It is not simple, it is not transparent and will ultimately cost New England customers far more than necessary,” White said Wednesday.

He said carbon pricing, on the other hand, pairs well with capacity markets.

“Pricing carbon emissions can be simple, transparent and cost-effective,” he said.

Sylwia Bialek, an economist who specializes in energy markets at the New York University School of Law’s Institute for Policy Integrity, said that’s because carbon pricing — as opposed to state clean energy mandates — allows for greater precision in rooting out emissions.

“If I give subsidies to wind and solar, they might compete with each other and not push out coal or gas,” she said in a recent interview. “But if I put a carbon price on fossil fuel generators, I will account for how polluting those are.”

She cited gas- and coal-fired power plants as an example. Both are polluting, “but coal is almost twice as bad,” she said. “So with a carbon price, coal will pay twice as much in penalties.”

Jessica Bell, an attorney with the State Energy & Environmental Impact Center at NYU School of Law, said FERC’s holding the conference on carbon pricing is a “positive and pragmatic” step toward recognizing the need to better harmonize state policy and market design.

“We know that the current path that FERC is on with regard to state clean energy policies is not sustainable,” she said.