Clean energy is facing a new attack, but they can evade them

Source: By Sylwia Bialek, The Hill • Posted: Wednesday, April 15, 2020

As part of the wave of federal efforts to undermine climate action, a little-known agency responsible for regulating the interstate electricity system – the Federal Energy Regulatory Commission, or FERC – is quietly impeding state efforts to promote clean energy.

Just last week, FERC announced it will soon take actions to reaffirm a landmark order forcing Midwest and Mid-Atlantic customers to pay more for new energy resources like offshore wind and batteries. States are, understandably, upset. A number are even considering an abrupt exit from key electricity markets because of the rules.

While states are right that FERC’s rules will needlessly increase costs and be a drag on clean energy, they shouldn’t rush to exit the markets yet. States could meet their climate goals while retaining the benefits of markets by pursuing another option: carbon pricing.

States across the country have embraced policies to reduce climate change, soot and smog caused by power plants that burn coal, oil and natural gas. Under one popular approach, sources such as wind, solar and nuclear get paid not just for the electricity they produce but also for helping to avoid climate and public health damages. As states have recognized the urgency of the climate threat, these policies are on the rise.

But a series of recent decisions by FERC (first for markets in New England, then in the Midwest and Mid-Atlantic, and most recently in New York) will make it more difficult for states to achieve their clean energy goals.

FERC’s decisions have focused on “capacity markets,” which ensure there is sufficient electricity supply by paying some generators to be on-call for times when electricity use surges, like on extremely hot or cold days. In these markets, the power generators willing to accept the lowest payment to stay on-call win the auction and get paid. These payments are an important source of revenue for generators. But FERC’s new rules require clean energy generators to bid higher than they would otherwise, making it much harder for them to compete.

To understand how FERC’s recent orders work, imagine that a city required all Airbnbs to charge at least $500 per night, regardless of the amount an owner is willing to charge, but issued no such rules for hotels. Vacationers would likely pick hotels over the very expensive Airbnbs; and hotel owners, knowing the minimum their competition must charge, could raise prices without losing business. The Airbnb owners would lose out, as would the vacationers, who would have to pay higher prices. FERC’s orders treat many clean energy resources like those Airbnbs, requiring them to bid more than they otherwise would and making it harder to win capacity auctions. At the same time, the price customers must pay to keep the winning fossil generators online will be higher than it would otherwise need to be.

FERC has concluded that its new rules are necessary to counteract the allegedly unfair benefit some energy generators get from state policies.

But FERC’s premise – that paying clean resources for avoided pollution amounts to a handout that distorts capacity markets – is wrong. These state policies correct a major flaw in the markets – their failure to account for the damaging pollution that some generators emit. FERC’s orders risk nullifying those corrective effects by allowing more polluting fossil generators to win capacity auctions.

FERC’s policy also means consumers will pay additional costs. If states want to continue attracting new clean generators, customers will have to pay more to make up for those generators’ lost revenue from capacity markets. At the same time, the capacity market will continue to pay dirtier fossil generators to be available even though, with more clean power on the system, they are no longer needed.

Richard Glick, a FERC commissioner who has dissented from the recent orders, presented a back-of-the-envelope calculation that this type of minimum offer requirement could cost consumers in the Midwest and Mid-Atlantic region an extra $2.4 billion per year. Another predicted capacity price could increase 25-30 percent.

Regional grid operators have done what they can to minimize the damage to clean energy, at least in the short run. But FERC has left them little flexibility with some of the newest technologies like offshore wind and battery storage. As state climate commitments get more ambitious over time, the damage will only increase.

States may not just accept FERC’s disruptive rules. Many – including Connecticut, Illinois, New Jersey and New York – are discussing alternative approaches, including withdrawing from capacity markets and relying more on state mandates to ensure sufficient capacity.

However, just as staying in these markets may increase prices and conflict with clean energy goals, leaving could mean states miss out on the benefits of the markets, like competitive bidding, which can keep costs low.

Leaving the markets now would be hasty. As with many Trump administration regulations, FERC’s actions are poorly reasoned and legally vulnerable. By the time states devise new approaches, a new FERC may replace the current rules, or the courts may have stepped in.

Moreover, another option is on the table – one that would achieve state climate objectives while likely escaping FERC’s meddling. Our organization, the Institute for Policy Integrity at New York University Law, recently released a report that extensively analyzes the economic benefits and legal viability of making fossil-fuel electricity producers pay for the damage caused by their pollution by incorporating a price on carbon dioxide emissions in the rules that govern the wholesale electricity markets. This carbon-pricing approach will make clean energy more competitive and attractive to build, aligning well with many state policy goals. As carbon pricing does not entail subsidies for carbon-free generators but rather “penalties” for dirty generators, FERC’s minimum bid policy would not constrain the clean generators anymore.

In fact, the New York grid operator has already proposed using a carbon price in its markets; studies have shown this will substantially lessen the harm of FERC’s new rules. A diverse collection of energy businesses, environmental groups and think tanks support the idea. But the grid operator is waiting on action by New York State to move the process forward. A similar dynamic is at play in the Mid-Atlantic and Midwest, and in New England.

Possibly due to the technical nature of electricity rules, the new FERC policy has garnered less attention than other federal attacks on climate policy. But FERC’s actions are poised to do serious damage to the climate, to consumers and to a long-running bipartisan commitment to energy market competition.

States prioritizing cleaner energy sources don’t have the luxury of ignoring the harms of these FERC orders and exploring leaving the markets entirely is a justifiable response. But, before states pull the trigger, they should also consider carbon pricing as a more effective way out of the dilemma caused by FERC’s hostility to clean energy.

Sylwia Bialek is an economist at the Institute for Policy Integrity at NYU School of Law.