In an historic first, ISO-New England may rewrite its market rules for regional electricity sales to account for carbon emissions and climate change. CLF is proud to be deeply involved in this remarkable effort.
What Is the ISO?
The Independent System Operator-New England (ISO-NE or just ISO) is the entity that runs the New England electricity grid in real time. It also operates the electricity markets that ultimately set the price we pay for electricity in the six New England states. (For background information on what the ISO does and why it is important, see this Primer, especially Chapter 3 on the ISO, Chapter 5 on how the ISO sets electricity prices, and Chapter 6 on the ISO-run Forward Capacity Market.)
Historically, the ISO has used only two criteria in operating the New England electricity markets: (1) system reliability (“keeping the lights on”), and (2) least cost (protecting ratepayers).
Integrating Markets and Public Policy
Those two criteria may no longer be enough, however. Today, all six New England states have carbon-emission-reduction goals, stemming from public policy concerns about climate change. Although the goals are not mandatory in every state, each state does seek to reduce its carbon emissions by 80% by 2050. As a result, the New England states have increasingly been mandating or authorizing contracts for renewable energy outside the ISO-run wholesale electricity markets. For example, Deepwater Wind in Block Island Sound, the nation’s first-in-the-water offshore wind project, was built as a result of a 2009 Rhode Island state law mandate. This past summer, the Massachusetts legislature passed a law calling for procurement of 1,600 megawatts of offshore wind power and an additional 1,200 megawatts of other renewables – land-based wind, solar, and/or hydro power.
In spring 2016, the ISO-NE initiated a so-called “IMAPP” process. IMAPP is an acronym that stands for “Integrating Markets and Public Policy.” The purpose of IMAPP is to explore whether these and other out-of-market renewable contracts could be brought into the ISO-run wholesale markets, thus literally integrating the ISO-operated wholesale markets with state public policies on climate and carbon reduction.
If successful, this would be the first time that the ISO-run markets for electricity and capacity would take account of more than system reliability and least cost. More specifically, if IMAPP is successful, the ISO-run markets would also seek to reduce carbon emissions in order to help the six New England states meet their climate goals of 80% reduction of carbon by 2050.
Many stakeholders (including several of the big energy companies) have developed proposals for exactly how the ISO might re-write its rules to account for carbon emissions; nearly all of the proposals presented thus far have addressed either the energy market or the capacity market, but not both. CLF has its own IMAPP proposal that is unique in that it addresses both the energy market and the capacity market.
CLF’s Two-Part IMAPP Proposal
The most important component of CLF’s IMAPP proposal is to put a price on carbon in the energy market. More specifically, CLF proposes to put a relatively high price on carbon, starting at $61 per ton, the Social Cost of Carbon (a calculation of the economic damages associated with climate change) as recently determined by the EPA. This price could be ratcheted up over time in order to ensure that the ISO-run electricity markets are keeping up with the states’ public policy goals on carbon reduction.
Putting a price on carbon would immediately produce economic incentives to avoid carbon emissions in operating the New England electricity grid. For example, when the ISO uses its traditional criterion of turning on the cheapest power generators first, having a price on carbon would make low-emitting generators more economical (and therefore more likely to be turned on) than higher-emitting generators like gas-fired plants. In the longer term, putting a real price on carbon in the energy market would create an economic incentive to build low or non-emitting resources, such as wind farms, and create an economic disincentive to build (or continue operating) high-emitting resources, like fossil fuel plants.
(Find more information on CLF’s proposed carbon price in the energy market here.)
The second component of CLF’s IMAPP proposal would create economic incentives in the capacity market for developers to build new zero-emitting resources. Here, zero-emitting generators would receive additional revenue from the ISO that dirty generators would not receive. This economic incentive to build zero-emitting generators would help to ensure that the region’s future climate goals would be achievable.
(Find more information about this second part of CLF’s IMAPP proposal, pertaining to the Forward Capacity Market, here.)
CLF believes that the two separate parts of its IMAPP proposal fit together well to make a coherent whole. The price on carbon in the energy market creates immediate incentives to use clean generation instead of dirty generation; providing economic incentives to build clean generation in the future helps ensure that there will be enough renewable energy on the system to reduce carbon emissions by 80% regionwide by 2050. And, importantly, CLF’s two-part IMAPP proposal would meld seamlessly with the ISO’s long-standing obligations to run the electricity grid reliably (keep the lights on) and economically – while also helping the six New England states meet their climate goals.
Looking to the Future
The world of ISO-run wholesale electricity markets can be confusing. But how our electricity is produced is of central importance to whether we can achieve our carbon reduction targets and our climate goals. In future blogs, I will provide updates on the ISO’s IMAPP process.