Friday, March 13, 2009

CO2 Cap and Trade Programs Inflate Electric Rates in Restructured States

Pennsylvania's Consumer Advocate Sonny Popowsky testified to the U.S. House of Representatives Committee on Energy and Commerce on March 12, 2009 that a national CO2 cap and trade system being proposed, analogous to the RGGI cap and trade program adopted by New York and nine other Northeastern states, will increase electric rates in states like Pennsylvania and New York, where utilities divested their power plants and now buy power in RTO or ISO wholesale spot markets such as those of the NYISO and PJM:
under the “single market clearing price” method that is used to establish generation prices in restructured markets, if the market clearing price reflects the cost (or market value) of an emission allowance, this price will be paid to all generators that are operating in that hour, including nuclear units that do not need to purchase allowances and do not incur any carbon compliance costs. As a result of these factors, consumers could pay many billions of dollars in increased generation prices with only modest reductions in actual carbon dioxide emissions.
Because only the power producers whose plants emit CO2 need to buy allowances, the new revenue to New York State from the sale of allowances will be much less than the added cost to customers because the nuclear and other non-CO2 emitting producers will be paid as if they had bought allowances. Drawing upon a PJM estimate that a cap and trade program would add $12 billion to electric bills for customers in the PJM region, Consumer Advocate Popowsky estimated that "one-third, or $4 billion, of the $12 billion in increased energy costs in 2013 will go to existing nuclear plants, who are already operating today at full capacity and who incur zero carbon compliance costs."

In New York, the power producers who typically set the spot market clearing prices in every hour are fossil fueled, and so they now incorporate the price of RGGI allowances in their bids (either the price they paid or the price in unregulated secondary markets), thus raising the clearing prices. Substantial amounts of electricity are produced in New York by nuclear and small hydro and wind plants. See It Was the [NYISO] Market. These plants do not emit any CO2 and thus their owners do not need to buy CO2 allowances in the RGGI program. Because the price of energy they sell in spot markets is set at the same market clearing prices as are paid to fossil-fueled plants, the owners of non-CO2 producing power plants receive more windfall profits at the expense of consumers, without reducing any emissions.

When the price available to all sellers in the NYISO spot markets is driven up by the price inflation due to the RGGI program, one can expect that electricity prices demanded by all wholesale sellers for any negotiated off-spot market long term sales are also inflated.

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