Carbon Pricing in New York ISO Markets: Federal and State Issues

Does the law permit the New York Independent Service Operator (NYISO) to incorporate, directly or indirectly, a carbon price into New York State’s wholesale electricity market? And, if so, what is the appropriate design of a carbon pricing scheme for the NYISO market? For example, at what level should a carbon price be set and when / how should it be adjusted? How should the revenues generated by such a price be used? What impact (if any) will it have on the Regional Greenhouse Gas Initiative (RGGI) and New York’s Clean Energy Standard?This working paper explores answers to those questions with due consideration for two contextual frames. The first is federal law, specifically the Federal Power Act, as interpreted by the Federal Energy Regulatory Commission (FERC) and the courts The second is New York’s energy marketplace, meaning both the physical and economic arrangement of generation and transmission resources vis-a-vis load centers, and the state’s ongoing efforts to reconfigure and decarbonize its portion of the electric grid by encouraging greater uses of information technology, energy efficiency, and distributed energy resources. Importantly, features of this second frame are both flexible and responsive to steps NYISO might take—as the New York Public Service Commission said in its Order adopting the Clean Energy Standard in August 2016, “the Zero Emissions Credit mechanism [established as part of the Clean Energy Standard] shall be such that it can be modified or eliminated by the Commission if there is a national, NYISO, or other program instituted that pays for or internalizes the value of the zero-emissions attributes.”This paper is especially timely because NYISO’s Integrating Public Policy Project (IPPP) has begun to “investigate potential market impacts from the implementation of the New York Clean Energy Standard, and determine whether other wholesale products or alternatives for incorporating the cost of carbon into the wholesale market could improve market efficiency and address potential market impacts.” By exploring legal constraints and options, the authors intend to help inform that investigation’s progress.