IPPNY’s Electricity Generation Sector Principles for New York’s Economywide Cap-and-Invest (NYCI) Program

The Independent Power Producers of New York, Inc. (IPPNY)[1] supports New York’s transition to a cleaner energy future, including the development and implementation of an economywide cap-and-invest program. IPPNY represents the largest fleet of clean energy generators in the state. Our members generate roughly three-quarters of the State’s electricity and pay over $1.7 billion in property taxes annually while employing over 10,000 New Yorkers. Further, for more than two decades, the private sector has helped reduce carbon emissions by nearly 50 percent, while SO₂ and NOx emissions have been lowered by 99 and 92 percent, respectively.

The NYCI program should include provisions for how to address emissions from imports, based upon the approach within the New York Independent System Operator’s (NYISO) carbon pricing proposal. To ensure that the NYCI program is developed and implemented properly and that it includes this provision and other important aspects of the program, we believe that the pathway should adhere to six principles:[2]

1. The NYCI should be structured to not jeopardize electric system reliability.
2. The NYCI should cover all sectors of the economy.
3. Electricity generating companies should not have to pay twice for the same carbon emissions.
4. The DEC should work with the NYISO to ensure program compatibility.
5. Electricity generating companies in long-term contracts should be grandfathered.
6. The NYCI should leverage off existing emissions programs and be designed to merge with other programs.

Additional details for each of these principles is provided below.

1. The NYCI should be structured to not jeopardize electric system reliability.
   a. Electricity generating companies must be capable of purchasing sufficient greenhouse gas (GHG) allowances to ensure they can continue to operate if they are the only resources available to maintain the reliability of the electric system.
   
   b. Limiting the ability of electricity generating companies to purchase allowances in Disadvantaged Communities (DACs) could seriously inhibit electric system reliability. Moreover, most of these facilities only run when needed to maintain reliability. Limiting their ability to buy allowances will result in higher prices that will be passed through to electric customers and would yield limited emissions benefit in comparison to the reliability concern. The best way to address the concerns associated with DACs is through the existing requirement of the Climate Leadership and Community Protection Act (CLCPA) for 40 percent of program economic benefits to go to DACs, which would provide incentives for the entry of zero emission resources in these communities.
   
   c. The NYCI should be designed to prevent market power[3] behavior that would reduce the supply of allowances prematurely. Further, the length of compliance periods, and eventually the integration of the program with other jurisdictions such as California, Washington, and Quebec, will decrease the chance for market manipulation. RGGI has a market monitor to protect the auctions from market power and so should NYCI.
   
   
2. The NYCI should cover all sectors of the economy.
   
   a. Every economic sector should be required to purchase GHG allowances (whether directly or indirectly) through an auction process at a single market clearing price. This approach will allow enough auction participants into the market, so no one entity can control access to allowances in the market.
   
   b. The environmental impact of a ton of GHG emissions on the climate is the same whether that ton is emitted by electricity generating companies, industrial processes, the commercial sector, the residential sector, or transportation. The allowance cost should be the same economywide so that GHGs are reduced in an economically efficient fashion sector by sector.
   
   c. The allowance price should be high enough to signal investment in needed technology innovation both to meet the CLCPA’s targets and maintain electric system reliability.
   
   
3. Electricity generating companies should not have to pay twice for the same carbon emissions.

a. New York should remain in the Regional Greenhouse Gas Initiative (RGGI) to ensure the program’s continued success during the introduction of the State’s NYCI program and due to the proven benefits of participation in a regional carbon market. However, the electricity generating companies that are covered by RGGI should receive a credit (i.e., rebate) of their RGGI compliance costs by rebating the average RGGI allowance auction cost for a year to each generating company based on its RGGI-related emissions in that year. This will ensure that, between RGGI payments and NYCI payments, the generating company would pay a total emission cost consistent with the NYCI program. In the unlikely possibility that RGGI has a higher allowance price than NYCI, the rebate could be limited to the NYCI allowance price.

4. The DEC should work with the NYISO to ensure program compatibility.
   
   a. The NYISO will play an essential role in upholding the objectives of NYCI, including protecting against emissions leakage in the electricity sector. The State should actively engage the NYISO to align its market rules to protect against emissions leakage in the electricity sector. The NYISO’s proposed carbon pricing approach guarded against higher emitting resources not subject to a carbon price being imported into New York State and underbidding and displacing New York’s lower emitting resources.[4] Allowing this to occur would increase total carbon emissions. This would happen if the allowance costs caused a relatively efficient New York electricity generating company’s total costs to be more expensive than the less efficient generating company in the neighboring system.
   
   b. The NYISO’s proposed leakage rule would strip the price of carbon out of the energy prices for imports and exports at the New York border. For electricity generating companies in RGGI states, the amount stripped from the generating company’s energy price should be the difference between the NYCI allowance price and the RGGI allowance price.
   1. For example, if the RGGI allowance price is $10/ton and the NYCI price is $34/ton, the NYISO would strip $24/ton out of the electricity generating companies’ energy prices.
   2. If a neighboring ISO or region does not, or most of the states in the ISO that are adjacent to the NYISO do not, have a carbon price, the NYISO will need to determine whether it is more appropriate to strip out the full NYCI price from the energy prices.

c. When the NYISO developed its carbon pricing proposal, it estimated it would take 18 months to implement after receiving the Federal Energy Regulatory Commission’s (FERC) approval. The State should encourage the NYISO to determine how much effort it would take to implement only the leakage part of the NYISO’s previously developed carbon pricing program and for the NYISO to be ready to file it at FERC once/if it appears that New York will be implementing the NYCI for electricity generating companies.

5. Electricity generating companies in long-term contracts should be grandfathered.
   
   a. All electricity generating companies with long-term bilateral contracts predating RGGI that are not able to pass on the cost of the allowances should be grandfathered and should receive a direct allocation for their contract terms until their contracts expire. The direct allocation approach was implemented in the RGGI program for electricity generating companies in long-term contracts that predated RGGI.
   
   
6. The NYCI should leverage off existing emissions programs and be designed to merge with other programs.
   
   a. California has been auctioning allowances under its program since 2012 and joined with Quebec in a joint auction in 2014. Building off an existing program and auction design may allow much faster implementation of NYCI. One of the goals of the CLCPA is to be a model that other regions can adopt. Washington State is looking at combining with California and Quebec.
   
   b. California has not allowed other regions to combine with its market without the other regions starting operations on their own first and then later being merged. Designing NYCI so that it could easily be merged with California, Washington, and Quebec would be a significant step in showing that a GHG reduction program could be expanded across a growing footprint.
   
   c. To the extent possible, NYCI should develop reporting obligations that are: consistent with reporting requirements of other programs; flexible; and not cost-prohibitive. This approach would enhance administrative efficiency and facilitate the ability to merge NYCI with other existing emissions programs (i.e., alignment with RGGI reporting obligations and adoption of cost-effective verification processes).

[1] IPPNY’s comments do not necessarily reflect the views of individual members of IPPNY. IPPNY is New York’s premier trade association dedicated to representing the largest fleet of clean energy generators in New York State and companies involved in: the competitive power supply industry; the development of electric generating facilities; the generation, sale, and marketing of electric power; and natural gas transmission facilities. IPPNY Member companies produce the majority of New York's electricity, utilizing all sources such as wind, solar, hydro, energy storage, natural gas, low sulfur oil, waste-to-energy, biomass, and nuclear.

[2] These principles were prepared in consultation with: Mark Younger of Hudson Energy Economics, LLC, 480 Pond View Road, Petersburgh, NY 12138, (518) 527-1036, e-mail: mdy@hudson-ee.com; and David Johnson of Read & Laniado, LLP, 25 Eagle Street, Albany, NY 12207, (518) 465-9313, e-mail: dbj@readlaniado.com.

[3] Market power refers to a company's relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand, or both.

[4] Please see https://www.nyiso.com/documents/20142/2244202/IPPTF-Carbon-Pricing-Proposal.pdf/60889852-2eaf-6157-796f-0b73333847e8 for an overview and final details at https://www.nyiso.com/documents/20142/7129597/6.20.2019_MIWG_Carbon_Pricing_MDC_FINAL.pdf/cf67ebb8-d0fc-7b4b-100f-c3756d6afae8.