A new discussion paper released today by Brattle economists addresses how regional wholesale power markets can help meet state and local clean-energy policies more cost effectively.

The paper comes after a recent decision by the U.S. Federal Energy Regulatory Commission (FERC) that rejected both of PJM Interconnection’s proposals to address challenges in its capacity markets due to state subsidies supporting preferred generation resources.  The FERC ruling requires PJM to create a strict minimum price offer rule (MOPR) with no exceptions, while also allowing states to exercise more control over their resource mix by partially opting out of the regional capacity markets.

According to the Brattle discussion paper, FERC’s Order sets wholesale markets and state policies on divergent paths, rather than integrating them.

“The regional wholesale market operators should embrace states’ and customers’ growing demand for a cleaner electricity system,” notes Kathleen Spees, a Brattle principal and co-author of the discussion paper.  “States could capitalize on the regional markets’ ability to deliver more competitive, low-cost, and innovative solutions.  As the generation fleet transforms toward an ever cleaner energy mix, regional market-based mechanisms will be more valuable than ever to guide investments to the fleet that can provide energy, reliability, flexibility, and clean-energy attributes at least cost.”

According to the Brattle paper, technology-neutral regional market solutions offer the most attractive path forward for meeting states’ emissions reduction goals cost effectively.  One proven, market-based tool is to establish a price or cap-and-trade market for carbon emissions. Pricing emissions enables the wholesale market to internalize environmental externalities, creating incentives for the competitive markets to achieve reductions. This approach works best in a broad super-regional and multi-sector context, otherwise seams have to be addressed.

Another market-based solution, according to the Brattle authors, would be to implement regional forward markets for clean-energy attributes. Such markets can build on the renewable energy credit (REC) systems that many states already employ, but would enhance the competitiveness and cost effectiveness through technology-neutral procurement, redefinition of the clean-energy product so settlement reflects marginal carbon emissions abated, and forward procurement with multi-year product terms. This market construct would be more competitive than the resource-specific and technology-specific contract procurements that are widely used today.

The Brattle authors argue that charting a constructive path forward will require states and system operators to work together to resolve the growing dissonances between states’ policies and wholesale market designs.  If continuing on the current path, policy-driven and regulated investments will grow to dominate the resource mix in states with significant long-term carbon goals.  This would reduce the scope of the existing regional power market and erode benefits achieved by these markets, as illustrated in the figure below.

The Brattle authors recommend a more sustainable path with an expanded wholesale power market design that includes clean-energy attributes, and in some cases expanded carbon pricing or cap-and-trade.  This will put states, wholesale customers, and system operators in the best position to harness the full benefits of competitive markets to identify the most cost-effective and innovative solutions for a reliable cleaner grid.

Future With and Without Regional Carbon and Clean-Energy Markets

Source: The Brattle Group

The discussion paper, “Harmonizing Environmental Policies with Competitive Markets: Using Wholesale Power Markets to Meet State and Customer Demand for a Cleaner Electricity Grid More Cost Effectively,” is authored by Brattle Principals Kathleen Spees, Johannes Pfeifenberger, Samuel Newell, and Judy Chang.

View Whitepaper