Would a PJM Carbon Market Address State Subsidization Issues?

August 29, 2018

PJM Interconnection, L.L.C. (“PJM”) is currently working with its stakeholders to address state subsidies for electricity generation resources.  One potential solution would be to incorporate the “price” of carbon emissions into PJM’s energy and capacity markets.  Such a carbon program would not be easy to develop or to operate.  It could, however, be a long-term approach worth discussing with PJM stakeholders; incorporating the costs associated with carbon emissions into PJM’s markets could internalize some of the current externalities associated with the emission of carbon dioxide and other greenhouse gases by generation resources.

On June 29, 2018, FERC rejected two PJM proposals to address state subsidies of generation resources that impact PJM’s capacity markets.  FERC has ordered PJM and interested stakeholders to propose a new solution to the state subsidization by October 2, 2018.  FERC understood the difficulty of resolving this intractable problem and provided no direct mandate.  FERC did suggest that PJM consider expanding the Minimum Offer Pricing Rules to new and existing generation resources, and allowing subsidized resources to be removed from the capacity markets (along with a commensurate amount of load), similar to PJM’s existing Fixed Resource Requirements opt-out process.

State subsidization programs that are impacting PJM’s markets are based, in part, upon encouraging low-carbon emission generation resources (e.g., New Jersey and Illinois subsidies for nuclear power plants).  If PJM encouraged low-carbon emission electricity generation, by incorporating a “price” for carbon emissions into its markets, then PJM states might be encouraged to phase out low-carbon emission resource subsidies after the PJM program went into effect.  Under a carbon pricing program, PJM could select generation offers by including an “adder” to reflect the amount of carbon that was associated with the generated electricity.  Under such a program, nuclear, hydroelectric, solar and wind-powered plants, for example, would presumably have no additional carbon price added to their offers.  Natural gas-powered plants would have a modest carbon price adder; coal-fired electricity generation would have a more significant carbon price added to its offer price to reflect the higher levels of carbon emissions associated with the production of such electricity.

If PJM adopted a carbon pricing approach, it would incentivize resources located within PJM’s footprint that produce low carbon emissions to increase production.  The program would also make high-carbon emission generation resources less competitive, and thus would discourage electricity generation from such sources that are located within PJM.

Carbon market programs are already being considered elsewhere.  In fact, the New York ISO has already begun studying how a price for carbon emissions could be incorporated into its energy markets. On July 9, 2018, the New York ISO discussed with its stakeholders how a carbon charge program could be incorporated into its energy markets.  New York ISO has suggested that it might be able to implement such a program as early as the 2nd Quarter of 2021.

One challenge to PJM implementing carbon-pricing for resources would be establishing an equitable price for carbon emissions.  If the price of carbon was set too high, inadequate amounts of generation might participate in the markets.  If the price of carbon was set too low, the program might not sufficiently incentivize low carbon generation resources, which would encourage continued state subsidies.

If, however, a carbon pricing mechanism was not simultaneously adopted by generation resources located outside of PJM, then there would likely be an emissions “leakage” issue.  Generation resources located outside of PJM would have an economic incentive to sell low-carbon electricity into PJM (to obtain preferable pricing).  At the same time, electricity generators located outside of PJM would have an economic incentive to increase their electricity generation from carbon intensive sources (to meet demand for electricity outside of PJM).  This potential increase in the generation of high-carbon electricity from the areas around PJM could result in a “leakage” of many of the benefits from a carbon pricing methodology.  Without an effective solution to the leakage problem, a carbon pricing program might result in the transmission of more low-carbon electricity resources into PJM, and an increase in the amount of high-carbon electricity that was generated in the larger region.  This “leakage” might discourage states from phasing out subsidies for low carbon resources in their states.

An additional hurdle to developing carbon pricing is the strong political pressures that coal producers and coal power plants are exerting to provide economic subsidies for carbon intensive resources.  On August 21, 2018, the U.S. Environmental Protection Agency proposed the Affordable Clean Energy rule, which would establish emission guidelines for states to develop plans to address greenhouse gas emissions from existing coal-fired power plants.  The White House has also suggested that coal generation facilities should be subsidized.  Any such “out of market” economic measures would undermine the logic and the effectiveness of carbon pricing, and also might be inconsistent with FERC’s mandate under the Federal Power Act.  If so, then our courts will likely be asked to resolve the matter.

Carbon pricing involves many complex economic and political issues, which cannot be resolved in a matter of weeks (or even months).  Nonetheless, PJM stakeholders should consider  carbon pricing issues as they develop optimal designs for future PJM markets.           

This Eckert Seamans Energy Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. If you have any questions, please contact Charles Zdebski at (202) 659-6605 – czdebski@eckertseanans.com.

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Charles A. Zdebski Photo Washington, D.C.

Charles A. Zdebski

Member - Washington, D.C.

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