GHG reduction goals in PJM states best met with an RTO-wide carbon price

November 2, 2020

by Peter Maloney
November 2, 2020

The PJM Interconnection, the largest wholesale power market in the nation, could create “substantial opportunities for low cost decarbonization” by pursuing policies such as establishing a charge on carbon dioxide (CO2) emissions, consulting firm Energy and Environmental Economics (E3) said in a new report.

A CO2, or “carbon,” price that would apply across the board in PJM’s marketplace, which operates in 13 states and the District of Columbia, would be a better option than “continuing to rely on fragmented and restrictive clean energy policies and subsidies,” the report, Least Cost Carbon Reduction Policies in PJM, argued. The report was commissioned by the Electric Power Supply Association.

Several states within the footprint of the regional transmission operator (RTO) have set up a variety of policies aimed at encouraging renewable energy resources or curbing greenhouse gas emissions, creating a patchwork of regulations

RTO specific policies establishing a carbon price recently gained a glimmer of support when the Federal Energy Regulatory Commission (FERC) on Oct. 15 issued a proposed policy statement, affirming that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined CO2 price in those markets. FERC’s proposal encouraged operators of organized markets to consider the benefits of establishing a price on CO2.

“Our study of decarbonization policies in the PJM region finds that the most effective policies are ones that maximize market participants’ choices and leverage diversity across the PJM footprint,” Arne Olson, senior partner at E3, said in a statement.

From a near-term policy perspective, current policies aimed at reducing greenhouse gas emissions by subsidizing specific technologies or in-state resources, such as renewable portfolio standards, are inefficient and will become less and less cost-effective as policy targets reach higher levels, the E3 report found.

The report put the cost of existing state policies at more than $3 billion per year by 2030, or $50 per person each year across the 65 million customers served by the PJM system, for a 12% reduction in net GHG emissions.

Instead, E3 said its analysis shows that technology-neutral policies that enable the broadest array of potential solutions will generally be “the most cost-effective by incentivizing coal-to-gas switching, retaining the most competitive zero-emission nuclear generators, and developing the lowest-cost renewables that harness the diversity benefits of PJM’s geography.”

Some current state policies are “well intentioned” but may not have the intended effect, the report said, citing the Regional Greenhouse Gas Initiative (RGGI) as an example of how a partial carbon pricing approach can undercut emission reduction goals.

RGGI, which includes New England and four adjacent Eastern Seaboard states, has limited or negative impact on emissions because of leakage across state lines where compliance costs within RGGI incentivize a shift in energy production to less efficient resources outside of the RGGI region, the report said.

E3 recommended improvements to RGGI to mitigate leakage by expanding the program to encompass more PJM states. Only three PJM states, Delaware, Maryland and New Jersey, are currently in RGGI and such an expansion could drive “significantly deeper emissions reductions.”

E3 also found that that current resource specific mandates for offshore wind and battery storage in PJM “appear premature if immediate GHG reductions or cost savings are the intended goals” and may not be needed to achieve decarbonization goals until after 2030. Such technology-specific policies could cost over $1 billion per year compared with more readily available GHG savings opportunities. Instead, E3 said, targeting cheaper onshore resources would reduce emissions at “significantly lower cost over the next decade.”

Beyond 2030, efficient policy design and resource usage will become increasingly important if GHG reduction goals are going to be met at a reasonable cost, the report said.

While there are sufficient renewable resources to meet 2030 goals, the report identified the availability of land, potential transmission constraints and flexible generation capacity to backstop those resources as key to achieving long-term decarbonization goals.

E3 said there is a “deep pool of flexible gas capacity in PJM” that will allow it to integrate renewables at low cost, though the authors noted that gas plant operations will look significantly different in the future. They will see increased levels of cycling and more seasonal operation.

By 2050, E3 sees at least 35 gigawatts (GW) and likely 50 GW to 80 GW of existing gas capacity remaining valuable for grid reliability. The price of that reliability, though, will likely be more volatile energy prices in certain hours or higher capacity prices may be required to keep these plants online, the report said.

The report also noted that there are limitations to the ability of existing technologies to reach a 100% reduction in GHG emissions by 2050 at a reasonable cost whether those goals are met by renewable resources or clean energy resources.

Moving from an 80% target to a 100% target “would lead to exponential increases in costs,” the report said. Moving from 80% GHG reductions to 100% reductions in 2050 would drive additional costs of over $20 billion per year, moving from an 80% to a 100% renewable portfolio standard policy would increase costs by over $30 billion per year, E3 said.

In conclusion, E3 said the diversity of the PJM system’s loads and resources offers significant cost savings for meeting the collective climate goals of the region and recommended that policy makers should “see the regional marketplace as a critical tool for enabling long-term decarbonization. Efficient policy will be key to meeting climate goals at manageable costs.”