In the US and other countries around the world, energy market prices are technology-agnostic. That is to say, regardless of where or how the electricity is generated, it's all the same product (electrons moving along a wire), and is purchased based on the price at which a generator can afford to deliver it. However, every generator is different; they use different fuels, different methods to deliver those fuels, and different methods to cool their turbines. And, particularly important in today’s hyper-regulated markets, they produce different amounts of carbon emissions.
Over the past year, the state of New York has increased its focus on this issue and developed a new innovative plan which begins to value the impact of carbon emissions produced from the state's generator fleet. In January, the New York Department of Public Services (NY DPS) proposed incentivizing carbon-free generation by paying nuclear generators for their power at above-market prices. The proposal is referred to as the Zero-Emission Credit program (ZEC), and the NY DPS identified it as a critical component to reach the state’s new emissions goal of 50% clean generation by 2030.
Prior to the ZEC proposal, nuclear plant owner Entergy had announced that it would be closing the Upstate 850 MW FitzPatrick nuclear facility due to its poor economic viability. As a result, energy prices temporarily jumped, but the news also drew New York's attention to a much larger problem. After years of increasing regulatory costs combined with shrinking revenues from a historically low energy market, nuclear facilities across the US currently face unstable economic futures. In addition to FitzPatrick, New York also saw the 597-MW Ginna nuclear plant considering a premature closure, as well as one of the units located at the Nine Mile nuclear facility. If all three were to close, one-third of the state’s nuclear generation would go offline.
In order to keep that clean generation in the mix, the ZEC was designed to reimburse eligible nuclear plants in New York for the full social cost of the carbon emissions they avoided by issuing a credit for every megawatt-hour they generate. The price of the ZEC is set as the difference between the social cost of carbon (as determined by the EPA) and what the plant would likely earn in the energy market. Using this methodology, the New York Research and Development Authority (NYSERDA) initially set the price for ZECs at $17.48/MWh, which eligible generators will earn in addition to their normal power-related revenues.
As for how the program will be paid for, since this is a state policy-driven initiative, the cost will be placed on all New York electric customers. Beginning in April 2017, all New York customers will purchase ZECs for a portion of their electric load through their electric supplier (either their utility or a third-party supplier). In 2017, ZEC-eligible generation is expected to make up approximately 17% of New York’s total demand, which means cost of the ZEC program will translate to an increase of approximately $3 to 4 mills per kWh ($0.003/kWh to $0.004/kWh) on customers’ electric bills.
As a result, New York will be closer to its state emissions goals, but may also benefit from more certainty in the electricity market. If upstate nuclear plants were to retire, they would likely be replaced by new natural gas generators, which contribute to price volatility in electric prices. An example of this volatility occurred during the 2014 Polar Vortex, when temperatures in the Northeast dropped drastically for a substantial period of time. From January through March, natural gas was largely diverted to customers who relied on gas for space heating, and the price of electricity spiked across the region. By avoiding a generator fleet that relies even more on natural gas as a source of power, New York will be less exposed to these types of weather events.
New York's plan is not without criticism from both sides of the debate. Some argue that the state should not favor any one type of fuel for generation, while others say the plan falls short of truly pricing carbon into its energy market. Regardless if this strategy is perfect, it is certainly a smaller part of a greater trend towards compensating nuclear generators for their carbon-free energy production. The neighboring state of Connecticut has acknowledged that its two nuclear units located at Millstone will have to remain operational in order to meet its emission goals. The New England Power Pool (NEPOOL), an association representing market participants, is launching an initiative which is considering implementing a carbon adder when clearing energy prices in ISO-NE's energy auctions. Other similar proposals have involved expanding the Regional Greenhouse Gas Initiative (RGGI) and increasing the emission allowance prices to better support clean generators.
The New York policy is a good example of an unforeseeable market change. New policies or regulations can unexpectedly drive up your energy costs without warning. Understanding what kinds of questions to ask before making an energy buying decision could go a long way toward protecting your organization from these kinds of market factors.
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