COMMONWEALTH MAGAZINE: Grid operator calls for ‘net carbon pricing’
As originally appearing in Commonwealth Magazine

Says approach deals with political impediments

By Bruce Mohl – October 2, 2020

THE HEAD of the organization that runs the New England power grid on Friday called for “net carbon pricing” of electricity in the region as the best way to develop the massive amount of clean energy needed to decarbonize the region’s economy.

Gordon van Welie, the president and CEO of ISO-New England, has long argued for carbon pricing as the best way to craft a market-based approach to electricity production. With resistance to carbon pricing strong in many New England states, he is proposing a “net” approach that he says would defuse political concerns.

“The net concept is really trying to deal with one of the political impediments to carbon pricing, which is the fear that carbon pricing is going to create this big price shock in the wholesale market and drive electricity prices up,” he said at a remote meeting of the New England Council.

Van Welie said net carbon pricing would assess a fee on all electricity being produced that emits carbon, and given the way wholesale electricity markets work would raise the price of electricity. A portion of the carbon fee would then be recovered from the generators, with more being recovered from the most carbon-intensive resources, and that money would be rebated to wholesale purchasers of electricity based on the size of their purchases. The rebate process would have the effect of blunting the impact of the price rise caused by the carbon assessment.

The approach incentivizes wholesale buyers to purchase electricity produced using less carbon and over time would steer more and more production to low-carbon or carbon-free types of electricity. Van Welie said prices would rise under net carbon pricing, but only moderately.

Van Welie said such an approach is desperately needed to rationalize wholesale electric markets. Currently, climate change impacts are not factored into the region’s wholesale markets, so there is little incentive to shift to renewables.

Since every New England state has set ambitious emission targets that hinge on clean, renewable electricity decarbonizing the economy, states, through their utilities, have started bypassing the markets and purchasing low-carbon electricity directly from suppliers.

Massachusetts, for example, has signed contracts to import a large quantity of hydro-electricity from Quebec and to purchase electricity produced by the offshore wind company Vineyard Wind. These contracts are gaining in popularity, but they put all the risk on ratepayers if something goes wrong and also tend to undercut the existing wholesale markets.

Van Welie says this dual system—a wholesale market struggling to coexist alongside a separate market of direct state purchases – is dysfunctional. As states buy more and more renewable electricity directly, van Welie worries the wholesale markets will stop functioning properly and many power generators needed as backup for wind and solar when the wind doesn’t blow and the sun doesn’t shine will go under.

Van Welie outlined the problem and the net carbon pricing solution at the New England Council meeting on Friday and he and his aides made similar comments at a carbon pricing conference on Wednesday hosted by the Federal Energy Regulatory Commission.

His push for net carbon pricing comes as the fate of a regional carbon pricing scheme for automobile fuels – the transportation climate initiative – has run into resistance from governors worried the approach would hike the price of gasoline significantly.

The big worry is that natural gas plants or other technologies that could be used in the future to power the region when the sun isn’t shining or the wind isn’t blowing won’t be there when we need them.

“We do not want to end up in the same place as California,” van Welie said, apparently referring to brownouts utilities there had to institute to keep the power grid functioning.

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