Carbon pricing: one of many solutions to decarbonize power in New York

After the passage of the Climate Leadership and Community Protection Act in June 2019, New York will need all available tools to meet increasingly ambitious climate targets. Targets formerly backed only by executive order now have the full weight of the legislature behind them. In the power sector, this means a new focus on planning for 70 percent renewable electricity by 2030, and 100 percent carbon-free power by 2040.

To achieve these goals, New York will continue to subsidize new renewables and some existing nuclear generators through existing mechanisms - namely the Clean Energy Standard and existing resource-specific procurement efforts. Carbon pricing (as has been proposed by NYISO) has the opportunity to further these efforts, as well as to begin to harmonize state goals with the functioning of wholesale electricity markets.

Current policy mechanisms present challenges to existing wholesale power markets. Growth of zero-marginal cost renewable resources depresses wholesale power market spot prices. The out-of-market payments provided to resources that would otherwise retire (such as nuclear plants) or to resources that would not otherwise come online complicate new investment decisions by increasing supply and distorting capacity market signals. In the case of intermittent renewables, resource characteristics also place new reliability demands on the system. Wholesale markets across the country have identified the need to evolve to work in tandem with state policies. By internalizing the cost of carbon emissions, the NYISO proposal strives to harmonize state goals with the wholesale markets.

Based on production cost modeling, IHS Markit expects the NYISO carbon pricing proposal would elevate wholesale power prices substantially in the 2020s. Our analysis found the absolute impact on average wholesale spot power prices would vary minimally by market zone and time of day.

IHS Markit expects only a small change in in-state power CO2 emissions under the carbon pricing proposal, largely due the substantial overlapping and supporting policies in the power sector. Despite the limited emissions reduction potential, a carbon price offers an opportunity to many stakeholders not provided by existing renewable and nuclear procurement mechanisms - increased wholesale market prices.

Gov. Andrew Cuomo's administration is still evaluating the proposal. If it moves forward, carbon pricing will ultimately require NYISO board and Federal Energy Regulatory Commission (FERC) approval. FERC will want to consider the proposal's import/export adjustments intended to mitigate emissions leakage outside of NY, as these adjustments (by design) would affect interstate power flows.

IHS Markit closely monitors the North American energy markets, publishing data, key insights and market analysis. Learn more about our research.

Posted 07 October 2019 by Lin Deng, Senior Research Analyst, North American Power Analytics, S&P Global and

Patrick Luckow, Associate Director, Gas, Power, and Energy Futures, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.