FERC Proposes Policy Statement on Incorporation of Carbon Prices in Wholesale Electricity Markets
On October 15, 2020, the Federal Energy Regulatory Commission (FERC) issued a proposed policy statement encouraging efforts to factor state-determined carbon prices into the rules governing organized wholesale electricity markets. The proposed policy statement follows a September 30, 2020 FERC technical conference focused on carbon pricing in organized electricity markets.
Proposed Policy Statement
FERC’s proposed policy statement on Carbon Pricing in Organized Wholesale Electricity Markets recognizes that states have led the charge in adopting policies to reduce electricity sector greenhouse gas (GHG) emissions. To date, those state policies have taken the form of regulatory requirements on generators, such as the cap-and-trade policies adopted by California and the Northeast states participating in the Regional Greenhouse Gas Initiative (RGGI) in the Northeast, or state policies providing subsidies directly to low carbon generators, such as renewable portfolio standards or zero emission credit policies. Several regional transmission operators (RTOs)[1] , however, are considering policies that would incorporate a carbon emission adder, based on a state determined carbon price, in the bid-based market algorithms for clearing their electricity markets. FERC proposes “to encourage efforts to incorporate a state-determined carbon price in RTO/ISO markets,” because if properly designed and implemented, these efforts would significantly improve the efficiency of those markets.
The proposed policy statement, in essence, seeks to clarify that FERC will not categorically hold proposed market rule changes to incorporate a carbon price into RTO tariffs to be outside its jurisdiction under section 205 of the Federal Power Act (FPA), but rather will consider jurisdiction on a case-by-case basis. FERC supports its finding on jurisdiction under section 205 by pointing to the Supreme Court’s decision in FERC v. Electric Power Supply Association (EPSA). EPSA established a two-part test for determining whether FERC is acting within its jurisdiction to regulate practices affecting wholesale rates. First, the regulated activity must “directly affect” wholesale rates. Second, FERC cannot regulate a matter that FPA section 201(b) reserves for exclusive state jurisdiction.
FERC finds that both prongs of this test can be met for RTO market rule changes to incorporate state-determined carbon prices, explaining that (1) wholesale market rules that incorporate a carbon price directly affect wholesale rates because, depending on the particular circumstances, the rules could govern how resources participate in the RTO market, how market operators dispatch those resources, and how those resources are ultimately compensated; and (2) incorporating a state-determined carbon price into RTO markets would not in any way diminish state authority and would be consistent with cooperative federalism. The proposed policy statement asserts that FERC’s oversight of the effect of carbon pricing on the operation of the markets would not disturb a state’s authority over the level of the carbon price or its powers to regulate generation facilities.
