Summaries of Selected Concurrent Sessions Presentations



Energy and Capacity Market Effects of Carbon Mitigation Policies in Restructured Markets


Jared Moore
Doctoral Candidate, Engineering & Public Policy,
Carnegie Mellon University (Pittsburgh, PA)
Jay Apt
Professor, Engineering and Public Policy, Tepper School of Business,
Carnegie Mellon University (Pittsburgh, PA) 



The U.S. Environmental Protection Agency (EPA) has proposed regulations for greenhouse gas emissions from existing power plants through Section 111(d) of the Clean Air Act.  We examined the cost per tonne of CO2 mitigated in PJM under two policies,  a carbon price and renewable portfolio standards (RPS).  We examined these policies from two perspectives: the social perspective (where wealth transfers are neutral) and the consumer perpsective.  Regardless of perspective, we found that a carbon price was more cost effective if gas prices were low ($4/MMBTU).  From the perspective of consumers, however, the RPS may be more cost effective in PJM under high gas prices ($7/MMBTU) because the added energy supply lowers market clearing prices.  We found that both policies have consequences in capacity markets and that the RPS can be more cost effective than a carbon price only under continued excess capacity supply coupled with high gas prices.

To estimate the effect of policies, we constructed an hourly economic dispatch model of the generators in PJM.  The dispatch model calculates marginal costs for all generators, then dispatches the least expensive generators to meet load.  The dispatch model is used to quantify market clearing prices (wholesale payments), fuel costs, and carbon emissions.

We assumed demand and the mix of generators stayed the same as it was in 2012.  U.S. demand has been constant from 2005 to 2012 and the EIA has projected existing capacity to remain adequate until 2023, even with expected coal plant retirements.  We found that moderate carbon prices (~$30/tCO2) did not induce new capacity, so the effect of a carbon price would be limited to fuel switching and would not change our assumption of a constant mix of generators.  We assumed that fuel costs remained the same as in 2012 except for natural gas which we varied from $4-$7/MMBTU.

In Figure A, we show the cost effectiveness of a carbon price and a renewable portfolio standard from the social perspective (wealth transfers neutral).  Mitigation is achieved with a carbon price through fuel switching.  From the social perspective, as theory would suggest, the marginal cost of abatement is equivalent to the carbon price.  For the RPS, we assumed wind to have a levelized cost of $100/MWh including variability and transmission costs.  The RPS acheives mitigation by displacing the marginal generator (usually coal or natural gas).


Figure A: Cost effectiveness from the social perspective of carbon mitigation policy options in PJM (2012 data as baseline).  Figure A shows the marginal abatement costs of policies if transfer payments are neutral.  The marginal cost of abatement is approximately equal to the carbon price. 


The second perspective we examined was the consumer perspective.  For consumers in restructured markets, the costs of policies are quantified by differences in wholesale payments and any related change in tax revenue.  Tax revenue is created by a carbon price and reduced by renewable energy subsidies.  From the perspective of consumers, cost effectiveness of carbon mitigation policies can be estimated for consumers as:

A carbon price creates tax revenue but increases market clearing prices.  The increase in market clearing prices leads to a windfall profit for low carbon (nuclear) generators who do not change their order in the dispatch stack.  Renewables require consumer-funded subsidies, but the increase in energy supply lowers market clearing prices.  Figure B below shows the consumer perspective of these policies.


Figure B: Cost effectiveness of carbon mitigation policy options from the consumer perspective in PJM (2012 data as baseline).

From the consumer perspective, the most cost effective policy is strongly dependent on gas prices.  A carbon price is the most cost effective option for consumers at low natural gas prices ($4/MMBTU).  With high gas prices, consumers may pay less per tonne offset with an RPS because the added energy supply does more to reduce market clearing prices.  A carbon price is not cost effective with high gas prices ($7/MMBTU) because a high carbon price is necessary to induce fuel switching, causing a wealth transfer from consumers to low carbon (nuclear) producers.

Policies may affect wholesale payments from capacity markets in addition to energy markets, and the estimates above do not take into account capacity markets.  Policies affect capacity markets because they affect the revenue earned by generators in energy markets.  Power plant bids in capacity markets are a function of fixed costs less energy market profits.  Both policies hurt the profits of coal fired power plants, but we found that the increase in their bids would be relatively moderate and would not likely change the decision of a policy maker.

However, a carbon price and an RPS have the opposite effect on the profits of NGCC and nuclear plants.  A carbon price increases the profits of NGCC power plants and would allow NGCC power plants to substantially reduce their capacity market bids.  A carbon price also does more to ensure the continued operation of nuclear generators by increasing their profits.

An RPS shortens capacity market supply by lowering the profits of all generators yet adding very little effective load carrying capacity.  We found that if an RPS results in substantial increases in capacity prices ($100/MW-day) or leads to appreciable nuclear retirements (~5 GW), the cost of mitigation to consumers could increase from ~$75/tCO2 to ~$140/tCO2.

For a policy maker concerned with minimizing consumer costs, the preferred policy approach should reflect beliefs about the future surplus of capacity and the continued operation of nuclear generators.  In order for an RPS to be cost effective for consumers, nuclear generators must be retained and capacity additions must be sufficiently inexpensive in order to prevent substantial increases from current capacity market prices.


This work was supported by grants from the Doris Duke Charitable Foundation, the R.K. Mellon Foundation, and the Heinz Endowments to the RenewElec program at Carnegie Mellon University, and the U.S. National Science Foundation under Award no. SES-0949710 to the Climate and Energy Decision Making Center.