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Monitoring Potential Emissions Leakage under the Regional Greenhouse Gas Initiative (RGGI):

Possible Lessons for Load-Based Cap-and-Trade Programs

Christopher Sherry

New Jersey Department of Environmental Protection

Linking Load-based and Source-based Greenhouse Gas Cap-and-Trade Systems: Issues and Solutions

April 19-20, 2007

California Public Utilities Commission

San Francisco, CA

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Overview

• Potential for Emissions Leakage (for source-based system) or Attribute/Contract Shuffling (for load-based system) is viewed by some as potential weakness of regional carbon cap-and-trade systems

• Proposal for monitoring potential emissions leakage under RGGI may provide guidance for design of load-based system, in particular emissions reporting

• May also prove useful for monitoring the success of a load-based system addressing a subset of broader regional wholesale electricity market

• RGGI Staff Working Group also evaluating the efficacy of various load-based policies for mitigating potential emissions leakage

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Concept of Emissions Leakage

• Implementation of a carbon cap on in-region power plants is expected to increase the cost of electricity generation in the RGGI region

• In a competitive power market, this may have the effect of shifting generation in the larger region to uncontrolled, and presumably cheaper, fossil fuel-fired generation not subject to a carbon cap

• A shift in generation and associated emissions from capped sources to non-capped sources is described as "emissions leakage"

• Implicit in this concept is the notion of causality; specifically that a cost increase due to a carbon cap is the key variable driving spatial changes in the operation of the electric power system

• This is distinct from a shift in the spatial distribution of electric generation resulting from other market variables and the dynamic nature of the electric power market

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RGGI Approach to Addressing Potential Emissions Leakage

• RGGI program acknowledges potential for emissions leakage

• RGGI Memorandum of Understanding (MOU) called for establishment of multi-state emissions leakage working group. The MOU tasks the Working Group with the following:

• Consider policy options and mechanisms to address potential emissions leakage

• Consult with a panel of experts, stakeholders, and representatives of regional transmission organizations and issue its findings and conclusions by December 2007

• RGGI MOU calls for monitoring of emissions leakage on an ongoing basis commencing from the start of the program, and the reporting of results of the

monitoring on an annual basis beginning in 2010

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Initial Report of Emissions Leakage Working Group Issued in May 2007

Initial report addresses following:• The market dynamics that could lead to potential emissions leakage, or

alternately, might mitigate it, assuming a modest carbon price

• A proposal for how to monitor regional emission leakage, through modifications to the existing environmental tracking systems operated by PJM and NE-ISO, and the system under development in New York

• A survey of the policy options that are available to mitigate emissions leakage, including a discussion of the potential effectiveness of each option and implementation issues or challenges that each might present

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Proposal for Monitoring Potential Emissions Leakage

• Emissions leakage to be tracked through modifications to the existing generator attribute tracking systems in the RGGI region

• Tracking emissions leakage requires tracking the emissions from all non-RGGI-affected electric generating units serving load in the RGGI region

• RGGI region includes NE-ISO, NY-ISO and portions of PJM

• Emissions of non-RGGI generation to be tracked through two-pronged process:

• direct monitoring of different categories of generation in the region (e.g., non-RGGI units, net imports into RGGI control areas and partial control area)

• through the residual system mix (lbs. CO2/MWh)

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Non-RGGI Generation

• Small fossil fuel fired units inside the RGGI region (< 25 MW)

• All other non-RGGI generators in RGGI region (nuclear, renewables)

• Net imports into RGGI region

• Directly tracked for NE-ISO and NY-ISO (“control area”)

• Inferred for RGGI portion of PJM (“partial control area”) through difference between load and generation in RGGI portion of PJM

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Tracking Potential Emissions Leakage

• Initial estimate of emissions leakage represented by increase in emissions from non-RGGI generation serving load in RGGI region, as tracked relative to applicable baseline.

• If emissions leakage occurs, it can be expected to result from the following:

• increased dispatch of in-region, non-RGGI units (i.e., fossil fuel-fired units smaller than 25 MW)

• increased utilization of out-of-region fossil fuel-fired generation serving load in the RGGI region (increased net imports)

• a combination of both

• Initial estimate of emissions leakage could be established by tracking changes over time to the level of non-RGGI generation (MWh) serving RGGI-region load, and changes in the associated CO2 emissions related to this non-RGGI generation (lbs. CO2/MWh x MWh)

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Modifications to Generator Attribute Tracking Systems

• Staff proposes the creation of new certificate fields for categories of generation units in the RGGI region

• Modifications would also allow for the generation of new types of data reports that could be used for emissions leakage tracking purposes

• Track emissions for individual categories of generators in RGGI region (e.g., small fossil units not subject to RGGI, but located in RGGI region)

• Track RGGI region “residual mix” emissions (average lbs. CO2/MWh x MWh) for non-RGGI units (RGGI-affected units flagged and removed)

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Explaining “Residual Mix”

• Residual mix concept used for environmental disclosure of electricity products– Attribute tracking systems create certificates for all generation (MWh) in a

control area, as well as net imports into a control area– Total certificates (generation within the control area, plus net imports) must

equal total load in the control area

• LSEs may purchase attribute credits (e.g., for RPS compliance)

• Residual mix represents the attributes of all remaining unsold or unused attribute certificates at the end of a monitoring or trading period

• Residual mix CO2 lbs./MWh represents the weighted average emissions rate of all remaining unclaimed/unused certificates

• LSEs apply residual mix attributes to all remaining MWhs for which they do not hold attribute certificates

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Explaining “RGGI Residual Mix”

• To determine how much non-RGGI generation is serving load in the RGGI region, and the emissions related to this generation, the same netting-out process currently used by the existing tracking systems to derive residual system mix attributes would be used

• Certificates associated with RGGI-affected units in a control area would be subtracted, leaving certificates for those units not subject to the RGGI program, as well as certificates representing net imports into the control area

• Total number of certificates equal to total load in control areas fully and partially subject to RGGI

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Explaining “RGGI Residual Mix” (Cont.)

• The weighted average lbs. CO2/MWh emissions rate for all remaining certificates would represent the lbs. CO2/MWh emissions rate of the RGGI residual mix

• This “RGGI residual mix” would represent the environmental attributes of all remaining generation used to serve load in a control area or partial control area subject to RGGI (including net imports), after subtracting generation from units subject to RGGI

• The total number of residual mix certificates multiplied by the emissions rate of the residual mix would represent the number of tons of CO2 emissions attributable to non-RGGI generation serving load in the RGGI region

• Based on this monitoring of electricity use and tracking of electric generation environmental attributes, an estimate of emissions leakage could be developed

and tracked over time

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Attribute Identifiers

• New attribute identifiers would be developed

• Each MWh generated in a control area fully or partially subject to RGGI would have an associated certificate with a field which identifies it, as applicable, as:

• “RGGI-affected unit” (e.g., > 25 MW fossil fuel-fired unit subject to RGGI cap-and-trade program)

• “unaffected small fossil fuel-fired RGGI-region unit” (e.g., < 25 MW fossil fuel-fired unit not subject to RGGI cap-and-trade program, but located within a jurisdiction subject to RGGI cap-and-trade program)

• “RGGI-region unit” (e.g., a unit located within a jurisdiction subject to RGGI cap-and-trade program)

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Generation Attribute Tracking

• In-Region Generation: New generation attribute identifiers would be developed for the following:

• “RGGI-affected unit”: unit subject to RGGI carbon cap-and trade program (e.g., fossil fuel-fired units > 25 MW)

• “Unaffected small fossil fuel-fired RGGI-region unit”: includes fossil fuel-fired units located in control area or partial control area subject to RGGI, but not subject to RGGI cap-and-trade program (e.g., fossil fuel-fired units < 25 MW)

• “RGGI-region unit”: includes RGGI-affected units and all other units located in the RGGI region (e.g., a unit located within a control area fully subject to RGGI or partial control area subject to RGGI)

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Net Import Tracking• For NY-ISO and NE-ISO, the net power flows from each adjoining control area would be

tracked directly, and certificates would be created to account for the attributes associated with each MWh of net imports

• environmental attributes for these certificates are aggregated from the average emissions attributes of all generation in an adjoining control area (e.g., average lbs. CO2/MWh).

• For PJM, net “imports” into the RGGI portion of PJM would be inferred based on the difference between total load in the RGGI portion of PJM and total generation in the RGGI portion of PJM

• Any deficit assumed supplied by system power, except that for the purposes of RGGI tracking, the environmental attributes of this system power would be limited to the attributes of generation units located outside the RGGI portion of PJM

• The environmental attributes applied to this generation would be based on a non-RGGI PJM residual mix

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Data Reports

• With the information described above, the modified tracking system could provide the following information

• Electricity demand: Total load (MWh) for a control area or partial control area subject to RGGI would be based on the following:

• Reported MWh load for all LSEs in a control area or partial control area subject to RGGI. This data would be derived from control area market settlement systems

• Total generation: Total generation (MWh) for a control area or partial control area subject to RGGI, would be based on the following:

• Sum of certificates with a “RGGI-region unit” identifier.

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Data Reports (Cont.)

• RGGI emissions mix: The average CO2 emissions rate (lbs. CO2/MWh) of all generation units subject to the RGGI cap-and-trade program located in a control area or partial control area would be tracked based on the following:

• Weighted average emissions rate (lbs. CO2/MWh) for all certificates with a “RGGI-affected unit” identifier.

• RGGI residual mix: The average CO2 emissions rate (lbs. CO2/MWh) of all non-RGGI generation (including net imports) used to serve load in a control area or partial control area subject to RGGI, would be based on the following:

• The weighted average emissions rate (lbs. CO2/MWh) of all remaining certificates, after subtracting all certificates with a “RGGI-affected unit” identifier.

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Data Reports (Cont.)

• Unaffected small fossil fuel-fired RGGI-region unit emissions mix: The average emissions rate for small fossil fuel-fired units not subject to RGGI, but located within a jurisdiction subject to RGGI, would be based on the following:

• Weighted average emissions rate (lbs. CO2/MWh) of all certificates with an “unaffected small fossil fuel-fired RGGI-region unit” identifier.

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Emissions Leakage Estimates

• Emissions leakage would be tracked based on changes in the emissions from non-RGGI generation, i.e., unaffected fossil fuel-fired units within the RGGI region and net imports, relative to a historic emissions baseline.

• The emissions totals would be derived by multiplying the number of applicable certificates by the carbon emissions attributes (lbs. CO2/MWh) of these certificates.

• Initial estimated emissions leakage would represent an increase in emissions relative to the respective emissions baseline.

• Different data reports could be generated to estimate total emissions leakage, as well as subtotals due to certain categories of power, such as net imports or fossil fuel-fired generation not subject to the RGGI cap-and-trade program.

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How is this Applicable to California?

• Similar system could be used to evaluate the on-going effectiveness of a California-only or regional load-based system

• Track residual system mix of generation not being used to serve CA/regional load

• Addressing attribute shuffling would use similar monitoring aspects for compliance-based program

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Addressing Attribute Shuffling

• Load-based cap-and-trade system different than RPS

• RPS starts with a deficit of low-emission attribute credits due need to build new renewable energy capacity

• Load-based regional cap-and-trade system likely to face a surplus of low-emission attribute credits

• Subject to attribute shuffling – paper exercise of assigning low-emission attributes to LSEs in regulated region without changing the dispatch of broader regional power system

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Addressing Attribute Shuffling

• Preventing attribute shuffling would likely involve a hybrid attribute-based system and contract path tracking system (use of attribute tracking systems in combination with ISO market settlement systems)

• Specific emissions attributes would be applied to the following:• LSE energy transactions where power from a specific conventional

generation plant is purchased along with the environmental attributes for that plant (deliverable power with scheduled transmission, plus attribute credits)

• Renewable energy attribute credits (RECs) held by LSE

• All other MWhs of load served would be assigned a residual mix lbs. CO2 /MWh attribute

• weighted average lbs. CO2/ MWh emissions rate of all other generation serving load in the control area, after subtracting generation for which LSEs allowed to claim plant-specific environmental attributes

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Role of Energy Efficiency/DSM

• Zero emissions energy efficiency attribute credits could be applied as a credit against the average emissions rate achieved by LSE

– Average LSE emissions rate adjusted based on zero-emissions “negawatts” used to serve load

• Total LSE load adjusted to equal actual delivered MWhs plus energy efficiency resource MWhs procured

– Total assumed load served adjusted by adding MWhs of efficiency resource procured

• Average emissions rate for adjusted total load includes zero emission MWhs due to energy efficiency