California ISO readies tariff changes related to CO2-control program

The California Independent System Operator on Oct. 29 filed with the Federal Energy Regulatory Commission an amendment to its tariff to include greenhouse gas compliance costs in certain calculations set forth in the ISO tariff.

The calculations cover determination of resource commitment costs (start-up and minimum load costs), default energy bids (bids used in the automated local market power mitigation process), and generated bids (bids generated on behalf of resource adequacy resources and as otherwise specified in the ISO tariff). The ISO requested that the commission accept the tariff revisions effective as of Jan. 1, 2013, so that they go into effect on the same date that the California Air Resources Board (CARB) plans to implement its new cap-and-trade program for greenhouse gas emissions.

“This tariff amendment is just and reasonable as it provides for cost recovery of an additional cost that resources with a CARB compliance obligation will incur as of January 1, 2013,” the operator said. “The ISO requests that the Commission issue its order by December 28, 2012 (i.e., 60 days from the date of this filing) to provide the ISO with several days after issuance of the order to allow for orderly deployment of the software and business systems necessary to implement these changes Pursuant to its tariff, the ISO performs optimized economic commitment of resources in the markets it operates based on the resources’ market bids as well as their commitment costs, which consist of the costs of starting up the resources (start-up costs) and the costs of running the resources at their minimum operating levels (minimum load costs). On a 30-day basis, scheduling coordinators for resources may choose either the proxy cost option or the registered cost option for specifying their start-up costs and their minimum load costs to be used for the resources in the ISO markets processes. The ISO tariff includes provisions for calculating these commitment costs under the proxy cost option3 and for calculating maximum commitment cost values registered in the Master File for resources that choose the registered cost option.”

The ISO tariff also includes incremental energy costs in the calculation of default energy bids and generated bids. Default energy bids are used to mitigate generator bids that are identified as having potential market power and are calculated for each resource under one of three options: the variable cost option, the negotiated rate option, or the locational marginal price option. Generated bids are created by the ISO when a bid is not submitted by a scheduling coordinator and is required for a resource adequacy requirement or other purpose set forth in the ISO tariff.

On Feb. 8, the ISO initiated a stakeholder process called Commitment Costs Refinements 2012 to discuss possible modifications to these and other ISO tariff provisions. The first set of tariff changes produced by that stakeholder process is the subject of this filing, which are revisions to include greenhouse gas costs in the calculation of commitment costs and incremental energy costs.

CARB to cap, then ratchet down CO2 emissions over time

The CARB cap-and-trade program will establish an overall limit on greenhouse gas emissions from capped sectors, including electricity generating facilities, and facilities subject to the cap will be obligated to acquire allowances to emit greenhouse gases. By slowly reducing the number of available allowances over several years, the cap-and-trade program is intended to reduce greenhouse gas emissions to 1990 levels by the year 2020 and ultimately to achieve an 80% reduction from 1990 levels by 2050, the ISO noted. CARB will distribute greenhouse gas allowances by allocating them at no cost to various entities and by selling them at periodic auctions, while also permitting bilateral trading of allowances.

The California cap-and-trade program will apply to the emissions of in-state generators and the emissions of the generation behind energy imported from outside the state. The resources subject to California’s greenhouse gas regulations include those fueled by natural gas (the vast majority of such resources), coal, and oil, as well as cogeneration facilities. The greenhouse gas regulations will not apply to resources that emit less than the equivalent of 25,000 metric tons of carbon dioxide (mtCO2) annually.

California’s cap-and-trade program is somewhat similar to the Regional Greenhouse Gas Initiative (RGGI) used in a number of states in the balancing authority areas of the eastern independent system operators – PJM, the New York ISO and ISO New England. Similar to California’s program, the RGGI includes an overall cap on and allowances for greenhouse gas costs that are sold at auction and can be traded bilaterally, the California ISO pointed out.

“As a result of the California cap-and-trade program, each resource subject to California’s greenhouse gas regulations will bear a per-megawatt-hour cost associated with the greenhouse gas allowance needed for its energy output,” the ISO said. “Nearly unanimously, participants in the stakeholder process for Commitment Costs Refinements 2012 expressed support for making those costs a component of the calculations under the existing ISO tariff for start-up and minimum load costs, as well as a component of the calculations under the existing tariff for default energy bids and generated bids.”

Working out the inclusion of greenhouse gas costs in the calculations under the ISO tariff was the subject of stakeholder discussion starting in February. The stakeholder process included an ISO issue paper, a straw proposal, and a draft final proposal. Also, the ISO’s Department of Market Monitoring (DMM) issued a white paper in the stakeholder process that included proposed equations for incorporating greenhouse gas costs. The ISO adopted the DMM’s proposal for calculating greenhouse gas costs.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.