NextEra Energy (NYSE: NEE), with its clean power fleet of regulated and non-regulated plants, is a backer of the U.S. Environmental Protection Agency’s proposed Clean Power Plan, but does see some issues that need to be resolved.
Joseph T. Kelliher, Executive Vice President of Federal Regulatory Affairs for NextEra Energy, testified March 11 at the Federal Energy Regulatory Commission’s Eastern Regional Technical Conference on the Clean Power Plan. The conference was based on looking at electric reliability, wholesale electric markets and operations, and energy infrastructure in the Eastern Region.
NextEra is one of the largest power companies in the United States, with more than 42,000 MW of electric generating capacity. NextEra has generation in 26 states and generates and sells power in every market in the U.S., both the bilateral markets and the organized regional transmission organization (RTO) and independent system operator (ISO) markets regulated by the commission.
“There are a number of challenges associated with assessing the impact of the Clean Power Plan on FERC-jurisdictional wholesale power,” Kelliher wrote in his prepared remarks. “To begin with, the EPA rule has not been finalized and is subject to change. However, I share the view that establishment of a price on carbon along with a trading regime would be the most efficient way to implement the Clean Power Plan in the RTO/ISO markets. But for those states outside of an RTO or ISO, and not already participating in a carbon trading program, there is considerable uncertainty as to whether such states would turn to trading regimes to implement the Clean Power Plan.
“Experience has shown that it is clearly possible for RTO and ISO markets to incorporate various carbon trading regimes, such as the Regional Greenhouse Gas Initiative (RGGI) or the California cap-and-trade program. The costs of obtaining emissions allowances under these programs can be factored into the cost of production in a fairly straightforward manner. However, participants in a carbon trading regime must agree on collective emissions targets and how allowance-related revenues will be allocated among the participants. It took the RGGI states 5 years to develop their auction program, and they were similarly situated with no obvious winners and losers. It is unclear how many states might find themselves in a similar situation under the Clean Power Plan.
“Another approach would be to administratively set a price on carbon that generators could reflect in bids to sell into RTO/ISO markets. This would be another straightforward way of factoring environmental compliance costs into the cost of production. However, some entity or entities would need to be responsible for setting the carbon price expected to result in the desired level of emissions. This could be a collection of states, the RTOs/ISOs or even EPA, but this approach again would require agreement on the target level of emissions and how emissionsrelated revenues would be allocated.
“Notwithstanding the savings that a regional approach could yield, state air agencies may be inclined to resort to more traditional approaches that are within their control when designing an implementation strategy for the Clean Power Plan. RGGI shows that states can adopt regional approaches toward carbon, but the circumstances governing new carbon trading regions today are very different than those that governed RGGI development. If region-wide approaches do not develop, each state will implement the Clean Power Plan in different manners. Some states may adopt plans based on the building blocks in the Clean Power Plan proposed rule. Other states will depart from the building blocks. Some states will adopt mass-based approaches; others will adopt rate-based approaches.
“While the flexibility afforded states by the Clean Power Plan is a positive aspect of the proposal, it opens the door to non-market approaches that will have an impact on FERC jurisdictional wholesale power markets in RTOs and ISOs. Which brings us to today’s discussion.”
Regardless of the manner in which states in bilateral markets choose to implement the Clean Power Plan, there should be no significant impact on the wholesale power market, Kelliher wrote. “To be sure, the Plan will increase the cost of generation for resources that emit high levels of carbon. That may affect the relative competitive position of some generators in bilateral markets, but that would be no different than any other prior Clean Air Act rule that raised the generating costs of higher polluting generators more than lower emitting generators. Increasing the cost of some generators in bilateral markets should have no significant impact on the competitiveness of the bilateral markets themselves. Unlike the organized markets, bilateral markets rely principally on bilateral power purchase agreements rather than centralized bidding and clearing.
“To the extent a buyer is in need of generation with particular environmental attributes, a power purchase agreement can be structured to meet the buyer’s needs, subject to the Commission’s regulatory oversight. Of course, a state’s implementation approach might result in cost shifting among utilities within the state by unfairly allocating compliance obligations. If a state in a bilateral market were to seek guidance from the Commission as to efficient ways to implement the Clean Power Plan, the Commission should encourage the state to avoid economic distortions resulting from unfair allocations of compliance responsibilities.”
NextEra criticizes ‘out-of-market’ approaches
States may resort to out-of-market contracts and subsidies to incentivize the development or operation of particular types of resources as part of their Clean Power Plan implementation, Kelliher noted. As currently designed, the RTO/ISO capacity markets are “agnostic” to the environmental characteristics of resources, he added.
The core purpose of the capacity markets is to maintain system reliability by sending price signals both to encourage entry of economic new resources and to discourage the premature exit of economic existing resources. This can lead to tensions between economically efficient market outcomes and state preferences for particular types of generation.
“For example,” wrote Kelliher, “some states are considering out-of-market approaches to subsidize uneconomic nuclear power plants. That out-of-market support could take the form of direct support, such as contemplated by the State of Illinois. Out of market support may also take the form of Reliability Must Run (RMR) agreements. Out-of-market approaches can affect wholesale capacity markets by suppressing capacity prices, adversely affecting other market participants and hurting market integrity. The Commission has long recognized that a capacity market will not be able to produce needed investment to reliably serve load if a subset of suppliers is allowed to step outside of the market.”
He later added: “NextEra is a renewable energy leader and we recognize that expanding renewable energy will likely be a core Clean Power Plan compliance strategy adopted by states. But we also recognize that renewable energy can be developed in a manner that hurts markets. For example, exempting state-sponsored renewable energy projects from buyer market power rules can suppress capacity prices. We believe state-sponsored renewable energy projects should be subject to buyer market power rules in the same manner as other existing and new resources that receive out-of-market support.”