Energy and Capacity Market Effects of Carbon Policies in Restructured Markets Jared Moore and Jay Apt (adviser) CMU Engineering and Public Policy Carnegie Mellon Electricity Industry Center USAEE/IAEE New York June 2014
EPA to use CAA 111(d) to regulate existing power plants : • EPA proposed how much each state must cut based on feasibility • EPA to approve SIPS which are flexible • Research Question: How will consumers in restructured markets be affected? 2
Use CAA 111(d) cost-effectively for consumers: • White House to EPA: “…Ensure that the standards are developed … with the continued provision of reliable and affordable electric power for consumers and businesses ” • Former EPA Administrator Lisa Jackson: We will “…implement the most cost-effective measures that do not burden small businesses and nonprofit organizations ”. • EPA estimates ~$8B cost and consumers savings of 9% 3
Carbon Price Wealth Transfer Payments 4
Carbon Price Wealth Transfer Payments $25/t CO 2 Tax 5
Economic Dispatch with Renewable Portfolio Standard Renewables Shift Supply Curve to the right 6
Economic Dispatch with Renewable Portfolio Standard Decreased Market Clearing Prices 7
Economic Dispatch with Renewable Portfolio Standard Cost of renewables to LSE’s including variability and transmission Decreased Market Clearing Prices 8
Assumptions for dispatch models: • No new builds or retirements of capacity (ELCC) 9
Capacity additions in U.S. 10
Assumptions: • No new builds or retirements of power plants (with the exception of renewables) • Model one year of hourly economic dispatch for existing generators in PJM, ERCOT, and MISO • Vary price of gas from $4 to $7/MMBTU • No transmission constraints • No price elasticity of demand 11
Results in PJM (no capacity reaction) 12
Marginal Abatement Costs of Carbon Policies: PJM (Economist’s Perspective: Wealth Transfers Neutral) $4 Gas $7 Gas Cost Effectiveness of Carbon Price 13
Marginal Abatement Costs of Carbon Policies: PJM (Economist’s Perspective: Wealth Transfers Neutral) $4 Gas $7 Gas Cost Effectiveness of RPS (wind at $100/MWh) Cost Effectiveness of Carbon Price 14
Marginal Abatement Costs of Carbon Policies: PJM (Consumer Perspective) $4 Gas $7 Gas Cost Effectiveness of Carbon Price Cost Effectiveness of RPS (wind at $100/MWh) 15
Results in ERCOT 16
$4 Gas $7 Gas Cost Effectiveness of RPS (wind at $100/MWh) Cost Effectiveness of Carbon Price 17
Capacity Market Reaction Capacity bids are the difference between fixed costs and profits earned in energy markets 18
New NGCC plant Existing Sub-Critical Coal Plant in PJM (class average) PJM RTO market clearing price range (2007-2016) 19
New NGCC plant Existing Sub-Critical Coal Plant in PJM (class average) PJM RTO market clearing price range (2007-2016) 20
New NGCC plant Existing Sub-Critical Coal Plant in PJM (class average) PJM RTO market clearing price range (2007-2016) 21
Conclusions • Rational consumer in restructured market may prefer RPS over a carbon price if: – Gas is expensive – And capacity supply remains long – And nuclear generators continue to operate – And it is fair/legal for fossil producers to pay for mitigation 22
Thank You 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. 23
$4 Gas PJM 24
$4 Gas $7 Gas New NGCC New Wind induced induced ($85/MWh) PJM 25
Carbon Mitigation Due to Fuel Switching $4 Gas $7 Gas ERCOT PJM MISO 26
$4 Gas $7 Gas Cost Effectiveness of RPS (wind at $100/MWh) Cost Effectiveness of Carbon Price
Marginal Abatement Costs of Carbon Policies: PJM Cost Effectiveness of Carbon Price (consumer perspective) $4 Gas $7 Gas Cost Effectiveness of RPS (consumer perspective, wind at $100/MWh) Cost Effectiveness of Carbon Price (wealth transfers neutral)
Capacity Market Bids in PJM (2014/2015) Market Clearing Price (2014/2015) 30
Classification of Costs in Restructured Markets 31
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