EPA should allow States to retain existing, market-based carbon-control programs and encourage States neighboring such programs to join them.

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1 EPA CO 2 RULE REGIONAL COMPLIANCE and RELIABILITY SAFETY VALVE PROPOSALS I. Introduction and Summary The New York Independent System Operator, Inc. ( NYISO ) appreciates the opportunity to provide EPA with comments on how it might fashion its regulatory guidelines for states to use in setting carbon dioxide control standards for existing and modified power plants. The NYISO is a member of the ISO/RTO Council ( IRC ) and joined in the comments filed on this issue on January 27, Like other members of the IRC, the NYISO plays a key role in maintaining electric system reliability and, as such, has a keen interest in the promulgation of environmental regulations when such regulations have the potential to impact reliable system operations. The development of a standard for existing power plant carbon control under 111(d) of the Clean Air Act presents a remarkable opportunity for EPA to develop guidance that recognizes that environmental regulation can be pursued in a manner that allows electric system reliability to be maintained. The NYISO commends EPA for its outreach on this matter. The NYISO encourages EPA to allow states to pursue regional carbon-control compliance options and, specifically, to allow states to continue their existing, regionally coordinated carbon control mechanisms, such as the Northeast Regional Greenhouse Gas Initiative (RGGI) as their regional compliance mechanism. The NYISO also encourages EPA to ensure that states provide in their State Implementation Plans the opportunity for transmission system operators to ensure electric grid reliability during the transition to a lower carbon-emitting power sector. States should be required to specifically identify potential impacts to electric system reliability that their standards and implementation plans may impose and to offer the availability of a reliability safety-valve, when necessary, to avoid a conflict between maintaining electric reliability and complying with the new carbon standards. II. EPA should allow States to retain existing, market-based carbon-control programs and encourage States neighboring such programs to join them. New York State is a member of RGGI. As mentioned, the NYISO encourages EPA to allow member states to pursue their Section 111(d) compliance obligations through continued membership in RGGI. Power sector participants within the RGGI footprint are familiar with the program and understand allowance acquisition and compliance. As a result,

2 maintaining RGGI as the compliance structure for its member states offers the opportunity for a smooth transition to EPA s forthcoming 111(d) guidelines. EPA should also recognize and encourage, in its guidance document, the opportunity for states that neighbor existing regional compliance mechanisms such as RGGI to join these existing programs. Allowing states that neighbor the RGGI footprint, for instance, to join RGGI and utilize it as their 111(d) compliance mechanism provides them with a ready-made compliance option that offers considerable advantages. Regional carbon compliance strategies that utilize market-based carbon control are useful in internalizing the cost of carbon control within the system dispatch. In RGGI, each power plant is obligated to obtain a carbon allowance for each ton of CO 2 emitted in the settlement period currently three years. In New York, the value of the carbon allowance, established through market-based trading and / or state-managed carbon allowance auctions, is includable in the generator s bid-cost of providing power. Since those power plants with high carbon emissions/mwh of energy produced will require more allowances, all other things being equal, than those power plants with lower carbon emissions, they will appear more expensive to the system dispatch operator. As a result, they will be dispatched less frequently than they would without the carbon adder. This market based approach is also well suited for gradual implementation of new carbon control measures. Because the value of carbon emission allowances will increase (provided they are subject to market-based pricing) over time as carbon control intensifies, more carbon-intense power plants will see larger and larger bid-cost increases and a declining opportunity to be economically dispatched. This is how RGGI has influenced electric dispatch in New York. As the following tables indicate, RGGI s market-based carbon control has already contributed to lower CO 2 emissions and an improved heat-rate for New York s power sector. The energy contribution from less carbon-intensive power plants is supplanting the contribution from power plants with greater CO 2 emisisons. Lower gas prices have also contributed to this trend. 2

3 New York State Power Plant Emissions NOX and SO2 Mass (1000 Tons) CO2 Mass (Million Tons) SO2 NOX CO2 Source: USEPA Air Markets Program Data * 2013 Data Preliminary Estimates 0 13,500 13,000 12,500 New York State Power Plant Heat Rates Heat Rate (Btu/Gross kwh) 12,000 11,500 11,000 10,500 10,000 9,500 9,000 8,500 8, Source: USEPA Air Markets Program Data * All 2013 Data is Preliminary Increasing the cost of energy through the addition of the value of required carbon allowances to each power plant s bid-cost also embeds the cost of controlling carbon in the 3

4 wholesale price of energy paid to Generators and charged to loads. When reliability requires an increase in the dispatch of a high-carbon emitting power plant, the price of energy should also increase. When such higher energy prices are long-lasting, new renewable and energy efficient assets become more cost-effective and are encouraged to enter new markets and expand existing facilities. Higher electric prices also provide consumers with economic signals to reduce usage providing yet another market-initiated opportunity to reduce the carbon emissions from the power sector. Finally, national or regional carbon control will bring a more level playing field to electricity trades among neighboring states and / or regions. 1 A more level playing field, in which all states are implementing some measure of carbon control for their electric generation fleet, can ensure that offers of electricity by generators across the region are collectively impacted by the costs of carbon control. This will diminish or eliminate the phenomenon known as leakage, or the increase in less expensive electricity exports from states that have not adopted comparable control measures to states that have implemented carbon control measures such as RGGI. To the extent that carbon controls exists in all states, no single state or region should be disadvantaged by higher cost electricity or reduced availability that carbon control can bring to an electric market. III. EPA should ensure that States adopt reliability safetyvalves in order to avoid irreconcilable conflicts between carbon-control compliance and reliability. This is an issue that January 27, 2014 comments address in detail. The NYISO concurs in the importance of reliability safety-values in the design of any state implementation plan for carbon control. The need for a safety value is particularly acute for states that implement EPA s carbon standard through unit-specific obligations. 2 When retirement is the chosen compliance strategy, and the unit is needed to meet load reliably, the absence of a reliability safety valve could jeopardize the maintenance of reliable 1 Regional compliance mechanisms also offer the flexibility that a broad set of existing power sources, only some of which will be high-carbon emitters, brings to carbon control. 2 An example of a reliability safety valve was adopted in of EPA s MACT rule. There, in its December 16, 2011 Memorandum on an Enforcement Response Policy for use of Section 113(a) Administrative Orders with Regard to Electric Reliability and the MACT rule, EPA offered an opportunity for power plants to continue operating for as many as two years beyond the initial compliance deadline if they were needed to preserve reliability and could not pursue, or finalize, their compliance strategy during that period. Often, the compliance strategy was to retire the facility. 4

5 electric service. Delayed compliance deadlines can provide system operators the opportunity to find alternative approaches to maintain reliability and allow the affected unit to retire in a manner that does not unduly disrupt the electric grid. Compliance deadlines that are staggered to coincide, for instance, with the triennial anniversary of individual power plants Title V permits, can also increase the flexibility available to a state and its regional system operator to find alternate approaches to maintaining reliability while still meeting compliance obligations. For states that pursue compliance through RGGI or similar allowance-trading mechanisms, the market-based program itself offers states a variety of safety-valve mechanisms that could be adopted to ensure that reliability is maintained. An emission allowance set-aside for reliability-related issues is one such possible safety-value. RGGI currently utilizes an allowance reserve which triggers a release of additional emission allowances under specifically prescribed circumstances to avoid emission allowance price spikes. Similar reserves mechanisms could be established with rigorous requirements for release to avoid reliability issues that early retirements could create. The NYISO encourages EPA to direct that states develop reliability safety valves, working with electric system reliability coordinators and / or regional dispatch organizations where possible, in recognition that EPA s existing-source power plant CO 2 rule needs to be implemented in a manner that accommodates and maintains electric reliability. IV. Conclusion The NYISO appreciates the opportunity to share its comments with EPA on this important issue and would be happy to discuss the issues raised in its comments at any time. Respectfully submitted; March 20, 2014 Mollie Lampi Assistant General Counsel The New York Independent System Operator, Inc. mlampi@nyiso.com 5