Framework Developed by Brattle Economists on Forward Clean Energy Market Presented to U.S. Congress
Prepared for NRG
A recent white paper, authored by Brattle economists and prepared for NRG, that provides a framework for a clean energy market to meet carbon reduction goals has been submitted to the U.S. House Energy & Commerce Committee in response to questions posed by the Committee. The Committee is seeking information to inform the development of comprehensive climate legislation. The white paper has also been used as the basis for draft legislation proposed by NRG in Illinois.
To cost effectively meet the ambitious clean energy targets set by corporations, communities, cities, and states, the Brattle white paper proposes a new forward clean energy market (FCEM) that will harness competition and innovation. The FCEM would provide a competitive, regional market for clean electricity attributes and would complement existing competitive wholesale electricity markets. It can also support the scale of clean energy investments to help decarbonize other sectors across the economy through electrification.
“When implemented, the FCEM would allow all interested purchasers of clean energy, including governments, retail electricity suppliers, and end users, to work with clean energy suppliers to accomplish the clean energy goals,” noted Brattle Principal and white paper coauthor Kathleen Spees. “This proposal can also be implemented relatively quickly as a much-needed complement to existing electricity markets.”
“At present, 29 states and countless cities have passed laws or adopted clean energy standards for the power sector. Six of those states and 133 of those cities have announced their intention to completely erase carbon emissions from the power sector over the next two to three decades. Many individual companies, like NRG, have also established corporate goals to reduce their associated carbon emissions,” said Travis Kavulla, Vice President of Regulatory Affairs at NRG, in the company’s letter to Congress. “Now that those goals have been set, the question is how to ensure the tools are in place to achieve those goals quickly and affordably. We propose such a tool in the FCEM.”
The FCEM design procures a product called the clean energy attribute credit while incorporating a number of best practices in market design. These include qualifying a broad set of resources to maximize competition; incorporating a downward-sloping demand curve to achieve clean energy goals sooner if resources are available at an affordable price; and using auctions to transparently award winners at competitive prices. The transparent, centralized forward auction format will further incorporate a multi-year price lock-in to enable financing for new resources. The design also includes optional advanced features to focus payments more sharply on realized carbon abatement.
According to the Brattle white paper, this design will help to resolve tensions between wholesale markets and environmental goals by using an approach that explicitly values environmental attributes in a way that is complementary to and consistent with existing energy, capacity, and ancillary service markets. It can work well with or without a price on greenhouse gas (GHG) emissions, and can work across regions with diverse GHG regimes without causing leakage.
This white paper provides a detailed description and design proposal that cities, states, market operators, or regional entities could use as a starting point for developing or enhancing their plans for meeting carbon reduction goals or other clean electricity targets, as well as options on how each region may want to adjust certain details to match their specific needs and context. It expands upon the concepts developed in partnership with a number of other stakeholders, including a related Brattle white paper on using wholesale power markets to enable a clean energy grid, a study on behalf of New England stakeholders to design a clean energy market, and support for the NYISO in assessing the incorporation of a carbon price into the wholesale power market.
