Carbon Pricing in Wholesale Electricity Markets—Options for Fossil-Fuel Generators

Sunset and electric transmission lines

This article was co-authored by Jack Gross, a graduating senior of the George Washington University class of December 2020.

On October 15, 2020, the Federal Energy Regulatory Commission (FERC) announced in a proposed policy statement that it had jurisdiction over carbon pricing mechanisms within the wholesale electricity markets. In that same policy statement, FERC also confirmed it had the authority to approve such rules if brought forward by regional transmis- sion organizations (RTOs) and independent system operators (ISOs).

FERC’s announcement ushers in a new era of wholesale electricity market regulation, particularly for fossil-fuel power generators using natural gas, coal, and biomass. These generat- ing resources will no longer be able to rely on

inexpensive fuels to remain competitive. Instead, they will have to navigate carbon pric- ing mechanisms for existing and future power plants if they are to remain competitive in wholesale electricity markets designed to decarbonize the electric power sector. As is the case with any new proposal from FERC, it will take time for RTOs and ISOs to develop carbon pricing proposals with their stakeholders and market participants. This gives companies time to discuss and develop strategies.

Because fossil-fuel power generators consist of regulated electric utilities, electric and gas utilities and independent power producers (IPPs), each of their approaches to dealing with carbon pricing will likely vary. Some companies might take a “business as usual” approach, including operating existing power plants until the end of their existing economic life, even if it’s shortened by carbon pricing. Generation owners may also decide to do one or more of the following to address carbon pricing in wholesale electricity:

Strategy 1—Embrace renewable energy generation and storage exclusively, either by importing hydropower, wind and solar power from Canada and Mexico where feasible or building new hydropower, wind, solar and solar-battery hybrid projects. New pumped storage hydro (PSH) projects could replace retired fossil-fuel power plants, especially if they are closed-loop PSH and don’t impact a natural body of water. The Energy Information Administration (EIA) has also reported the cost of utility-scale battery storage has seen a recent decline of 70 percent, making the use of this technology more financially feasible.

Strategy 2—Embrace the new hydrogen economy by blending H2 and natural gas in existing and new gas-fired power generating facilities

Strategy 3—Embrace a circular carbon economy that emphasizes reducing, reusing, recycling and removing carbon dioxide and using the IRS 45G tax incentives for using carbon capture, use, and storage (CCUS) technologies at natural gas and coal-fired power plants. 

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