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Research & Commentary: PJM Electric Grid Neighbors Beware, Virginia's Proposed Cap-and-Trade Regulations Would Impact You as Well

April 10, 2019

Proposed carbon dioxide regulations in Virginia will impact the price of electricity in other states within the PJM interconnection.

The current cap-and-trade regulatory proposal by Virginia Gov. Ralph Northam would significantly impact Virginia energy consumers. Virginia’s unelected Air Pollution Control Board is meeting on April 19 to approve these new regulations.

The State Corporation Commission has calculated that the increased electricity costs to consumers caused by the proposed cap-and-trade scheme would reach up to $5.9 billion over the first 10 years, but this doesn’t account for the overall economic impact on the state, which will surely suffer as energy-intensive industries see their production costs increase and consequently pass them on to consumers. Many industries would eventually leave the state.

Virginia consumers would not be the only victims of these regressive regulatory measures. Virginia’s Mid-Atlantic and Midwest neighbors on the PJM grid must also beware, as these regulations stand to negatively impact them as well.  

The PJM Interconnection is a wholesale electricity market that coordinates the flow of electricity through all or parts of 13 states and the District of Columbia. As a regional transmission organization (RTO), PJM operates markets in which individual generators sell electricity to utilities or independent energy providers for delivery to retail consumers. There are two types of markets: day-ahead and real-time. The “day-ahead” market calculates hourly prices for the next day, while the “real-time market” is a spot market in which prices are calculated every five minutes.

The wholesale price of electricity fluctuates due to many factors, including peak capacity hours and increased demand, transmission constraints, and the cost of power generation. Because the cost of power generation increases for natural gas and coal-fired plants under a cap-and-trade scheme, these generators will bid into the market at a higher price. As bids clear from lowest to highest, the bid that sets the clearing price, or the wholesale price of power, is the resource that clears at the cost needed to meet demand.

Regulations act as a disruptive force within the market. They can create uncertainty within multi-state markets because regulations and their severity differ from state to state. This creates a predicament for PJM market participants when states like Virginia consider cap-and-trade proposals that have the specific goal of pricing out resources such as coal and natural gas from the marketplace. In 2017, coal and natural gas accounted for 58.9 percent of PJM’s energy mix. The increase in the price of generation from these sources would increase the wholesale price of electricity across the entire grid. The price would be further impacted during peak hours as demand is increased.

Whether a state has a deregulated energy market, such as in Ohio and Pennsylvania, where utilities are separated from re-sellers, or has a regulated monopoly utility, such as in West Virginia, Kentucky, Indiana, and North Carolina, the effect of the regulatory measures is the same: All entities within the PJM grid buy and sell off the wholesale market. Currently, Delaware and Maryland are members of the Regional Greenhouse Gas Initiative (RGGI), an interstate cap-and-trade scheme. Any purchase of power from generators in these states puts a tax on that purchase, on top of the already increased price of power. The same would be said about the purchase of power from Virginia generators if Northam were to impose his own cap-and-trade regulations, even if not a part of RGGI.

PJM essentially operates as a compact that provides for interstate commerce. Regulatory measures in certain states, such as those proposed in Virginia, would not only increase electricity prices through higher generation costs, it would also create capacity issues, because plants are inevitably prematurely shut down and new capacity must be built in their place. These capacity problems would cause transmission restraints, preventing the free flow of electricity across parts of the grid. It must be noted that any artificial constraint on the use of existing power plants potentially constitutes a violation of the commerce clause, infringing on interstate trade.

Virginia does not exist on a grid unto itself, and therefore officials in neighboring PJM states should be consulted prior to the implementation of cap-and-trade regulatory measures that would unjustly and unfairly impact them and their constituents, particularly lower-income households that cannot shoulder the burden of increased electricity costs.

The following documents provide more information about the PJM grid, wholesale electricity markets, and cap-and-trade programs:

PJM Learning Center: Market for Electricity
https://learn.pjm.com/electricity-basics/market-for-electricity.aspx
This module by PJM gives a basic overview of wholesale electricity markets and how power is bought and sold on the PJM grid. It explains how the wholesale market operates and how power is bought, sold, and distributed to retail consumers.

Wholesale Electricity Markets and Regional Transmission Organizations
https://www.publicpower.org/policy/wholesale-electricity-markets-and-regional-transmission-organizations
This article published at PublicPower.org gives an overview of the history of wholesale electricity markets and explains in detail the seven different RTOs in the United States.

Five Myths of Cap-and-Trade
https://www.heartland.org/publications-resources/publications/five-myths-of-cap-and-trade
Articles supporting cap-and-trade programs rely on several fallacies. In this article by Todd Myers of the Washington Policy Center, Myers identifies and explores five persistent myths concerning cap-and-trade regulations, including the belief that a cap on carbon dioxide emissions guarantees emissions reductions.

A Review of the Regional Greenhouse Gas Initiative
https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2018/2/cato-journal-v38n1-chapter-11.pdf
This Cato Journal article authored by David T. Stevenson of the Caesar Rodney Institute shows the Regional Greenhouse Gas Initiative (RGGI) has not resulted in any additional emissions reductions or associated health benefits. Additionally, Stevenson argues RGGI has had minimal impact on energy efficiency and low-income fuel assistance, and that it has increased electric bills in the region.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit The Heartland Institute’s website and PolicyBot, Heartland’s free online research database. 

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