NYISO Offers Insight into Impact of New Real-Time Carbon Pricing Model

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Called the “location-based marginal price for carbon” (LBMPc), the NYISO said this past week the pricing model could appear as early as the spring of 2021.

Carbon pricing in New York state shook up the market for wholesale power since the discussions started after the New York Independent System Operator (NYISO) released this past December its final draft for carbon pricing.

Last Tuesday, the NYISO provided a bit more clarity on how this pricing mechanism would work. This mechanism would allow for a calculation of a Location Based Marginal Price for Carbon or, as the NYISO has termed it, an “LBMPc.”

The LBMPc will be calculated after a real-time market run to assess the societal cost of carbon to the users of electricity on the grid. The calculation of the LBMPc is straightforward and transparent, but still pretty complicated and beyond the scope of discussion in this article.

What are likely to be the impacts? Well, the NYISO included a few examples which they have deemed for “discussion purposes only” in their presentation.

The low end of the range provided was $0 per megawatt hour (MWh) for a trivial case, and a gas case provided an LBMPc of $20 per MWh. The high end of the range was $52 per MWh with a typical oil case coming in at $39 per MWh.

The market is trading with a premium of around $10 per MWh higher for power supplied after implementation versus before implementation. NYISO has reported that the earliest date for implementation would be spring of 2021. With all this said, the markets have not moved much at all since the presentation on Tuesday.

What should the retail electric customer do when facing a potential increase in the second quarter of 2021 of close to $10 per MWh? Our advice in this market is to continue to watch developments carefully, but make no commitment to energy prices beyond Q2 2021.

We also advocate that customers do long-term deals to lock in capacity prices now so that when an opportunity comes where there is more clarity on carbon pricing, the customer has a vehicle to transact quickly and efficiently.

Author: Mark Kleinginna

RPAC ARTICLE

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May you Live in Interesting Times…..

-       Chinese Proverb

Carbon Pricing in New York State shook up the market for wholesale power since the original discussions started. Last Tuesday the New York ISO provided a bit more clarity on how this pricing mechanism would work. This mechanism would allow for a calculation of a Location Based Marginal Price for Carbon or as the NYISO has termed it an LBMPc. The LBMPc will be calculated after the real-time LBMP in a transparent manner to assess the societal cost of carbon to the users of electricity on the grid. The calculation of the LBMPc is straight forward and transparent (but still pretty complicated an beyond the scope of discussion in this article. 

What are likely to be the impacts? Well the NYISO included a few examples which they have deemed for “discussion purposes only” in their presentation. The low end of the range provided was $0/MWh for a trivial case, and a gas case provided an LBMPc of $20.00/MWh. The high end of the range was $52/MWh with a typical oil case coming in at $39/MWh.

The market is trading with a premium of around $10 per MWh higher for power supplied after implementation vs. before implementation (NYISO has reported that the earliest date for implementation would be Spring of 2021). With all this said, the markets have not moved much at all since the presentation on Tuesday. 

What should the retail electric customer do when facing a potential increase in the second quarter of 2021 of close to $10 per MWh. Our advice in this market is to continue to watch developments carefully, but make no commitment to energy prices beyond Q2 2021. We also advocate that customers do long term deals to lock in capacity prices nowso that when an opportunity comes where there is more clarity on carbon pricing, the customer has a vehicle to transact quickly and efficiently.

 

Mark Kleinginna 
VP Operations

NYISO SUMMER 2019

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Like the well-known rock group WAR said “Cause it’s Summer, my time of year”. And with electricity generators all around the US. Summer is the time when capacity values can actually rise above fuel costs and provide some beneficial incremental margin to owners of efficient generation. This translates to higher hourly price volatility for customers. The above chart was published in April 2, 2019 in Megawatt Daily in a report about NYISO’s prediction of its system wide peak demand. What this graph shows us is a year over year increase in July prices of $4 and August prices of $2 for New York City. MW Daily points out that generation prices are higher year over year for the Summer. In looking at fuel prices for this load, gas is only up about $.10 per MMBtu which implies that the system is valuing the ability to produce power at a higher rate than a year ago. There is support for this notion as last Summer prices in New York City cleared on the spot market very near to the forward prices. (LBMP for July was $46 and for August was almost $50.) This is unusual as LBMPs usually clear at a discount to forward prices.

Does all this mean the consumer should hedge for July and August? It does. Taking risk off the table during volatile periods is simply good risk management practice.

But this graph is really telling in that it shows a significant run-up as we get closer to the prompt month. It is far better not to wait to buy Summer power until the end of June. In fact, a customer would have done extremely well to get this power hedged in April or May to avoid any potential upward revisions in the weather forecast. Nothing good for consumers happens in June for the forward July or August markets. Bottom line – if you are going to hedge – do it early.

Ke Wang
Senior Energy Analyst