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Questions about Forward Clean Energy Markets and Resource Adequacy for New England

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Richard Brooks's picture
Co-Founder and Lead Software Engineer Reliable Energy Analytics LLC

Dick Brooks is the inventor of patent 11,374,961: METHODS FOR VERIFICATION OF SOFTWARE OBJECT AUTHENTICITY AND INTEGRITY and the Software Assurance Guardian™ (SAG ™) Point Man™ (SAG-PM™) software...

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  • Nov 9, 2020

In 2019 the Brattle Group prepared a report for NRG describing a forward clean energy market design with a goal to reduce carbon emissions. The "Forward Clean Energy Market" (FCEM) is described in a report titled "How States, Cities, and Customers Can Harness Competitive Markets to Meet Ambitious Carbon Goals THROUGH A FORWARD MARKET FOR CLEAN ENERGY ATTRIBUTES EXPANDED REPORT INCLUDING A DETAILED MARKET DESIGN PROPOSAL"

This posting contains my analysis and some questions/comments about the FCEM concept.

  • Funded by NRG
  • Proposes a market that trades in clean energy attribute credits (CEAC) futures.
  • A CEAC is the same as a REC (page 12):
    • “the clean attribute product would be similar to unbundled renewable energy credits (RECs) that are used to track renewable energy generation today. A REC represents the clean attribute of energy generation, and unbundled RECs are often sold separately from the original electricity production that generated it. Each REC is tied to a specific delivery year when it is generated. The CEAC product procured in the FCEM would have these same characteristics.”
    • CEAC's and REC's are very different animals: REC's represent actual clean energy that has been produced where CEAC's represent a "promise to produce clean energy at some future date". A REC is like having a $100 bill in your pocket now, a CEAC is like having an IOU for $100 in 2024. I'll take the $100 bill now, thank you. 
  • the FCEM can be viewed as a natural successor to existing REC markets
    • Does this suggest that existing REC programs, i.e. RPS, will be replaced by FCEM?
    • REC's are monetized through an auction process that requires certain entities to buy REC's in order to offset carbon emissions. How will CEAC's be monetized? They do not represent actual emission reductions - they represent future obligations to reduce emissions, which may or may not actually occur, due to market conditions. Will Green Buyers forego their PPA deals in place of CEAC's? I doubt it.
  • generators who own or are developing resources that produce carbon-free electricity would offer to sell CEACs in the delivery year at a price they choose (page 13)
  • The forward auction would set the quantity and price of the CEACs procured for the given delivery year (page 13)
  • By procuring carbon-free energy for a future year, the new market would incentivize investment in non-emitting resources (page 13)
  • I believe a Clean Energy Standard, as documented by E3, would be a much more effective incentive to investment in non-emitting resources.
  • It would provide renewable developers access to a predictable source of revenues, including multi-year commitments for new resources that help to mitigate investor risk and reduce financing costs (page 13)
  • Each State can set their own CEAC targets to meet energy goals over time, e.g. suppose MA sets a goal of 20% renewables in 2020 equaling 2000 CEAC’s then a 2030 goal of 40% renewables equals 4000 CEAC’s in the market
  • Each state or individual buyer would submit its demand for clean energy and the maximum willingness to pay for a specific quantity of CEACs (page 14)
  • It's unclear how a buyer of CEAC's would monetize their CEAC's in the future. There are also no guarantees that the funds from CEAC sales will be invested in non-emitting resources. 
  • The demand from each state and individual buyer would be summed into an aggregate market-wide market demand curve, representing to total quantity of CEACs desired by the market at each price (page 14)
  • Buyers could also use more complex demand curves to represent their willingness to purchase CEACs as a function of price. This would allow them to represent higher willingness to purchase CEACs at low market prices if desired (page 14)
  • A forward auction, which occurs three years in advance of the delivery period (page 15)
    • this 3 year look ahead for CEACs is subjected to significant uncertainty which could result in significant excess capacity or worse, shortfalls in capacity
  • Sellers whose resources are also valuable for providing energy, capacity, or ancillary services could offer at low prices into the FCEM because the large majority of the resource’s costs will already be paid for by revenues from other wholesale electricity markets (page 15)
    • This statement seems to indicate that the existing FCM will continue to operate, as is, which will supply revenues to each resource, enabling them to lower their CEAC prices. These additional supply resources in FCM would lower capacity clearing prices for all generators as more renewables join the auction and compete for capacity payments, resulting in excess capacity being acquired and the capacity payment being reduced accordingly for all generators. This exacerbates the problem we have today where generators aren’t compensated enough to commit to being available, through the FCM process.
    • This assumptions also does not consider the problems plaguing both Capacity and Energy Markets today, due to an over abundance of electric generating supply on the system.
  • On the demand side, states with mandatory targets for meeting clean electricity goals would make up the majority of bidders. For bids won by state entities, the costs and associated CEACs would be passed through to the retail providers within that state. Other participants including private companies, municipal utilities, electric cooperatives, and retail providers could submit voluntary bids to procure additional clean energy. (page 15)
    • This seems to suggest that States will compete for CEAC’s against each other and with other buyers, like Google.
  • Page 16 shows a sample clearing result in the FCEM
  • While this proposed FCEM will be similar to existing REC markets as described above, it would also have several important features that will allow it to cost-effectively achieve far more carbon reductions at lower costs than traditional REC markets: (page 16)
    • Technology-Neutral Participation (same as AOCE)
    • Mechanisms to Support Price Stability, suggests implementing a “ a spot auction conducted right before the compliance deadline would mitigate the boom or bust pricing tendencies of existing REC markets
    • Capability to Support Financing of New Clean Energy Resources: “several design elements would support financing for new resources better than existing RECs, including a multi-year commitment for new resources and a forward auction to support financing of resources with longer development timeframes.
  • One potential drawback of the market as presented here is its focus on incentivizing non-emitting resources while admittedly not providing incentives for lowering the emissions through fuel switching from coal to gas generation as carbon pricing could. (page 17)
  • A Clean Energy Standard is far superior at incentivizing investment in non-emitting resources to reduce GHG emissions. 
  • the proposal outlined in this paper could be implemented relatively quickly as a much-needed complement to the existing electricity markets (energy, ancillary services, and capacity). The initiative to create this market could be taken by a single state, a group of states, a group of clean energy buyers, or an RTO. (page 17)
    • Does not address existing FCM issues that are impacting/crushing generator payments. Seems to exacerbate the issue by allowing resources with CEAC revenues to compete in FCM. Need clarification to confirm this is the case.
  • state utility commissions or environmental agencies would develop state demand bids, in alignment with the commitments to achieve carbon abatement and maintain market sustainability. Large companies, cities, public power, retail providers, and other interested parties could also develop and submit voluntary demand bids (page 18)
    • This seems to reaffirm the earlier statement that States are competing against each other and with other buyers, i.e. Google, in the FCEM

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