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Carbon In Electricity Markets

Price transparency will drive GHG reductions.

Fortnightly Magazine - August 2009

varying generator performance in order to allow for accommodation of variable and non-disptachable resources.

The broader the geographical reach of the market, the more renewable energy producers’ variable output efficiently can be accommodated. This accommodation is achieved through ancillary services, which are needed to manage the variable nature of wind generation. By broadening the supply of ancillary services, RTOs effectively lower the cost of managing variable resources while maintaining overall grid reliability. This is evidenced by MidAmerican Energy Company’s recent announcement that it intends to integrate fully into the MISO as a transmission-owning member. 16 According to recent reports from the Department of Energy and the National Renewable Energy Laboratory, this can lead to increased value for wind energy operators. 17, 18

The degree to which investors can assemble accurate data to inform an investment decision, and increase the value of their investment through optimizing the output, improves the investor’s ability to make rational risk return trade-offs as renewable energy investments are considered.


Competitive electricity markets will play a vital role in the successful implementation of regional and national CO 2 emission-trading programs. If the intended results of a carbon market are to be achieved, CO 2 prices will need to alter the manner in which the U.S. produces and consumes electricity.

Empirical analysis of the history of coal-plant heat rates and nuclear-generator capacity factors demonstrates how electricity generators react to price signals in order to improve operating profit margins. The expectation of a similar price-signal reaction is at the core of market-based GHG policies. Behavioral changes stemming from accurate and transparent prices—and the financial incentives and disincentives they create—will drive decisions that likely will reduce emissions from existing generation sources. As a corollary, these price signals likely will lead to increased penetration of renewable energy and load-management technologies, which in turn will facilitate a faster transition to a lower-carbon electricity grid.

Regional, federal, and state policymakers designing GHG policies need to consider the inter-dependant nature of carbon markets and electricity markets—and more important, how prices in these two markets are related. Policymakers need to understand that consumers’ and producers’ abilities to increase efficiency and improve utilization of innovative technologies will be enhanced and rewarded in a market-based environment, which will ensure the best opportunity for success in achieving the goal of significant CO 2 reduction nationwide.



1. Massachusetts v. Environmental Protection Agency , 549 U.S. 497 (2007).

2. For example, Order No. 888 prevented transmission owners from discriminating against wholesale sellers of electricity. Order No. 889 set standards of conduct related to a utilities communications between the transmission and wholesale power functions. Order 2000 encouraged the formation of ISOs and RTOs.

3. NCI analysis of Ventyx generating unit data. Capacity owned by unregulated entities in the Ventyx data base have been referred to as “competitive suppliers.” Unregulated entities are defined as entities that do not have a designated franchised service area and that do not file forms listed in the Code of Federal Regulations, Title 18, part 141, which are considered unregulated entities. This includes qualifying CHP, qualifying