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October 28th, 2014

RGGI Revitalized

by Andrew Price, President & COO

The Regional Greenhouse Gas Initiative (RGGI) has been injected with new life by reforms implemented in 2014. The CO2 cap was reduced 45%, from 145 million short tons to 91 million short tons. With fewer credits available for sale, the price is up 250% to about $5 per short ton in both the June and September 2014 auctions. Higher prices have also attracted traders and other non-compliance entities. Unregulated third parties purchased more than 50% of the available credits in some recent auctions.

RGGI, the CO2 cap and trade program, launched 6 years ago, was designed to regulate emissions from northeast electric power generators greater than 25 MW. (See my prior blog on RGGI here.) The RGGI program suffered, however, from a chronic oversupply of credits. The allowable number of credits was set just prior to the 2008 financial crises at emissions levels that reflected the robust economic times. The subsequent recession resulted in actual emissions falling well below the established cap. In auctions held during 2010, 2011 and 2012, the total number of credits sold was routinely far lower than the total number of credits offered for sale. This oversupply relegated the price of RGGIs to a regulatory floor price of about $2 per short ton.

The resurgence in prices has been attracting buyers from non-compliance entities. Only regulated electricity generators located in the 9 participating states are required to purchase RGGI credits. In some recent auctions, however, more than 50% of the available credits have been purchased by third parties, including investors and emissions brokers. The percentage of credits purchased by regulated generators has ranged from a low of 43% (December 2013 auction) to a high of 100% (September and December 2012 auctions). The average over all 25 auctions to-date is 78%.

The 2014 RGGI program redesign anticipated the possibility of rapid price increases and included provisions to mitigate their magnitude. A Cost Containment Reserve (CCR) was established that makes a limited number of additional credits available each year if certain price thresholds are exceeded. The March 2014 RGGI auction, of more than 18 million credits, triggered the $4 per short ton CCR threshold and resulted in the automatic release of an extra 5 million RGGI credits. The entire CCR reserve established for 2014 of 5 million RGGIs was sold at the regulated $4 per short ton price, leaving none to mitigate the price in the three remaining 2014 auctions. Indeed, the June and September auctions this year settled at $5.08 and $4.88 per short ton, respectively, about $1/short ton above the CCR circuit breaker. 

The CCR price is set at $6 per short ton for 2015, $8 per short ton for 2016 and $10 per short ton in 2017. Beyond 2017 the CCR price will increase at 2.5% per year. 

Higher RGGI prices look like they are here to stay. What do higher prices mean for the average electricity consumer? Higher RGGI prices translate directly into higher electricity rates in member states. A $5/short ton RGGI cost will increase power prices by about $2/MWh for a natural gas fired power plant and $5/MWh from a coal fired power plant. Natural gas and renewable generators are therefore economically incentivized over coal when planning for new generation requirements. Most states use RGGI auction revenue to fund energy efficiency, renewables, and similar programs. As these programs receive more cash they will need to be expanded to distribute the money to electricity consumers. Taking advantage of these programs becomes increasingly important for consumers to offset the impact of higher electricity prices.  Higher prices may also make RGGI a more attractive partner to other CO2 cap and trade programs. After the merger of the California and Quebec carbon tracking programs, is a union with RGGI (or at least individual RGGI members) possible?

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