Independent System Operators (ISOs) & Carbon Pricing: An Explainer

Independent System Operators (ISOs) & Carbon Pricing: An Explainer is a report by Lucy Davis-Hup, Emerson Johnston, Mridhu Khanna, and Sudhanshu Mathur, all of whom are State Carbon Pricing Network Fellows at Climate XChange.

The next game-changing actor on the carbon pricing stage is one you may not have heard of — Independent System Operators (ISOs).

ISOs are non-governmental, non-profit organizations charged with overseeing the wholesale electricity market. They coordinate real-time electricity flow, ensure fair competition, and facilitate long-term grid investments. Today, seven regionally-based ISOs operate two-thirds of all electricity delivered in the United States, and are tasked with supplying affordable and reliable electricity. ISOs are not alone in shaping electricity markets and operating the electric grid. Federal bodies, state agencies, and other non-governmental groups play a significant role in determining the trajectory of electricity regulations, infrastructure, and operations.

Our current electricity generation model, one based largely on burning fossil fuels, fuels climate change — accounting for 27% of total U.S. emissions. Extreme weather conditions also endanger electric reliability, a core responsibility for ISOs. As a result, ISOs may be critical players in promoting cleaner energy generation and addressing climate change, especially through integrating carbon pricing into their operations. Recent carbon pricing developments at four ISOs — CAISO (California), NYISO (New York), PJM (13 states and D.C.), and ISO-NE (six New England states) — are promising, yet face challenges.

CAISO’s attempts to charge power coming in from out of state the carbon price paid by California utilities, but may not be doing so effectively. The body is a crucial player in the state’s Cap-and-Trade program, helping to guide policy decisions and outcomes through monthly emission reports. That said, it struggles to adequately report on and solve its resource shuffling issue, something that is proving to be the defining feature of the next decade of California’s emission reduction plans. 

NYISO has proposed that they create a wholesale price on carbon equal to the social cost of carbon – which is at least ten times higher than the $5 per ton of CO2 charged under RGGI, which New York is part of. NYISO is paving the way forward for carbon pricing in wholesale energy markets. NYISO has drafted market rules in an effort to advance decarbonization set by RGGI and the State of New York. While emission reduction efforts have been largely led by state governments, NYISO is setting a precedent for wholesale electricity markets to impact decarbonization efforts in a major way. The outcome in New York will set the potential for state governments, ISOs, and federal agencies to align for climate action. 

PJM is currently conducting a decisive study to determine the potential impacts of a carbon price on the region’s electricity markets, with a second phase that will map the regulatory reforms needed to implement a carbon price effectively. PJM has repeatedly stated that it will not be introducing a carbon pricing policy or proposal, but favourable study results may change that. Modelling potential impacts has been complicated, yet modestly promising — whether these results are strong enough to warrant further action is still to be seen.

ISO-NE’s President and CEO, Gordon van Welie, has voiced emphatic support for carbon pricing at a regional level. However, the ISO has not acted decisively so far, suggesting that it would need the support of the six states or the federal government before it introduces a carbon pricing proposal. Carbon pricing discussions are ongoing in the background, including an October 2019 symposium hosted by the MA Attorney General’s Office — ending with an agreement that “Meaningful regional carbon pricing will be necessary, but not sufficient, for decarbonization of the regional power system or economy.”

A changing grid and complex policy conditions will further challenge ISOs as they push for a cleaner electric future. ISOs are likely to become more prominent in the public domain, as different levers to achieve public climate goals are used. Undoubtedly, carbon pricing developments at ISOs signify the emergence of a new, critical policy opportunity to promote pro-climate changes to the nation’s sprawling, influential and high-emitting electric infrastructure.