K Greenhouse Gas Allowance Price Calculation, Cost-Based Bid Calculations, and Examples

K Greenhouse Gas Allowance Price Calculation, Cost-Based Bid Calculations, and Examples

K.1 Background

Starting in 2013 some of California’s thermal generating resources have beenare subject to a greenhouse gas (GHG) allowance cap-and-trade system run under the authority of the California Air Resources Board. As such they bear per-MWh and per-startup costs associated with the purchase of GHG allowances compliance instruments [PG&E Comment: they can purchase offset credits as well as allowances] needed for to cover the GHG emissions associated with their energy output. The CAISO is including those costs in the cost-based calculations for minimum load and start-up costs, as well as default energy bids and generated bids.

This attachment contains:

1. The methodology used to calculate the daily index price used in certain cost-based bid components.
2. The methodology used to calculate the GHG component of start-up and minimum load costs, variable cost-based default energy bids, and generated bids
3. Sample calculations.

K.2 Greenhouse Gas Allowance Price

Resources subject to compliance with the California Air Resources Board (CARB) greenhouse gas cap-and-trade regulations are responsible for submitting allowances compliance instruments for equal to their GHG emissions. CARB distributes these allowances through quarterly auctions and annual allocations to entities for future consignment, and also directly allocates them to certain entities. CARB designates each allowance with a “vintage,” which is the calendar year the allowance is associated with. Compliance instruments from one compliance period can be held for sale or surrender in a future compliance period. A given vintage allowance can be used for compliance in the vintage year or a later year.

California Greenhouse Gas Allowances are currently traded as futures products on commodity exchanges such as ICE. There is the potential for development of spot market products or forward contracts generally traded to trade bilaterally in the over the counter market as spot market products or as forward contracts. There is also the potential for futures products to be developed by commodities exchanges.

[PG&E Comment: California GHG Allowances are currently traded as futures products on commodity exchanges (i.e., ICE). There is a potential for the development of spot market products in the over the counter market.]

Index prices representing the average trading price on for a given day are published by commercial providers after the close of trading on that day, and represent executed trades within the previous 24-hour period [PG&E Comment: Please define “given day” and “close of trading” and clarify if index prices are based on executed trades within a 24-hour period]. The CAISO or an independent entity selected by the CAISO shall procure these prices from up to three separate publications. The index price used by the CAISO for calculations, known as the Greenhouse Gas Allowance Price, shall be the average of values sourced from at least two providers.

The industry sources for greenhouse gas allowance trade prices have been identified as:

• Intercontinental Exchange (ICE) Index (index currently available in ICE’s End of Day Report)
• Platt’s Daily (not currently available)
• ARGUS Air Daily(market price assessment currently available with subscription to Argus Air Daily)

[PG&E Comment: Please see attachment for a summary on currently available GHG price sources.]

Based on the availability and timing of data from providers and the need to ensure accuracy, reliability and consistency the following principles have been established:

 The Greenhouse Gas Allowance Price should be a one-day index, not a multi-day index. This allows for a more accurate index.

 The ISO uses prices for the current year vintage greenhouse gas allowances.

 If the price index lists greenhouse gas allowance prices based on futures or forwards prices, the ISO uses the price corresponding to a December delivery date, unless at a future time the ISO determines that sooner the soonest expiring futures or forwards contracts are more representative of market fundamentals.

[PG&E Comment: CAISO should not use the price corresponding to the soonest expiring futures, as these are unlikely to be the most liquid product due to the nature of annual compliance dates. In other emission markets, the December contract has been the delivery date of choice; early indications are that it is the same in this market. CCA’s with different delivery dates should be treated as different products since they have different risk profiles and they offer different market values depending on the current compliance year/period.]

 If the price index lists a range of prices, then the ISO uses the volume-weighted average price if available, alternatively, it uses the simple average price.

 At no stage will the number of source prices used fall below two. Should fewer than two current source prices be available the most recent Greenhouse Gas Allowance Price based on two or more source prices will be used.

 A prior Greenhouse Gas Allowance Price will also be used whenever a current Greenhouse Gas Allowance Price is unavailable for any reason.

 The ISO will calculate the daily greenhouse gas allowance price using a different method if the ISO determines that a greenhouse gas allowance price calculated in accordance with the methodology above does not reflect market fundamentals [PG&E Comment: CAISO should clarify what metrics it will use to determine if a greenhouse gas allowance price does not reflect “market fundamentals”]. An example of this would be a lack of liquidity in the market for greenhouse gas allowances or excessive short-term volatility in their prices. If this occurs, the ISO will calculate the daily greenhouse gas allowance price as follows:

1. It will use the greenhouse gas allowance price as calculated above from the most recent day the ISO determines to reflect market fundamentals.
2. If the ISO determines that no price calculated in accordance with 1, above reflects market fundamentals, then it will establish the greenhouse gas allowance price at the market clearing price of the most recent California Air Resources Board greenhouse gas allowance auction.

 The Greenhouse Gas Allowance Price will be posted between 19:00 and 22:00 based on source prices representing trades occurring over the 24-hour period ending previously that day for the current year. In OASIS the price will be associated with the following day’s trading day. For example, the Greenhouse Gas Allowance Price for Trading Day (TD) January 23, 2013, will be based on source prices which are based on trades that occurred on January 21 to January 22.

[PG&E Comment: According to ICE’s current methodology, the price index is based on trades executed from 2:31 pm E.T. of the previous trading day to 2:30 pm E.T. of the current trading day. CAISO’s GHG Price would not be based on trades occurring only in the trading days but also trades that happened after 2:31pm of the previous day.]

 Due to the publishing timing, the Greenhouse Gas Allowance Price associated with TD-1 will be used for the Day-Ahead market for any given TD. The Greenhouse Gas Allowance Price associated with TD will be used for the Real-Time market for any given TD. For example, for Real-Time markets running on January 23, 2013, the Greenhouse Gas Allowance Price used can be downloaded from OASIS by selecting the date January 23, 2013. That price in OASIS will have been published between 19:00 and 22:00 on January 22.

K.3 Cost-Based Bid Calculations

The following calculations apply to gas-fired resources. For non-gas-fired resources, GHG related costs should be incorporated in the overall start-up, minimum load, and energy costs submitted to the CAISO via the Master File.

K.3.1 Start-Up Costs

The cost of the greenhouse gas allowances shall be incorporated into the start-up costs as follows:

1. Calculate the greenhouse gas allowance start-up cost (one curve per resource, up to three segments) as a cost per start-up:

CO2e emissions per start-up (mtCO2e/start-up) * 1 (allowance/mtCO2e) * Greenhouse Gas Allowance Price ($/start-up)

Where:

CO2e emissions per start-up (mtCO2e/start-up) = unit’s start-up fuel requirement (mmBTU/start-up) * CO2e emission rate (mtCO2e/mmBTU).

Both the start-up fuel requirement and the CO2e emission rate is submitted by the SC in the Master File. The CO2e emission rate must be authorized by derived from the unit’s most recent verified emissions report submitted to and accepted by the California Air Resources Board. If a verified emission report is unavailable, the default emission rate for the fuel burned as accepted by the California Air Resources Board may be used. [PG&E Comment: CAISO should specify how this will be done – PG&E recommends dividing the unit’s total emissions in CO2e by the cumulative annual heat input for the unit in MMBtu to derive the CO2e emission rate]

2. Add this incremental cost to start-up costs calculated using the Proxy Cost Option. For the Registered Cost Option, GHG allowance compliance costs are factored into the maximum Start-Up Costs using the same methodology. However a monthly projected price is used as specified in Appendix Attachment G.

K.3.2 Minimum Load Costs

The cost of the greenhouse gas allowances shall be incorporated into the Minimum Load Costs as follows:

1. Calculate the greenhouse gas allowance Minimum Load Cost (one value per resource) as a cost per MWh:

Average CO2e emissions at minimum load (mtCO2e/MWh) * 1 (allowance/mtCO2e) * Greenhouse Gas Allowance Price ($/start-up)

Where:

Average CO2e emissions at minimum load (mtCO2/MWh) = unit’s average heat rate at minimum load (mmBTU/MWh) * CO2e emission rate (mtCO2e/mmBTU).

Both the average heat rate and CO2e emission rate is submitted by the SC in the Master File. The CO2e emission rate must be authorized by the California Air Resources Board.

2. Multiply this cost by the resource Pmin to obtain a cost in $/hr,

3. Add this incremental cost to Minimum Load Costs calculated using the Proxy Cost Option. For the Registered Cost Option, GHG allowance compliance costs are factored into the maximum Minimum Load Costs using the same methodology. However a monthly projected price is used as specified in Appendix Attachment G.

K.3.2 Default Energy Bids and Generated Bids

The cost of the greenhouse gas allowances shall be incorporated into the incremental energy costs as follows:

1. Calculate the greenhouse gas allowance incremental energy cost (one curve per resource, up to ten segments) as a cost per MWh:

Incremental CO2e emissions (mtCO2e/MWh) * 1 (allowance/mtCO2e) * Greenhouse Gas Allowance Price ($/start-up)

Where:

Incremental CO2e emissions (mtCO2e/MWh) = unit’s incremental heat rate (mmBTU/MWh) * CO2e emission rate (mtCO2e/mmBTU).

The incremental heat rate is calculated from average heat rates submitted by the SC in the Master File, similar to the way the incremental heat rate is calculated in preparation of Default Energy Bids. See Appendix Attachment D for details on this calculation.

The CO2e emission rate is submitted by the SC in the Master File. The CO2e emission rate must be derived from the unit’s most recent verified emissions report submitted to and accepted byauthorized by the California Air Resources Board. If a verified emission report is unavailable, the default emission rate for the fuel burned as accepted by the California Air Resources Board may be used.

2. The resulting curve is subject to monotonicity (left-to-right) adjustments similar to those used in calculation of Default Energy Bids. See Appendix Attachment D for details on this adjustment.

3. Add this incremental curve to generated bid cures and Default Energy Bids calculated using the Variable Cost Option.

K.4 Examples

K.3.1 Start-Up Costs