Four Facts about Electricity Costs & RGGI in Pennsylvania

Opponents of the Pennsylvania DEP's proposed CO2 Budget Trading Program, which would enable the Commonwealth to participate in the Regional Greenhouse Gas Initiative, are mounting a disinformation campaign about the program's impact on electricity bills. This blog provides facts and data on this important issue, expanding on an earlier blog I wrote on the topic.

It's a longish read, with a lot of details and numbers, but there are two main take-aways. First, the cost of RGGI carbon allowances, which emitting power plants in Pennsylvania will buy to account for their pollution, will be a tiny part of Pennsylvanians' electric bills—a fraction of a fraction of a fraction. Second, the same people who claim to care about RGGI's impact on your electricity bills have no problem supporting billions of dollars in subsidies for fossil fuel plants.

Fact # 1: The electricity bills of Pennsylvania households are divided between wholesale generation and transmission costs and distribution system costs, with each making up roughly half of the average residential bill.

Electric utilities in Pennsylvania used to own power plants as well as electricity distribution systems. Then, in 1996, Pennsylvania enacted a law, the Electricity Generation Customer Choice and Competition Act, that forced utilities to spin off their power plants to competitive generation companies. The utilities became "electric distribution companies” (EDCs) whose business is to build and operate the poles, wires, and other infrastructure that bring electricity to your home. The now-separate business of generating and transmitting electricity became a competitive enterprise, with power plants competing to sell electricity as a commodity at lowest cost on the wholesale markets designed by the PJM Interconnection.

Due to the changes made by the Competition Act, electricity bills in Pennsylvania today include two main types of charges: (1) wholesale electricity generation and transmission charges (“transmission” here refers to the high-voltage lines that carry electricity from power plants to EDC systems) and (2) charges for EDC distribution systems.

Each year the Pennsylvania Public Utility Commission, which regulates EDCs in the Commonwealth, publishes a report that breaks down the components of each EDC’s bill and compares bills across EDCs. The latest report, covering 2020, shows that while there is considerable variation among EDCs, residential customers’ electricity bills are roughly half wholesale generation and transmission costs and half distribution system costs. Here is the PUC’s breakdown for a residential customer that uses 500 kilowatt-hours (kWh) per month:

And here’s the breakdown for a customer that uses 2,000 kWh per month:

According to U.S. Energy Information Administration data, the average Pennsylvania household used 837 kWh per month in 2019. Since 837 is closer to 500 than to 2,000, the breakdown in the 500 kWh table is likely more representative of how the average Pennsylvania household’s bill is divided between wholesale generation and transmission charges and distribution charges. The PUC’s rate report shows that for a residential customer using 500 kWh per month, wholesale generation and transmission charges generally constitute less than one-half of the bill and average 44.5 percent across the EDCs.

Fact #2: When Pennsylvania participates in RGGI, the cost of CO₂ allowances will be a small fraction of wholesale electricity costs and a very small fraction of Pennsylvanians’ electricity bills.

Both distribution system charges and wholesale generation and transmission charges are influenced by a wide variety of factors.

For example, distribution charges depend significantly on the cost of materials and labor because they recover (among other things), the cost of building and maintaining utility infrastructure. They depend on the extent to which charges are collected through a fixed monthly fee known as the “customer charge,” as opposed to cents-per-kilowatt-hour rates. And, most of all, distribution charges depend on what types of investments the PUC allows EDCs to recover from customers. (The PUC regulates all EDC decisions and investments that determine distribution charges).

When Pennsylvania participates in RGGI, the cost of carbon allowances purchased by CO₂-emitting power plants will have no effect on EDC distribution rates. They will, however, have a small effect on wholesale electricity costs. Understanding that effect requires an understanding of the many factors that go into wholesale costs.

Every year, PJM’s Market Monitor—whose job is to analyze the performance of PJM’s electricity markets and assess whether they are competitive—publishes a “State of the Market” report that “decomposes” both total wholesale electricity prices (broken down among PJM’s energy, capacity, ancillary services, and transmission markets) and prices on PJM’s energy markets. In the energy markets, PJM calls power plants online according to their operating costs, with the lowest-cost plants called first. Plants that need to buy CO₂ allowances to account for their pollution have to include allowance costs in their market “bids.” The resulting prices are called “locational marginal prices,” or LMPs, because they vary by location across the multi-state PJM region.

Here is the Market Monitor’s breakdown of prices in PJM's day-ahead energy market (PJM also has a smaller "real time" energy market) during the first nine months of 2020 and 2021:

And here is the Market Monitor’s breakdown of the average total wholesale electricity price in PJM during the same nine months (in this table energy market costs are described as "load weighted energy"):

The tables show that in 2020, the cost of RGGI allowances sold for compliance in Maryland, Delaware, and New Jersey—the three PJM states then in RGGI—was 0.9 percent of locational marginal price, while LMP was 48.6 percent of total wholesale costs. In 2021, the cost of RGGI allowances for those three states and Virginia (which started participating in RGGI in 2021) was 2.0 percent) and LMP was 59.4 percent of total wholesale costs.

A review of Market Monitor reports over the last decade shows that RGGI allowance costs’ two percent contribution to LMP in 2021 was an historical high, driven both by the fact that four PJM states were participating in RGGI and that allowances sold at record-high amounts, averaging $9.61 per ton of CO₂  at auction. In all other years over the past decade, the percentage of energy prices composed of RGGI allowances has been considerably lower, as data from previous Market Monitor reports shows.

Cost of RGGI Allowances as Share of PJM Day-Ahead Energy Market Prices, 2011-2021, per Market Monitor's State of the Market Reports

When Pennsylvania starts participating in RGGI, the size of RGGI’s allowance market will nearly double. Assuming that the percentage of LMP made up of CO₂ allowance costs also doubles, RGGI allowance prices could rise to about 4 percent of LMP. (The percentage will probably be lower because with the supply of allowances almost doubling, the price of allowances should drop considerably from 2021 levels. And it's almost certain not to be higher because  RGGI has a “cost containment reserve” designed to keep prices from rising above a certain level—$13.91 in 2022). Then, if LMP continues to be around 60 percent of total wholesale costs and wholesale costs remain around 50 percent of total electricity bills, the cost of RGGI allowances is likely to account for between 1 and 2 percent of Pennsylvanians’ bills.

This result is consistent with modeling performed by the Pennsylvania Department of Environmental Protection (see slide 16 of the linked DEP powerpoint), which found that without the investment of RGGI proceeds into energy efficiency and other bill-savings measures, RGGI would raise total wholesale prices between 1.73 percent and 3.96 percent between 2022 and 2030, with smaller percentage increases to customers’ bills.

In other words, RGGI allowance costs are a very small portion of electricity bills. Other factors, such as the cost of gas, are much more significant. For purposes of comparison, the table below shows how much the gas costs contributed to LMP over the same 10-year period. It is much more—between 11 and 113 times higher, depending on the year—than the contribution of RGGI allowances, which means that volatility in gas prices has a much greater impact on customers’ bills.

Cost of Gas as Share of PJM Day-Ahead Energy Market Prices, 2011-2021, per Market Monitor's State of the Market Reports

Fact #3: Because RGGI allowance costs will be a very small part of wholesale electricity rates in Pennsylvania, investing RGGI auction proceeds in energy efficiency can lower Pennsylvanians’ electricity bills even if rates increase.

Although a small part of your bill, the “customer charge,” is the same every month, for the most part your bill is determined by cents-per-kilowatt-hour rates. As a result, the more electricity you use, the more you pay. It follows that if you reduce your consumption through energy efficiency measures like better insulation and more efficient appliances, you can lower your bill. What’s more, the combined effect of efficiency measures across all households and businesses is to lower total regional demand for electricity (wholesale rates rise as electricity demand rises) and reduce the need for costly investments in transmission and distribution infrastructure that customers would otherwise pay for on their bills.   

Because efficiency reduces both energy costs and pollution, the RGGI states have invested most of their allowance proceeds into efficiency programs, to date: 54 percent as of 2019. And those investments have enabled the RGGI states to lower customers’ bills even as RGGI allowance costs have been factored into wholesale markets.

Again, the numbers tell the story. According to the annual investment reports issued by RGGI, Inc., the total expected lifetime energy bill savings from RGGI investments through 2019 is more than $13,462,910,994. (The term “lifetime savings” refers to savings achieved during the useful life of an efficiency upgrade; e.g., a new, high-efficiency HVAC system will save money every year it’s used, not just the year it’s installed). By comparison, through 2019 the RGGI states had invested $2,795,539,789 in RGGI allowance proceeds. So for every $1 that carbon-emitting power plants paid for allowances, electricity customers in the current RGGI states will save more than $4 on their bills.

In its most recent independent economic evaluation of RGGI (covering 2015-17), the Analysis Group summarized this dynamic as follows:

[T]he inclusion of the cost of CO2 allowances in wholesale prices tends to increase wholesale electricity prices.... But these near-term impacts are more than offset ... because the states invest a substantial amount of the RGGI auction proceeds on [energy efficiency (EE)] programs that reduce overall electricity consumption and on [renewable energy (RE)] projects that reduce the use of higher-priced power plants. Consumers gain because their overall electricity bills go down. Since RGGI’s commencement in 2009, energy and dollar savings resulting from all states’ investments in EE and RE has more than offset the wholesale market price increases associated with inclusion of allowance costs in market bids.

By targeting these investments in efficiency to the communities and households that most need them, such as low-income households, which tend to spend a larger portion of their  income on energy costs, RGGI investments can have further energy affordability and equity benefits. Virginia, the newest RGGI state, is leading in this area, putting 50 percent of its allowance proceeds into low-income efficiency. Pennsylvania should likewise build its investment plan around low-income efficiency, ideally in conjunction with the passage of Senator Nikil Saval’s “Whole Home Repair Fund” legislation.

Fact #4: Many Pennsylvania legislators who claim to be concerned about RGGI's impact on electricity costs seem happy to support policies that raise Pennsylvanians’ bills—when those policies benefit fossil fuel interests.

Curiously, the Pennsylvania legislators who are most in the habit of making false and distorted claims about RGGI have another bad habit: pushing for wasteful policies that subsidize polluting fossil fuels and add hundreds of millions of dollars to customers’ bill. 

Take, for example, RGGI opponents’ support for PJM’s 2019 Minimum Offer Price Rule, or “MOPR," on display at a Senate Environmental Resources and Energy Committee hearing last fall. The 2019 MOPR would have required customers throughout PJM to pay extra money into PJM’s capacity market to the benefit of fossil fuel power plants. In 2021, PJM wisely replaced the MOPR with a less costly, more clean-energy-friendly alternative and the Federal Energy Regulatory Commission approved the replacement—but not before the state Senate held a hearing to criticize PJM's move. Now the Pennsylvania PUC is opposing the replacement rule in a federal lawsuit—a perverse position, given the PUC's duty to ensure "just and reasonable" electricity rates for Pennsylvanians.

An even better example is Act 114 of 2020, a set of changes to Pennsylvania's Fiscal Code into which Republican leaders slipped the text of Senate Bill 1305 of 2019-20. That language amends the state Alternative Energy Portfolio Standard (AEPS) to require EDCs to purchase Tier II credits—which mostly benefit waste coal plants—from power plants within Pennsylvania. 

Every year, EDCs are required to buy more than 14 million Tier II credits. Before 2020, Tier II credits could be purchased from any state in the PJM region and the average cost of credits purchased by EDCs never exceeded $1.00. The cost of Tier II compliance was always less than $10 million per year. After the enactment of Act 114, though, the prices of Tier II credits skyrocketed. During year 2020-21 EDCs paid an average of $5.76 per Tier II credit, and since April, 2021 Tier II credits have been consistently trading at more than $13, and for as high as $18.56!

Due to the higher credit prices, Pennsylvanians will pay hundreds of millions of dollars more for AEPS compliance—all for the benefit of Tier II AEPS resources, which are mostly waste-coal-fired power plants. (Renewables are in Tier I of the AEPS). This is not an unintended consequence. As the chief sponsor of SB 1305 noted, raising Tier II prices to provide more money to waste-coal plants was the point of the legislation. Did legislators understand that it would cost as much as it will- (and already has)? That's unclear. They never held a hearing on it.

What would state legislators be doing if they really cared about electricity costs?

In response to the DEP's proposed RGGI regulation, the Republican majorities in the General Assembly have done exactly one thing apart from moving bills and resolutions to block the proposal: Senate Republicans have refused to confirm any of Governor Wolf's nominees to the Public Utility Commission, the state agency whose job it is to ensure that Pennsylvanians have "just and reasonable" utility distribution system rates. As a result, the five-seat PUC is now down to three commissioners. 

That's a strange way of showing concern for constituents' electricity bills. 

"Let them eat cake," Marie Antoinette infamously (if apocryphally) said on hearing her starving subjects lacked bread. Today, the attitude of many Pennsylvania legislators regarding both energy affordability and the climate crisis seems to be "let them eat gas," even though overdependence on gas is as problematic for energy costs as it is for the climate. The General Assembly should ring in 2022 by embracing RGGI and turning its attention to how RGGI proceeds can be invested (including in energy efficiency for low-income Pennsylvanians) to maximize health and economic benefits for the Commonwealth's environmental justice communities and communities transitioning from economic dependence on fossil fuels. Holding hearings on the RGGI Investments Act would be a good start.