Why your electric bill is going up

I have bad news for New Yorkers who are already paying the fifth highest residential electricity prices in the nation—your bill is going up, and it has nothing to do with the utilities. It’s because leaders in Albany decided they want us to pay higher prices for fossil-fueled electricity. That is the purpose of the Regional Greenhouse Gas Initiative (RGGI): to intentionally increase the cost of producing electricity from fossil fuels and thereby make lower-emission generation more competitive.

While a vast majority of New Yorkers are concerned about the cost of living, RGGI, one of the largest policy-driven costs embedded in electric bills, is going up largely hidden from public view. This is because the mechanisms transferring the costs of RGGI to every day New Yorkers are complicated and opaque. Conveniently so for elected leaders who won’t have to explain why Albany continues to shift billions onto their monthly bills.

Comprised of 11 states, including New York, RGGI requires fossil fuel generating units over 25 MW to purchase allowances for their carbon emissions. Those costs are incorporated into electricity prices, while renewable generators benefit from the higher market prices that result. New York recently finalized regulations to align with RGGI’s third program review.

RGGI has evolved from a carbon-reduction program into a hidden energy tax that increases electric bills, funds dozens of government programs with limited public accountability, and disproportionately disadvantages natural gas customers and the utilities that serve them.

New York State Energy Research and Development Authority (NYSERDA) has published that the state will raise $500 million by auctioning carbon allowances. However, the true economic cost to utility customers is in the billions and is obscured by energy markets so complex that it is nearly impossible for the average consumer to see. Some experts have done their best to illustrate this. A  paper by former energy-industry executives demonstrated that consumers ultimately pay substantially more than the amount Albany collects.

The first part of the explanation lies in the difference between what Albany receives for an allowance and the cost that is passed along to consumers

This is because generators do not necessarily include the auction price of an allowance into their electricity offers. Instead, they use the market value of the allowance in the secondary market. This means the cost incorporated into electricity prices reflects the current market value of an allowance, not what the state originally received when it sold that allowance. For example, in the most recent RGGI auction, allowances cost generators $35, even while they were trading at $44 in the secondary market. That secondary-market value can be reflected in generator offers and ultimately passed through wholesale electricity prices.

And that is only the first layer of the cost; the higher secondary-market price of allowances is then magnified by marginal pricing.

As generators bid into the market, those offers are ranked, in order, from the lowest to the highest. The least costly is accepted first until the last generator needed to meet demand is selected. The last offer accepted establishes the marginal clearing price—the price that all selected suppliers will receive.

And it is precisely because the marginal generator is frequently fossil-fueled and that the cost of RGGI allowances raises the bids of marginal generators, that those increased costs are incorporated into the market-clearing prices paid to all generators at a particular time.

So while New York only collects revenues from the allowances fossil generators buy at a RGGI auction, consumers pay the resulting higher market-clearing price across all generation, including renewable sources, dispatched during that interval to meet demand. That is the mechanism by which the cost of the allowances is amplified—by ultimately being included in the clearing price that all generators receive.

The state prominently accounts for the money RGGI raises but has not disclosed to New Yorkers how many billions may be embedded in wholesale electricity prices as a result. In 2023, RGGI’s own analysis estimated that carbon-allowance costs represented nearly 20 percent of New York’s average wholesale electricity price. That calculation was based on an average allowance price of just $13.58. Today, allowances are trading for around $40.

Using the same basic methodology RGGI employed to estimate the 2023 wholesale-price impact, today’s allowance prices suggest that the gross wholesale-market cost associated with RGGI could approach or exceed $3 billion annually. That would be several times the roughly half-billion dollars the state collects in auction proceeds.

The bottom line is we are paying more due to marginal pricing and the allowance prices established in the secondary market. At a time when state leaders routinely cite volatile natural gas prices as a threat to affordability, it is reasonable to ask why New York is adding billions of dollars to wholesale electricity costs—and why those costs receive so little attention.

Justin Wilcox
Executive director, Upstate United

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