United States: States Look To Market Solutions To Support Nuclear Power

Last Updated: February 20 2017
Article by Jeff Smith

On August 1, 2016, the New York Public Service Commission ("PSC") adopted a sweeping energy bill, the Clean Energy Standard Order, with the goals of combating climate change and ensuring a diverse and reliable low-carbon energy supply. One provision implements a nuclear-specific zero-emissions credits ("ZEC") program that is intended to prevent the premature retirement of three of New York's nuclear power plants. Nuclear power plants generate zero carbon emissions. Therefore, the premature retirement of nuclear power plants means the loss of a sizable amount of zero-carbon electricity generating capacity—capacity that would likely be replaced by carbon-emitting gas or coal. For a variety of reasons, recent wholesale electricity auction prices have been inadequate for nuclear generators to cover their marginal operating costs. As such, nuclear plants throughout the country are at risk of imminent retirement. New York is one of the first states to enact legislation intended to preserve the zero-emission attributes of nuclear generation by creating a market-based credit system.

ZEC programs are designed to operate similar to renewable energy credit ("REC") programs, which are a common way for states to promote electricity generation from renewable resources. Like RECs, ZECs represent the environmental attributes of zero-emission nuclear power and are sold separately, or "unbundled," from the electricity itself. Under the New York law, one ZEC represents the environmental attributes of one megawatt hour ("MWh") of electricity produced by a qualifying nuclear facility. In other words, for each MWh of electricity a nuclear plant generates, up to a codified cap, it will earn one ZEC.

In New York, qualifying nuclear facilities are eligible to sell ZECs to the New York State Energy Research and Development Authority ("NYSERDA"). All load servicing entities ("LSEs")—entities that serve end-use electricity customers—within the state are then obligated to purchase their proportional share of ZECs from NYSERDA. The LSE recovers the ZEC costs from ratepayers though commodity charges on customer bills. ZEC pricing is set by the PSC using a formula based on the social cost of carbon. The state intends to utilize the ZEC program to help achieve its goals of reducing carbon emissions while preventing the premature loss of nuclear power's desirable zero-emission attributes.

New York's ZEC program is being challenged in federal court. See Coal. for Competitive Elec. v. Zibelman, No. 1:16-CV-8164 (SDNY filed Oct. 19, 2016) ("Zibelman"). The plaintiffs, who include various electricity generators, claim the ZEC program is preempted by federal law because it intrudes on the Federal Energy Regulatory Commission's exclusive authority over the sale of wholesale electricity. The plaintiffs rely heavily on Hughes v. Talen Energy Mktg., LLC , 136 S.Ct 1288 (2016). In Hughes, the U.S. Supreme Court struck down a Maryland law designed to incentivize construction of new in-state electric generation facilities. The Maryland law required LSEs to enter into a 20-year pricing contract, called a "contract for difference," with a company selected to build a new gas-fired power plant in the state. The contract for differences required the plant owner to sell its capacity into the wholesale market, but if the market clearing price was below the contract price, LSEs were required to pay the difference. In striking down the law, the Supreme Court held that the contract for differences provided a guaranteed rate of return distinct from the wholesale clearing price and thus "invade[d] FERC's regulatory turf." Id. at 1297.

The plaintiffs in Zibelman, citing Hughes, argue that "[t]he ZEC Order invades [FERC's regulatory turf] because it directly affects the wholesale clearing price of electricity sales in the [wholesale electricity] auctions." Complaint at 35, Coal. for Competitive Elec., No. 1:16-CV-8164. The defendants argue that the ZEC program does not suffer from the "fatal defect" that rendered Maryland's program unacceptable because it does not involve payment for sales of electricity into a wholesale auction at prices different than the FERC-approved auction prices. Motion to Dismiss at 19, Coal. for Competitive Elec., No. 1:16-CV-8164.

In Hughes, the Supreme Court distinguished between programs like Maryland's, which operate within the wholesale market, and those that operate outside the auction. The Court emphasized that "[n]othing in [Hughes] should be read to foreclose ... States from encouraging production of new or clean generation through measures 'untethered [from] a generator's wholesale market participation.'" Hughes at 1299. The defendants argue that, like RECs, ZECs are untethered from wholesale market participation and simply provide compensation for the desirable environmental attributes of electricity produced by zero-emission nuclear facilities. Motion to Dismiss at 22, Coal. for Competitive Elec., No. 1:16-CV-8164. The outcome of Zibelman will have an effect beyond New York, as Illinois—which recently passed similar ZEC legislation—and other states look to emulate the ZEC program in an effort to save their nuclear plants from imminent retirement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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