Zero Emissions Credits Upheld

Author: Keith Martin Publication | August 2017

State plans to award “zero emissions credits” to nuclear power plants were upheld in two widely watched lawsuits in New York and Illinois.

The credits — called ZECs — have some features in common with renewable energy credits offered under state renewable portfolio standards.

Five independent generators, the Electric Power Supply Association and the Coalition for Competitive Electricity tried to block New York from awarding zero emissions credits worth $17.48 a megawatt hour in 2017 and 2018 to owners of nuclear power plants in the state. The value of the credits will be reset after 2018. The program is expected to run 12 years.

A US district court upheld the plan in late July.

The case was a test of whether a state can offer such credits as a supplement to wholesale power prices without running afoul of federal law. Only the Federal Energy Regulatory Commission can set wholesale power rates for electricity sold in interstate markets. States retain the right to regulate retail sales of electricity within their borders.

At least three of the six nuclear plants in New York are expected to receive the credits. The credits were approved by the New York Public Service Commission in August 2016 in an effort to keep the plants open. Nuclear power accounts for roughly 31% of total New York generating capacity. The state says the nuclear plants are important to limiting carbon emissions.

The nuclear plant owners will sell the credits to the New York Research and Energy Development Authority, NYSERDA, at the price established by the New York Public Service Commission. NYSERDA then will resell them to New York utilities on a pro rata basis in proportion to each utility’s share of total New York electricity load.

Low natural gas prices are forcing nuclear power plants in parts of the country with competitive power markets to shut down.

The credits represent a significant subsidy on top of what the nuclear plants are being paid currently for their electricity. The generators, who compete with the nuclear plants for a share of wholesale power sales, argued that the program is illegal state interference with the wholesale power market because it will artificially depress wholesale power prices by keeping generators in business who would otherwise have dropped out of the market.

The US district court disagreed. It said the credits will not directly affect wholesale power prices. It would view the plan differently, it said, if the plan required nuclear generators to bid into a capacity auction and then the credits supplemented whatever market-clearing price the generators were awarded by auction but, since it does not, any effect on wholesale power prices is “incidental.” The court said the ultimate failing of the generators was their inability to show a difference between ZECS and RECs awarded to renewable energy generators. It said FERC has not seemed troubled by the use of RECs by states to promote renewable energy.

The generators also argued that ZECs are an impermissible interference with interstate commerce; they are an effort to “save jobs at subsidized generators . . . to preserve the local industry from the rigors of interstate competition.” The “dormant” commerce clause to the US constitution bars state actions that discriminate against or unduly burden interstate commerce.

The district court said the generators failed to allege discrimination against interstate commerce. It said their complaint is with the type of generation being favored.

The case is Coalition for Competitive Electricity v. New York Public Service Commission.

An environmental group filed a separate suit last November 30 to block the credits in state court. It charges the program violates the state constitution. The case in state court is Hudson River Sloop Clearwater v. New York Public Service Commission.

Meanwhile, a US district court in Illinois upheld a similar program in that state in mid-July, just 11 days before the New York decision. Illinois is expected  to award roughly $235 million a year in ZECs to Exelon to help keep open two nuclear power plants in Illinois for another 10 years.

The utility has two large nuclear power plants in the state with a combined capacity of about 3,000 megawatts. ZECs will be awarded under the Illinois program to any power company that is capable of generating zero emissions electricity equal to about 16% of what the state retail load was in 2014. Illinois utilities must enter into 10-year contracts to buy the ZECs from facilities that are awarded the credits at the “social cost of carbon,” reduced potentially by a price adjustment to the extent the price exceeds a baseline market price index. The social cost of carbon will be set by an interagency committee.

The US district court in Illinois used similar reasoning as the court in New York to reject complaints about the program.          

It said the Illinois program does not usurp federal authority to regulate wholesale power prices because the credits are awarded to nuclear generators merely for generating electricity and are “not directly conditioned on clearing wholesale auctions” and, therefore, they do not “alter the amount of money that is exchanged for wholesale electricity.” It rejected the argument that the program interferes with interstate commerce. The program does not prevent out-of-state generators from submitting bids, the court said, and it would not assume that state agencies charged with awarding ZECs will discriminate, but even if the credits end up going entirely to Illinois nuclear plants, there could be legitimate reasons for favoring such plants, such as they are more likely to reduce pollution in Illinois.

The Illinois decision has already been appealed. The appeals court agreed in late July to an accelerated briefing schedule, which could lead to a decision by year end.

The district court issued a single opinion to decide two lawsuits: one called Village Old Mill Creek, v. Star brought by a group of Illinois electricity customers and the other called Electric Power Supply Association v. Star brought by the generator group.

Meanwhile, a bill to award ZECs to nuclear plant owners in Ohio has stalled in the state legislature at least until autumn. The bill would award ZECs worth $17 a megawatt hour for the first 16 years of the program to FirstEnergy, which has two nuclear power plants in the state. FirstEnergy announced plans last February to close or sell the plants by the middle of next year.

Connecticut Governor Daniel Maloy ordered two state agencies in late July to investigate and report back by February 2018 whether Connecticut should provide some form of financial support, such as zero emissions credits, to keep a 2,100-megawatt nuclear plant near Waterford operating. Dominion, which owns the plant, said a decision in 2018 will come too late to keep the plant open.


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Keith  Martin

Keith Martin

Washington, DC