Zero emissions credits

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Publication October 23, 2018

Zero emissions credits were upheld — again.

State plans to keep nuclear power plants running in New York and Illinois by awarding the power plant owners “zero emissions credits” were upheld by two US appeals courts in September.

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.

The 2nd circuit US court of appeals upheld the plan in late September.

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.

Three of the six nuclear power plants in New York qualify currently for credits. Others may still qualify in the future. 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 29% of total New York generating capacity. The state says the nuclear plants are important to limit carbon emissions.

The nuclear plant owners will sell the credits to the New York Research and Energy Development Authority, NYSERDA, at prices established by the New York Public Service Commission. NYSERDA will then 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 appeals court disagreed. It called the effect on wholesale power prices “incidental.” It had a hard time seeing any difference between renewable energy credits and ZECs. Both reward production from particular sources rather than insert themselves directly in electricity sales.     

FERC has said that states may “grant loans, subsidies or tax credits to particular facilities on environmental or policy grounds,” and even go so far as to order retirement of existing power plants or construction of new ones that are environmentally more friendly, the court said.

“To the extent the ZEC program distorts an efficient wholesale market, it does so by increasing revenues for qualifying nuclear plants, which in turn increases the supply of electricity, which in turn lowers auction clearing prices,” the court said. “But that is (at best) an incidental effect resulting from New York’s regulation of producers . . . . ZECs do not guarantee a certain wholesale price that displaces the NYISO auction price.”

The court also said it could not see how the ZEC program interferes with federal goals.

The case is Coalition for Competitive Electricity v. Zibelman.

Meanwhile, the 7th circuit court of appeals upheld a similar program in Illinois in early September.

The plaintiffs have now lost challenges to the ZECs programs in Illinois and New York in both federal district courts and on appeal.

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 10 years.

The utility has two large nuclear power plants in the state with a combined capacity of about 3,000 megawatts. ZECs are 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 ZECs from facilities that are awarded the credits.

The price is $16.50 a megawatt hour, which Illinois set based on a federal working group’s calculation of the social cost of carbon emissions. The price per megawatt hour falls if a “market price index” exceeds $31.40 a megawatt hour. Illinois derives the index from the annual average electricity prices set in PJM auctions and two state energy markets.

The plaintiffs argued that the price adjustment aspect steps across a line into regulating wholesale electricity prices.

The appeals court asked FERC its view. FERC said the program does not interfere with interstate electricity auctions and is not otherwise preempted by federal law.

The court said the Illinois program has only an indirect effect on wholesale prices by keeping nuclear power plants that might otherwise shut operating. “A larger supply of electricity means a lower market-clearing price, holding demand constant,” the court said, but a “state policy that affects price only by increasing the quantity of power available for sale is not preempted by federal law.”

The court also rejected an argument that the Illinois program violates the US constitution by interfering with interstate commerce.

The court said the state was merely regulating inside Illinois. “All carbon-emitting plants in Illinois need to buy credits. The subsidy’s recipients are in Illinois; so are the payors.”

The Illinois case is Electric Power Supply Association v. Anthony M. Star.

Output from nuclear power plants was up 4.05% during the first half of 2018 compared to the same period in 2017, according to the latest “Monthly Energy Review” released by the US Energy Information Administration in late September.

Output from non-hydro renewables was up 7.04% during the same period. Fossil fuels output increased by 8.8%. Carbon emissions were up by 3.04%.


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