Two Federal Courts May Have Just Saved The Nuclear Power Industry

States that want to keep their aging nuclear power fleet from retiring now have a court-approved roadmap for doing so.  That’s because two federal courts of appeals last month upheld very similar state laws in Illinois and New York aimed at subsidizing those states’ under-performing and at-risk nuclear power plants.

The current market conditions are, quite literally, killing the nuclear power industry. With natural gas prices low and cheap renewable energy flooding the markets, it’s been virtually impossible for many nuclear power plants to compete.

Some view this as simply the market picking winners and losers. But others see this as problem. To significantly lower this country’s greenhouse gas emissions, they argue, we’ll need baseload power (i.e., power plants that can run all of the time). And only three current large-scale power sources fit that bill: coal, natural gas, and nuclear. Of those three, only nuclear power can generate energy without carbon dioxide emissions.

Yet, in Illinois (and in most other states), nuclear energy does not qualify as a “renewable energy resource,” which means nuclear generation facilities are categorically ineligible to produce and sell renewable energy credits.

That’s why, in response to concerns that two of Exelon Corporations' nuclear generation facilities were on the brink of closing and that the zero-emission value of nuclear generation was not being recognized, the Illinois legislature passed the Future Energy Jobs Act.

The Act directed the Illinois Power Agency to create a subsidy program requiring generators that use coal or natural gas to buy zero-emissions credits (ZECs) from nuclear power plants connected to the regional grid. The price of each credit was set at $16.50 per megawatt-hour, a number Illinois derived from a federal working group’s calculation of the social cost of carbon emissions.  But, to ensure that the new program does not cause power prices to skyrocket, the price of ZECs under the program goes down if average annual energy prices on the market exceed a set cap.

Almost immediately, a group of generation facilities and consumers filed a lawsuit challenging the Illinois law. The group alleged, among other things, that the ZEC program invades the Federal Energy Regulatory Commission’s (FERC) exclusive authority over the wholesale sale of electricity in the interstate markets.

Under the Federal Power Act, FERC has sole jurisdiction over the interstate sale of electricity at wholesale; yet states are authorized to regulate energy production within their borders, including the power plants that produce that energy.

The challengers in the case, called Electric Power Supply Association v. Star, argued that Illinois’ ZEC program went too far because it tied the price of ZECs to future wholesale market prices.

On September 13, 2018, the Seventh Circuit Court of Appeals disagreed. “The zero-emissions credit system can influence the [market] price only indirectly,” according to the Court, because the value of a credit does not depend on the producer’s bid in the market.

Interestingly, at the Seventh Circuit’s request, FERC submitted a brief in the case, which argued that Illinois’ ZECs program was “not preempted” by the Federal Power Act because it does not expressly require generation facilities to participate in the FERC-regulated markets.

Exactly two weeks after the Seventh Circuit issued its decision, the Second Circuit issued a strikingly similar ruling in a case called Coalition for Competitive Electricity v. Zibelman.

Plaintiffs in the Zibelman case, a group of electrical generators and trade groups, also alleged that the Federal Power Act preempts New York’s ZEC program.

That program subsidizes three specific nuclear plants: FitzPatrick, Ginna, and Nine Mile Point, all of which are also owned by Exelon Corporation. Each of the plants under the New York program will obtain an additional $17.48 per megawatt-hour over the program’s first two years, and then the ZEC price every two years thereafter will be reset.

Brushing aside similar arguments from the challengers as the Seventh Circuit did, the Second Circuit Court of Appeals on September 27, 2018 ruled that the ZEC program is not preempted “because Plaintiffs have failed to identify an impermissible ‘tether’ . . . between the ZEC program and wholesale market participation.”

Together, these two decisions won’t just save the specific nuclear power plants at issue. They may give a lifeline to the entire nuclear power industry.

Unless, of course, the U.S. Supreme Court decides to weigh in.