Written By Conor Tallet
On July 25, 2017, District Judge Valerie Caproni, of the U.S. District Court for the Southern District of New York, dismissed a challenge to New York’s Zero Emission Credit (“ZEC”) subsidy program.
The program originated from Governor Andrew Cuomo’s Clean Energy Standard, which established a policy goal of achieving 50% of electrical generation from renewable sources by the year 2030. It also sets forth a goal of a 40% reduction in carbon emissions by 2030.
Due to low gas prices leading to lower power pricing, nuclear plants have been threatening to shut down because they are operating at a loss. The plan, then, is to have taxpayers subsidize the nuclear power plants over the next twelve years in order to ensure that they continue to operate, thus permitting New York to “reap the value of the virtually emissions-free power.” It’s estimated to cost New York electric ratepayers approximately $7.6 billion over the next twelve years.
A key component in achieving a reduction in carbon emissions is to preserve the zero-carbon attributes of nuclear generation facilities in New York. Consequently, the Clean Energy Standard promulgated a nuclear subsidy targeted at uneconomic nuclear power plants in the New York wholesale electricity market.
The subsidy involves the payment of approximately $17.48 per megawatt hour sold from the nuclear generation facilities into the wholesale market. This causes the wholesale electricity market to work as an auction, by matching up the demand for electricity with the cheapest bids for electricity from generators. Thus, the subsidy helps nuclear plants to continue operating.
Soon after the subsidy was passed by the New York Public Service Commission, a number of wholesale electricity generators filed suit. In Coalition for Competitive Electricity v. Zibelman, the plaintiffs argued that New York’s program intrudes on the Federal Energy Regulatory Commission’s (“FERC”) exclusive jurisdiction over the wholesale energy market vested in it by the Federal Power Act.
Where the direct sale of electricity from an individual’s local utility, to a consumer, is regulated by the individual states, any “sale for resale” of electricity is regulated by FERC. Because the ZEC subsidy works to allow nuclear plants to submit artificially low bids in the wholesale auction (when they otherwise would be uncompetitive in the wholesale market), the plaintiffs argued that the Federal Power Act should preempt the ZEC state subsidy.
A key case for the plaintiffs has been Hughes v. Talen Energy Marketing, LLC. In Hughes, the Supreme Court struck down a Maryland subsidy aimed at preserving in-state generation by paying a generator a subsidy of the difference between a bilateral contract price and the actual price the generator’s electricity cleared the wholesale market. In a narrow holding, Justice Ginsburg articulated that “[s]o long as a state does not condition payment of funds on capacity clearing auction, the State’s program would not suffer from the fatal defect that renders Maryland’s program unacceptable.” Accordingly, so long as the payment of a subsidy is not contingent, or “tethered,” on the electricity clearing the wholesale auction, it escapes the grasp of the Supreme Court’s rule and is a permissible state regulation.
The Southern District of New York determined that the ZEC program is not tethered as in Hughes. Specifically, the court stated that, contrary to the plaintiffs’ argument, New York does not require nuclear generators to sell their power into the wholesale market to receive the subsidy; rather, it is a business decision on the generators’ part. Since New York is not requiring the qualifying nuclear plants to actually sell their power into the wholesale market, the ZEC program lacks the “tether,” as was fatal in Hughes. In addition, the court determined that ZECs merely incorporate environmental attributes that are “unbundled” from the wholesale electric rate, and therefore, fall squarely within a state’s jurisdiction to incentivize clean energy outside the confines of FERC’s wholesale jurisdiction.
New York’s ZEC program has been copied in the State of Illinois, who also recently threw out a challenge to its ZEC subsidy and will likely continue to proliferate to states seeking to preserve environmental attributes of expensive forms of electrical generation.
This case has been appealed to the Second Circuit and will likely be appealed all the way up to the Supreme Court.
Andy Anderson, New York Electricity Supply Costs to Increase in 2017 – PSC Approves Clean Energy Standard, Subsidizes Upstate Nuclear Power, EnergyWatch (Aug. 1, 2017).
Coalition for Competitive Electricity v. Zibelman, 16-CV-8164 (S.D.N.Y. 2017).
Hughes v. Talen Energy Marketing, LLC, 136 S.Ct. 1288 (2016).
Tim Knauss, How Will Subsidies for Upstate NY Nuclear Plants Affect Your Electricity Bill?, Syracuse.com (Mar. 3, 2017).