FERC Should Act as Soon as it Restores Quorum
By Janis Kreilis
FERC, the Federal Energy Regulatory Commission, held last week a technical conference for several stakeholder groups – independent system operators and regional transmission organizations, state public utility commissions, and industry members – trying to find a solution to a crucial question: how to square the preferences of several states to subsidize nuclear plants for their zero-emissions attributes with the current market design, which would put such subsidized plants on an uneven footing?
The core issue lies in the recent financial woes of nuclear plants in the Northeast and Midwest. As natural gas prices have fallen due to the production boom in the Marcellus shale region and elsewhere, nuclear plants, unable to cut their costs to the same degree, have struggled to compete with natural gas-fueled plants, leading to their operators’ announcements of closures in states such as New York and Illinois.
For these states, however, nuclear provides a reliable baseload power source that emits zero carbon. For example, New York’s Clean Energy Standard requires the state to procure 50% of its energy from clean power sources by 2030. Should its four nuclear plants close down, reaching that goal with sun and wind resources would become extraordinarily difficult due to their intermittent nature and current costs of installation?
Because of these reasons, New York approved a nuclear subsidy plan to compensate its stations for the zero-carbon electricity they provide though zero-emission credits in August 2016. Illinois followed suit with its zero-emission standard in December 2016. Predictably, both states are now facing lawsuits with the core argument that such subsidies interfere with the regulated wholesale market design.
And the list does not stop with New York and Illinois. Connecticut lawmakers opened a similar discussion in March 2017, and Ohio proposed its own nuclear subsidy in April 2017. New Jersey is currently investigating such policy, and calls to subsidize nuclear have been heard in Pennsylvania, too.
Before the conference, FERC outlined three ways to address the issue. First, the stakeholders could find answers in court but this would result in a prolonged litigation with a potentially haphazard set of outcomes. Second, the regulatory construct could be changed towards deregulation (for which there seems to be no demand, FERC noted). And third, the market participants and regulators could try to design a new market solution for this problem.
Alas, finding such consensus was difficult. The organized market operators differed in their suggestions. ISO-NE and PJM suggested two-state capacity auctions as a way to address the issue, while NYISO (and PJM) proposed internalizing the price of carbon into the wholesale price and thus leveling the field for nuclear power plants. NYISO’s proposal was supported by the Independent Power Producers of New York, a trade association, that also pointed out the stark contrast between NYISO’s social cost of carbon ($43/ton) and the current RGGI price ($3/ton).
Public utility commissions emphasized state supremacy over setting intrastate energy policy but expressed their readiness to work with FERC on developing a program that would value non-carbon attributes nationwide. As for the industry, Exelon, a major nuclear operator, also supported carbon pricing but said the company believed it was possible for the wholesale markets and state preferences to coexist. Dynegy and NRG, however, disagreed, pointing to the negative impact of such subsidies on unsubsidized plants.
Despite the lack of consensus among these groups, changing the wholesale market rules appears to be the most sensible option out. Mechanisms to include carbon price into the wholesale market design or having two-step auctions could both potentially work and ensure fair competition among the resources on the wholesale market.
For that, however, we will have to wait until FERC is back to quorum. The Commission lost it when the previous commissioner Norman Bay resigned in February 2017, and without the quorum, FERC’s capacity to act is limited. On May 9, President Trump named his nominees for FERC, but the subsequent hearings could take months. Once this process is done, the next one can begin.