A federal judge in New York ruled last week that the Empire State’s plan to subsidize nuclear power plants “is constitutional” and “of legitimate state concern.”

It’s a significant win for the nation’s largest nuclear fleet owner Exelon, which has been struggling to keep its money-losing power plants operational amid weak electricity demand and low energy prices. But the ramifications of last Tuesday’s decision go well beyond the legality of New York’s nuclear program.

The ruling marks the third time in less than a month that a federal court has affirmed states’ authority to favor certain clean energy resources in their supply mix -- which could influence how states across the nation set renewable energy targets and credit programs in the years to come.

The New York case was brought by a coalition of competitive power producers that predominantly generate power from coal and gas, including Dynegy and NRG Energy. Plaintiffs argued that subsidies for the state’s nuclear power plants violate federal market rules and put out-of-state generators at a disadvantage.

District Judge Valerie Caproni dismissed all challenges, however. She ruled that New York’s zero-emissions credit (ZEC) program does not intrude on the Federal Energy Regulatory Commission's jurisdiction over wholesale electricity markets and that it is constitutional for states to take action on climate change.

“The ZEC program is plainly related to a matter of legitimate state concern: the production of clean energy and the reduction of carbon emissions from the production of other energy,” Caproni wrote in her decision.

Caproni’s ruling comes shortly after a federal judge in Illinois threw out a nearly identical challenge to the Prairie State’s ZEC program. A couple of weeks prior, the Second Circuit Court of Appeals upheld a Connecticut district court decision to dismiss arguments against the state’s renewable energy procurement program and renewable portfolio standard.

“Courts have upheld three programs in one month, all confirming that states have authority to favor certain types of generation and use financial incentives to effectuate those preferences,” said Ari Peskoe, senior fellow in electricity law at the Harvard Law School Environmental Law Program Policy Initiative.

So while the New York and Illinois cases were centered on subsidies for nuclear power plants, the cases have significant implications for all types of state-led clean energy programs, he said.

The bond between nuclear and renewable credits

“Both the Illinois and the New York court talked about how they were not able to legally distinguish between ZECs for nuclear plants and renewable energy credits under state programs,” said Peskoe. “I think that was an important point. Courts were aware that if ZECs were impermissible, it was going to lead to challenges to all other state programs, and I don’t think they wanted to go down that path.”

The Federal Energy Regulatory Commission (FERC) previously examined whether renewable energy credits (RECs) used to meet state-level renewable energy targets are an infringement on federal authority and determined they were beyond FERC jurisdiction. Putting ZECs on equal footing helps to reaffirm states’ rights to support various types of energy resources -- which could prove useful as new legal challenges arise.

"The fact that two separate federal courts have now determined ZECs are effectively a new type of REC seems to indicate we're on an inevitable course, potentially as high as the Supreme Court, of determining how much state support for specific generating assets is lawful,” said Rob Rains, energy analyst at Washington Analysis.

New legal challenges are already on their way. Power producers in Illinois have already filed an appeal in the nuclear subsidy case, and plaintiffs in New York are expected to do the same.

A spokesperson for New Yorkers for Fair Energy, speaking on behalf of competitive power producers, said this week that the ZEC ruling would be appealed. The state’s public service commission “failed ratepayers last year when it instituted a $7.6 billion bailout for uneconomic nuclear plants with almost no public input,” he said. The group’s website calls the ZEC program “a backroom deal” that offers a single out-of-state corporation (nuclear plant owner Exelon) “more money than any handout in New York’s history.”

In Illinois, NRG spokesperson David Gaier said, “If upheld, the Illinois decision would effectively strip FERC of its authority to regulate wholesale markets, would harm ratepayers, and threaten FERC’s ability to put in place rules protecting competitive electricity markets.”

The debate over the sanctity of state-level policies is far from over.

Why a win for nuclear credits is a big deal for renewables

Nuclear and renewables, while both low-carbon energy resources, haven’t always been on friendly terms. In Ohio, an ongoing debate over nuclear subsidies has pitted renewable energy advocates against utility FirstEnergy. And there’s a broader energy-sector debate taking place over the need to shore up aging coal and nuclear plants versus pivoting to intermittent renewables and fast-reacting natural-gas turbines. 

However, recent events in New York and Illinois highlight that nuclear and renewables have common interests when it comes to certain legal and political challenges. That’s partly because of President Trump and partly because of a 2016 Supreme Court case entitled Hughes v. Talen Energy Marketing.

“We see [the New York] case and the Illinois case and other cases challenging state policies right now in the wake of the Hughes decision as very important, because they will determine the ability and tools available to states to advance renewable energy and energy storage and cleantech policies across the board … [including] renewable energy credit programs, policies to facilitate long-term contracts, new policies that credit renewable energy based on their environmental benefits,” said Miles Farmer, clean energy attorney at the Natural Resources Defense Council.

“And it’s really important, particularly in the context of the Trump administration working to roll back environmental regulations, that states leading the fight against climate change have all of the tools available to them, and can confidently adopt them to further clean energy,” he said.

The theme of combating President Trump’s efforts to roll back Obama-era clean energy and climate change policies came up repeatedly in the New York ZEC case.

“At a time when the federal government has abdicated its leadership on climate change, [this ruling] ensures our progress will not be blocked or rolled back by fossil fuel interests and others seeking to maintain the status quo,” said New York Gov. Andrew Cuomo, who supported the ZEC program as part of his broader clean energy agenda, which includes a mandate to achieve 50 percent renewable electricity by 2030.

Judge Caproni’s decision specifically references President Trump’s earlier statements that climate change is a “hoax” in a footnote.

“Some say that human-caused global warming is a 'hoax,' while others accept the overwhelming scientific conclusion that human activities, and particularly carbon dioxide discharges into the atmosphere, are causing the planet to warm,” she wrote. “Although no individual state can reverse the trend all by itself, New York and many other states have decided that they will do their part to reduce the emissions that contribute to global warming. The issue in this case is whether the method New York has chosen to facilitate its doing so is constitutional. For the reasons that follow, the Court concludes that the New York program is constitutional.”

Caproni’s decision also references Hughes v. Talen -- a case that was, on the surface, about a natural-gas plant, but came with massive implications for renewable energy. Hughes addressed a Maryland deal to incentivize the construction of a natural-gas plant, which the Supreme Court ultimately struck down because it required the generator to bid capacity into PJM’s power market in order to receive the subsidy. The court determined the deal artificially suppressed power prices and infringed on FERC’s jurisdiction.

The decision was narrowly applied to the impact on wholesale markets, and explicitly stated that states have broad authority to advance their energy preferences. “Nothing in this opinion should be read to foreclose Maryland and other states from encouraging production of new or clean generation through measures ‘untethered to a generator’s wholesale market participation,'” the decision states. Nonetheless, in denying a state-level program, the Supreme Court opened the door for legal challenges to a wide array of state energy policies.

“Since that decision, opponents of state policies have latched onto it and essentially misread it around the authority of states and use it as a basis for challenging state policies,” said Farmer.

“We’ve not only seen this in the lawsuits brought so far, but also in states considering new policies,” he said. “There’s always this discussion that occurs, and confusion around the boundaries of state authority is an obstacle to the process of adopting strong clean energy standards, because states have to be confident and clear they’re not going to get sued.”

Recent decisions in New York, Illinois and Connecticut are important because they’re the first cases to be decided since the Hughes v. Talen ruling came out in April 2016. The eventual outcome of these cases, with appeals still pending, could prove critical for offshore wind and energy storage, but also to ensuring that existing state renewable portfolio standards across the country are safe, Farmer said.

What it means to “tether” and debates at FERC

To understand what could happen next, it’s helpful to take a closer look at arguments made in the New York case.

Plaintiffs in New York specifically cited the Hughes decision in their complaint, arguing that the ZEC program is “tethered” to the wholesale auction the same way as the Maryland program. While New York’s policy does not require generators to bid into the wholesale market, plaintiffs argued that because nuclear plants that receive ZEC payments can still bid into the wholesale market, they are necessarily distorting prices.

Judge Caproni was not convinced. “This argument is no more than an attempt to fashion a ‘tether’ by jamming a square peg into a round hole,” she wrote. The New York incentive program is tied to zero-emissions energy, not the generator’s participation in wholesale markets. For that reason, it is “critically different” from the Maryland case, Caproni said.

“A whole host of measures that states might employ to encourage clean energy development -- such as tax incentives or direct subsidies -- involve propping up the operation of a generator that might otherwise be unprofitable,” she wrote. “Hughes did not prohibit such state assistance, and Plaintiffs have not argued that such state subsidies are per se preempted.”

Opponents also argued that New York’s use of forecast wholesale rates in calculating the state’s ZEC price created an unconstitutional tether. Caproni dismissed that claim as well.

“[Hughes v. Talen] has really created a difficult set of circumstances for [independent power producers] to argue against these ZECs. You have an issue where they’re trying to contort themselves into arguing ZECs are tethered to [wholesale] markets, but so far that’s not the case” -- at least in the eyes of some district judges, according to Washington Analysis' Rob Rains. “All of these programs are set and enforced by the states and do not [require] that participants must participate in PJM.”

While nothing is certain, Rains’ bet is that state clean energy programs will ultimately be upheld.

“At the end of the day, I think it signals a gradual erosion of the sanctity of wholesale power markets as states assert themselves more on the types of generation they want for their customers,” he said.

Recognizing this, independent power producers have already attempted to seek their own form of state-level protection. Dynegy, for instance, sought assistance for coal plants in Illinois through a proposed Fixed Resource Adequacy Plan, or FRAP, included in a massive energy bill that would also provide subsidies to Exelon’s nuclear plants. But the FRAP was ultimately yanked from the legislation.

Power producers are now looking for support through regional markets, as they continue to wage a legal battle against subsidies for other fuels. In May, FERC held a technical conference to study the intersection between state-level policies and federal markets. And this summer, PJM launched a stakeholder process to try to address how markets respond to state subsidies. The RTO recently floated a proposal to bifurcate capacity and pricing to subtract subsidies from plants that participate in the auction and protect generators from lower prices, which would benefit generators like Dynegy, NRG and Calpine. It’s a clunky and complex way to try to address the price pressure independent power producers are facing, but may still gain traction. 

As discussions continue at the wholesale level, it’s important to remember that they’re fundamentally different from the battles taking place in the courts, said Harvard fellow Peskoe. 

“I think FERC and the federal courts are addressing two different issues,” he said. The courts are tackling the legality of state clean energy programs, while FERC is looking at the economic effects of state programs, Peskoe explained. The question there is: Does FERC need to order PJM and other market operators to change their rules to account for the economic effects of the state-level programs? That question has yet to be answered, and it won't be as long as FERC lacks a quorum.

In the meantime, renewable energy proponents can breathe easy knowing the state-level clean energy programs have been upheld -- for now.