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Natural Gas Burners File Suit Challenging Fairness of New York Zero Emission Credits

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A coalition of electric power producers that operate natural gas-burning generation plants have filed suit in the U.S. District Court Southern District of New York. They are challenging the New York State Department of Public Service’s (NYSDPS) recently enacted Zero Emission Credit.

Competition wasn’t designed with customers in mind

The lawsuit filing document Indicates that the market structure that disadvantages nuclear power plants and encourages their owners to consider permanently closing is a feature, not a bug, of electricity “deregulation.” The document makes it abundantly clear that power generators burning natural gas have partnered with renewable energy marketers, appointed federal officials and antinuclear activists to create market rules that are purposely designed to make continued operation of nuclear power plants uneconomic.

Aside: Electricity market “deregulation” was an idea that received heavy marketing and lobbying expenditures by powerful corporations like Enron, Westinghous, General Electric and Siemens. Those entities touted the benefits of “competition” loudly and repeatedly, but the plan was never about providing customers with better service or lower prices. Companies don’t spend money for altruistic reasons; investors wouldn’t accept that kind of behavior.

They do, however, invest in political actions that might help them grow their businesses and increase their profitability even if it is at the expensive of competitors and customers. End Aside.

Once the owners of operating nuclear plants have reached the point at which they are losing money under the current auction rules, they are supposed to permanently exit the market. That will force capacity and energy prices to rise. The price increases will moderate after they have reached a level high enough for long enough to encourage the construction of generation systems that can be built sited and built quickly, remotely controlled or provided with skeleton crews, allowed to remain idle much of the time and respond quickly when market prices rise sharply, signaling the fact that they are needed right away.

Those new generators usually qualify to bid into capacity markets with minimal or non-existent fuel storage capacity, making them dependent on the ability of a different market and infrastructure to supply them with the fuel they need to generate power.

Risk from achieving the desired end state

Rather than being able to make relatively minor adjustments to a system with a strong foundation provided by always on, low marginal cost, stable, high-inertia electrical power generators, future grid operators will be expected to produce electricity responsively from a system offering ever fewer predictable parameters.

Instead of coordinating the output of a limited number of controllable generators to respond to changes in customer needs and desires, the grid operators are supposed to conduct a much more complex system. Their job will be akin to attempting to produce coherent music with a mix of players that includes a shrinking population of disciplined orchestra veterans, a group of variably talented jazz improvisors and a growing number of raw amateurs who recently joined the middle school band.

The power system that the Coalition for Competitive Electricity wants would include disparate, weather-dependent power systems that rely on ever rising support from hydrocarbon-burning power generators. Their desired power system does not value cleanliness, career jobs, local tax roles, predictable pricing, or onsite fuel storage produced along with electricity by nuclear plants. It assumes that the fuel delivery infrastructure can infinitely expand and that customer demand can be economically rationed to fit within available power capacity.

Of course, the filing that the coalition’s attorneys produced does not describe the members’ goals in exactly the words used above, but the intent can be gleaned from the document with only a modest reliance on critical thinking and reading comprehension.

What does the lawsuit say?

For example, page 4 of the complaint states:

The ZEC payments threaten to disrupt the economically efficient function of the FERC-approved monthly capacity market auctions administered by the NYISO. In anticiapation of significant disruption to the April 2017 and subsequent monthly capacity market results, financial over-the-counter capacity markets that trade in advance of the FERC-sponsored auctions have already shown dramatic price declines as a result of the ZEC Order. These declines reflect that nuclear plants that were scheduled to leave the market are now likely to remain in operation. The artificial retention of the nuclear units in the market has a significant effect on wholesale capacity market prices subject to FERC’s exclusive jurisdiction.
(Emphasis added.)

Translation: We were expecting to receive higher prices for our plants to sit idle, ready to start up if needed, as the market structure that we helped to craft forced nuclear plant operators to lose money. Those operators were supposed to respond by permanently retiring their capacity. That would leave plenty of room for our capacity while still producing the market tightness that drives prices higher.

The filing accidentally describes the benefit to the system and to customers of having large, low marginal cost, reliable generators as part of the supply mix. They keep prices under control and can help prevent the price spikes that can occur with the perception of a lack of adequate supply.

(From page 14) A large price-taking unit significantly decreases energy market prices paid to competitors, as it injects large quantities of energy into the grid, which lowers market-clearing prices. As long as energy-market prices, on average, are higher than the nuclear unit’s marginal operating costs, this may be financially sustainable for a nuclear unit, since the total revenues earned will exceed the unit’s costs of production.

(Page 21) Because capacity-market prices are sensitive to even small shifts in the supply/demand, the decrease in total capacity market costs can be large. In some cases, the reduction in total capacity market costs can exceed the artificial subsidy needed to cause the distortion in prices.

That last point is important and says what many nuclear advocates have been saying for a long time. Moderate revenue increases, probably much lower than the cost of replacing their capacity, are suffficient to keep nuclear plants running.

By the document’s own admission, the reduction in capacity payments to nuclear competitors might reach $15 billion during the 12-year period in which the maximum ZEC payment to retained nuclear plants would be $7.6 billion. The authors try to minimize the importance of that cost comparison with the following statement.

While artificially depressed (below-market) energy and capacity prices may save New York ratepayers money in the short run, these savings will be [partially] offset by both increased costs of the ZECs themselves and by the enormous [vague and uncalculated] forgone benefits of competition and more efficient generation over the long run.

The document also describes what the current market dynamic is doing to nuclear plant income.

Recent decreases in energy-production costs, however, largely driven by access of cheap shale gas, have decreased energy prices below the level necessary to keep some nuclear plants operating.

If gas prices rise faster than currently expected by most market observers, energy prices will quickly rise to levels that are sufficient to keep nuclear plants operating. NYSDPS recognized and accounted for this possibility when it designed the ZEC; the price for the ZEC phases down gradually once prices exceed a certain level and disappears completely once prices hit a second trigger point.

Here’s another intriguing statement (from page 22).

Artificially suppressed prices threaten the viability of more efficient generators, including Plaintiffs, and discourage investment in efficient new, flexible generators better suited to integrate weather-dependent, zero-carbon renewable generating resources like wind and solar. Accordingly, not only will the ZEC program ultimately lead to higher wholesale prices, but it will also stifle the unquestionable environmental benefits derived from competitive electric markets.

That statement raises a number of questions. By what measures are the generators “more efficient?” It seems that the only measure of importance for the Plaintiffs is the ability to bid at the lowest prices in short term markets and to be able to dramatically reduce carrying costs if the electricity isn’t being sold at a high enough price.

How long will it take before the higher wholesale prices predicted will materialize? What if the moderate revenue rewards for clean energy, good jobs and local tax considerations help to keep those “uneconomic” nuclear plants running for another several decades and encourage the construction of additional units that can qualify for the ZEC?

By whose judgement are the environmental benefits of replacing zero emission nuclear with a combination of moderate emission natural gas plus zero emission wind and solar “unquestionable?” What if the efficient market solution is a mostly gas grid – as long as unexpected price spikes and supply interruptions never occur?

Why haven’t plaintiffs filed suit against RECs and tax credits?

When discussing this lawsuit with colleagues, some have wondered why the coalition hasn’t challenged the market damaging effects of favoritism toward wind and solar? Why do they support the continuation of federal tax credits — which amount to direct market subsidies for systems that might otherwise be completely uneconomical — and renewable energy credits (RECs) that are similar to the ZEC for nuclear for wind and solar?

The — rather weak — defense of this seeming disconnect can be found on page 23.

Since the fundamental basis for the complaint is that New York’s ZEC is preempted by the federal governments assertion of jurisdiction over wholesale electricity markets under the interstate Commerce Clause, the defense of renewable source favoritism rests on federal law.

According to the plaintiffs, federal law allows states to set different prices for certain types of renewable generators but does not allow states to establish favorable prices for nuclear generators. That might be the case if you limit the areas of federal law and regulations referenced, but the Clean Power Plan will most likely allow states to devise structures that encourage nuclear plant construction and retention to meet emission reduction goals.

The plaintiffs also take a pass on challenging the federal government’s decision to subsidize renewables. That’s probably prudent, the federal government is hard to sue.

There is one part of the complaint that might be on solid legal ground. As currently structured, nuclear generators from outside of New York that sell their power into the state’s wholesale market are not eligible for ZECs. Neither are other zero carbon — like small hydro or Indian Point — sources of electricity. A case can be made that excluding out of state vendors amounts to interference in interstate commerce and that exclusion of other sources of zero-carbon electricity that are not already able to qualify for RECs is unfair.

I am no fan of competition in electricity markets. Continuous, reliable supply of the product is too important to the functioning of our society to allow it to be left to market forces, especially the kind of imperfect market that is the result of the special characteristics of electrical power.

Without careful crafting, markets do not value product features like strong employee training programs, contributions to local organizations, environmental cleanliness, STEM education encouragement or local tax bases.

Electricity is a vital product. The system that delivers it to customers really is a natural monopoly that should be fully integrated from power generation to current delivery. It should be operated by well-supervised and regulated technical and operational experts who are adequately compensated to serve the public.

The United States created such a system out of the mess produced in the Insull era of the 1920s. The power system our grandparents created became the envy of the world and was immitated by many others. There’s no reason we cannot return to thosetraditional electric utility system structures. We know how it was done and have a number of excellent examples still operating today.

The post Natural gas burners file suit challenging fairness of New York Zero Emission Credts appeared first on Atomic Insights.

Photo Credit: Aurelien Guichard via Flickr

Discussions

Bob Meinetz's picture
Bob Meinetz on Oct 27, 2016 3:42 pm GMT

Rod, it was FDR’s Public Utility Holding Company Act of 1935 which created the American Public Utility Model, the crossbreed of capitalism and socialism you and I grew up with. It worked well – and extremely efficiently – for 70 years.

PUHCA’s death in 2005 marked the beginning of its end – hence the Prohibition-era mess we have today. Freedom, in the form of “energy independence”, comes with responsibility, a lesson we might need to learn all over again. Back to the Future.

Darius Bentvels's picture
Darius Bentvels on Oct 31, 2016 9:28 am GMT

I am no fan of competition in electricity markets. Continuous, reliable supply of the product is too important … to allow it to be left to market forces.

Electricity markets with fierce competition show to supply electricity with superior reliability compared to USA (>8 times better reliability)!

The system that delivers it to customers really is a natural monopoly that should be fully integrated from power generation to current delivery….

In the countries that have superior electricity supply reliability compared to USA, the systems that transport & deliver to the customer are fully separated from power generators!

Darius Bentvels's picture
Darius Bentvels on Oct 31, 2016 9:35 am GMT

So those ZEC’s imply that NY-state rate payers subsidize rate payers in other states.

Mark Heslep's picture
Mark Heslep on Nov 1, 2016 5:56 pm GMT

…no fan of competition in electricity markets. Continuous, reliable supply of the product is too important to the functioning of our society to allow it to be left to market forces, especially the kind of imperfect market

Many things are important. No doubt there were some who thought production, distribution, and preparation of food too important for the market. Also housing of course, a critical need, not to be trusted to markets. And transportation. Imagine if people were allowed, based on the whims of supply and demand, to hurtle thousands of hundred ton aircraft through the air at 2/3 the speed of sound and five miles above the ground.

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