American Oil and Gas Reporter - December 2016 - 29

WASHINGTONWATCH
New York ZECs
Distort Electric Markets
To Gas's Detriment
Natural gas, which is clean burning and has helped the
United States reduce its carbon emissions to 20-year lows, has
come under attack by opponents of fossil fuels who advocate
"leave it in the ground."
In the state of New York, this has taken the form of a state
ban on hydraulic fracturing, as well as denial of a water quality
certification that would allow construction of the Constitution
Pipeline. Now, the New York Public Service Commission is attacking natural gas, albeit indirectly, by adopting a program
that effectively will subsidize some uneconomic nuclear power
plants to the detriment of otherwise competitive generators,
such as those supplied by natural gas.
According to a group of generators, the PSC's zero emissions
credits (ZECs) will force New York's retail ratepayers to fund the
PSC's effort to artificially depress wholesale prices, thereby harming
other generators, reducing supply, and increasing prices for local
utilities and ultimately the homeowners and businesses receiving
service. This group of generators, as well as environmental groups
and consumer protection organizations, has sued the PSC, arguing
that the ZEC program is unlawful because of federal pre-emption.
New York's wholesale electric market is operated by the New
York Independent System Operator (NYISO), which conducts
auctions for the purchase and sale of energy and capacity. The
Federal Energy Regulatory Commission regulates energy markets
through its reliance on market processes "to bring more efficient,
lower cost power to the nation's electricity consumers (FERC
Order No. 888)." FERC has exclusive regulatory authority, to
the exclusion of state and local governments, over the transmission
of electricity in interstate commerce and the sale of electricity at
wholesale in interstate commerce, according to the Federal
Power Act. The U.S. Supreme Court upheld FERC's exclusive
jurisdiction in a 2016 case that struck down a Maryland proposal
that would have tread on wholesale electricity pricing.
Four upstate nuclear plants sell into the NYISO market.
Three of those four plants are uneconomic, and indicated that
they would close. According to the non-nuclear generators'
complaint, "The PSC adopted the ZEC program in response to
the financial problems of these three plants, ostensibly to avoid
'losing the carbon-free attributes of this generation.'"
The rising mandates by states for suppliers to generate
electricity from renewable sources have broader implications.
Intermittent energy sources such as wind and solar generation
require a quick-start backup supply, such as that from gas generation. As the generators' complaint observes, "Recent decreases
in energy-production costs . . . largely driven by access (to)
cheap shale gas, have decreased energy prices below the level
necessary to keep some nuclear units operating."
Under the competitive market envisioned and mandated by
FERC, the NYISO as well as other regional transmission operators
rely on an auction mechanism that "creates . . . price signals for
new capacity to enter the market if it can supply (electricity at)
prices below the clearing price. At the same time, the market
provides price signals for existing suppliers to exit the market if

"The New York PSC program will
subsidize uneconomic nuclear power
plants to the detriment of otherwise
competitive generators.

they are unable to beat the clearing price." While there would be
higher interim clearing prices to incentivize new generation,
"the ZEC subsidies will deter the entry of new, efficient suppliers,
including suppliers of renewable energy, and the end result is
higher prices to consumers and businesses in the long term."
The subsidy for the three noncompetitive generators is significant. According to the complaint, "At current wholesale
prices, for every megawatt of energy the upstate nuclear plants
sell into the FERC-jurisdictional market, the nuclear units will
receive a more than 80 percent premium from the ZECs."
The cost of the ZECs paid to these three nuclear facilities ultimately is borne by the customers of the load-serving entities.
"Even competitive retail suppliers providing 100 percent carbonfree energy to their customers as a premium service are required
to purchase ZECs from the state," the complaint points out.
It continues, "If the ZEC program goes into effect as planned
in April 2017, plaintiffs will be damaged because the subsidies
will enable the nuclear generators, who compete against the
plaintiffs in interstate markets, to continue operating moneylosing facilities, and selling uneconomic capacity and energy
into the FERC-regulated auctions, causing the auctions to return
significantly lower prices, which disrupts FERC's efforts to
promote, design, and implement competitive wholesale energy
and capacity markets."
While this situation would be a concern even if isolated to
the NYISO, there is the potential for noncompetitive nuclear
generators in other states to seek similar subsidies. Pricing in
electricity markets can be complicated, but ZECs are fairly
clear cut. ZECs intrude on FERC's exclusive jurisdiction over
wholesale electric energy sales. Natural gas, a reliable fuel
source with low carbon emissions, should not bear the brunt of
ZECs and their market distortions.
r

SUSAN GINSBERG is vice

president of crude oil and natural gas regulatory affairs for
the Independent Petroleum Association of America. She covers legislation and regulation,
focusing on the CFTC and
FERC. Her experience in natural gas regulatory affairs
spans 25 years.
DECEMBER 2016 29

American Oil and Gas Reporter - December 2016

Table of Contents for the Digital Edition of American Oil and Gas Reporter - December 2016