Executive Insight, Generation, Nuclear

Capturing the Climate Benefits of Nuclear Power Using the Social Cost of Carbon

This August the New York State Public Service Commission (“NYPSC”), for the first time among state energy regulators, adopted a “Clean Energy Standard” that recognizes the environmental benefits of nuclear power plants by compensating them for the zero-carbon energy they produce.  The Clean Energy Standard, relying on a cost-benefit analysis based on the Social Cost of Carbon (“SCC”), will provide “zero-emission credits” to at least three nuclear plants, James A. FitzPatrick, R.E. Ginna, and Nine Mile Point.

For New York, the Clean Energy Standard was sensible in the face of the potential closure of the three plants, which would have been devastating to the state’s climate change goals and the local economy.  In approving the plan, the NYPSC calculated that it would save the state billions in climate-change related costs alone, as well as hundreds if not thousands of jobs, and avoid over 15 million tons of CO2 emissions a year.

            But New York’s Clean Energy Standard—particularly its use of the SCC—carries implications far beyond the state.  It represents a significant step towards recognizing the value of nuclear power in fighting climate change.  Although nuclear plants produces 63 percent of the country’s zero-carbon electricity, its environmental benefits have often been marginalized.  This is despite the fact that many prominent experts, including NASA climate expert James Hansen, in an article published last December in The Guardian concluded that “nuclear power paves the only viable path forward on climate change.”

Other states are considering or have attempted to value the various benefits of nuclear power, particularly towards reliability and the local community.  Ohio attempted to put through a program to compensate nuclear power for these benefits through a fixed charge funded by ratepayers.  New York, before the Clean Energy Standard, also established a program to support the R.E. Ginna nuclear plant based on its critical grid reliability benefits.  But generally states have deemphasized the zero-carbon value of nuclear power.  Massachusetts and California, despite having some of the most stringent greenhouse gas reduction goals, are allowing their largest sources of zero-carbon generation to shut down prematurely.

Attempts by states to recognize the value of nuclear power must be structured to avoid legal constraints.  As recently explained by the Supreme Court in Hughes v. Talen Energy Mktg., LLC, 136 S. Ct. 1288 (2016), states “may not seek to achieve ends, however legitimate, through regulatory means that intrude on FERC’s authority over interstate wholesale rates.”  Compensation schemes based on economic benefits are particularly suspect.  FERC in 2016 blocked Ohio’s effort because it believed customers would end up saddled with fixed charges they could not avoid, influencing wholesale power markets.  FERC allowed New York’s R.E. Ginna effort because the plant was determined to be necessary for grid reliability, but still struck many elements of the plan.  However, not all plants can be deemed necessary for grid reliability.

This is where the SCC could be a game-changer.  The NYPSC Clean Energy Standard, as it relies on the SCC, is better prepared to survive the legal challenges that plagued the other state programs.  This is because the SCC relates to the “market” for CO2 (or the lack thereof), not to the market for electricity.  Therefore, state compensation schemes based on the SCC can reliably argue that these plans fall within the purview of states and outside FERC’s jurisdiction, because they are “untethered to a generator’s wholesale market participation” (Hughes v. Talen).

Treating the SCC as a proxy for CO2 reductions is legally supportable.  The SCC was developed by an expert federal government interagency working group, and “is meant to be a comprehensive estimate of climate change damages.” It has been widely adopted across the federal government for this purpose. In adopting the Clean Energy Standard, the NYPSC chose to use the SCC because it “more closely ties the pricing mechanism [] to the environmental attribute, leaving no doubt that it falls squarely within the State’s exclusive jurisdiction.”  Use of the SCC to price the impact of climate change has recently been upheld by the Seventh Circuit in regards to a DOE energy efficiency rulemaking.  Zero Zone, Inc. v. DOE, Nos. 14-2147, 14-2159, 14-2334, __ F.3d __ (7th Cir. Aug. 8, 2016).

Second, on the policy front, the SCC makes much clearer just how important nuclear power is in addressing climate change.  If the SCC was applied to all the clean energy produced in a 1GW reactor, it would total $150 to 200 million dollars annually.  Applying this to the roughly 100 reactors present in the United States, the SCC makes plain that nuclear power prevents $15–20 billion annually in climate change damages.  Simple arithmetic can now clarify the energy debate, allowing a better comparison of nuclear power versus other sources of energy. The NYPSC did the math and concluded that compensating nuclear based on the SCC was cheaper than generating clean energy through other means, including renewables.

The NYPSC program has been called a blueprint for other states going forward, and nuclear operators are considering seeking this model for plants in Ohio and Pennsylvania.  Even Carol Browner, a former EPA Administrator, has called NYPSC’s program a game changer.  There is no reason that New York’s approach could not be replicated elsewhere, especially for those states with nuclear plants at risk of shutting down, or for those states struggling to meet their climate change goals. 

 

About the authors: Dan Stenger and Amy Roma are partners, and Sachin Desai is an associate, in the Energy Practice of Hogan Lovells US LLP.  Their practices focus on nuclear industry issues and they are based in the firm’s Washington, DC office.