Dive Brief:

• A federal appeals court on Thursday upheld nuclear energy subsidies put in place by New York, the second ruling in a month affirming states' ability to support clean energy resources.

• The U.S. Court of Appeals for the 2nd Circuit upheld New York's Zero Emission Credit (ZEC) program, ruling it does not overstep state authority because it does not mandate participation in wholesale power markets and is little different than renewable energy policies already allowed under established legal precedent.

• This spring, the Federal Energy Regulatory Commission (FERC) and Department of Justice (DOJ) filed a brief supporting nuclear subsidies in a similar case in Illinois. The 7th Circuit Court upheld those subsidies on Sept. 13, a ruling fossil fuel generators on Thursday appealed.

Dive Insight:

The federal court decisions add to a growing body of case law on the boundaries of federal and state energy jurisdiction and boost the pressure on FERC to decide how it will treat subsidized resources in wholesale power markets.

Under the Federal Power Act (FPA), states regulate power generation within their boundaries, while the federal government regulates interstate power markets through FERC.

In this case, fossil generators argued the New York program breached that boundary by allowing subsidized nuclear plants to enter bids in the New York ISO's capacity market, lowering the price from what it would have been if the plants retired.

The 2nd Circuit judges shot down that argument, saying a program only oversteps state authority if it ties the receipt of a subsidy to participation in the wholesale power market. 

The value of New York’s nuclear subsidies is based on a calculation of future forecasted energy prices and the social cost of carbon, a proxy for the value of greenhouse gas pollution. Though the subsidies may affect power market prices if plants choose to bid, “that incidental effect is insufficient to state a claim for field preemption under the FPA.”

“New York has kept the line in sight, and gone as near as can be without crossing,” wrote Judge Dennis Jacobs, an appointee of President George H. W. Bush.

That legal boundary between state and federal authority was established in the 2016 case Hughes v. Talen Energy, which invalidated a Maryland generation program that made subsidies contingent on participation in the PJM capacity market. In that case, a unanimous Supreme Court said that state policies "untethered" to the wholesale power market should still be permitted under the FPA.

The construction of the ZEC program is little different from renewable energy subsidies in New York and other states expressly authorized under the Hughes decision, Jacobs noted.

"It is telling that Plaintiffs cannot persuasively explain why FERC's holding regarding [renewable energy credits] does not apply equally to ZECs," he wrote.

The 2nd Circuit application of Hughes closely resembles the 7th Circuit ruling, which drew on FERC's amicus brief supporting the state programs. Though appeals are pending, energy lawyers say the back-to-back decisions show a solidifying legal precedent around the treatment of state energy policies, pushing the issue back to FERC.

The commission is currently weighing how to price subsidized resources in the PJM Interconnection, the nation's largest electricity market. Comments are due in that docket Oct. 2.

"The courts are making clear they will not step in and save the markets absent a tie to the market analogous to Hughes," said Matthew Larson, partner at law firm Wilkinson Barker Knauer. "It is all eyes on FERC."