Last year New York and Illinois promulgated programs providing nuclear power plants with monetary credits for their ability to generate power without emitting carbon dioxide. Opponents have filed lawsuits in federal court in both states to invalidate the zero emission credit (ZEC) programs. As discussed in a prior blog, the plaintiffs allege that the programs: (1) are preempted by federal law because they interfere with the operation of wholesale power markets and FERC’s exclusive jurisdiction over those markets; and (2) violate the dormant Commerce Clause because they benefit in-state wholesale generators to the disadvantage of out-of-state producers.

Although the lawsuits are aimed only at the state’s ZEC programs, they could have collateral consequences. For proponents of renewable energy, the most unfortunate of those consequences would be a judicial ruling that has a rationale broad enough to invalidate not only ZECs, but also renewable portfolio standards and renewable energy credits (RECs).

Ironically, both sides in the New York and Illinois litigation have vouched for the legitimacy of renewable portfolio standards and RECs. Supporters of the ZEC programs note that the concept of ZECs was based on RECs, which they characterize as “a tested tool whose legality is well-established.” The plaintiffs in both cases agree that clean energy standards and RECs are permissible, but take pains to distinguish them from the ZEC programs. For example, the Illinois plaintiffs assert that the “price of RECs [in contrast to ZECs] is not fixed by the State and is not tethered in any way to wholesale electricity prices.” They add that “RECs are created by all qualified renewable generators, without regard to economic need,” while ZECs are limited to specific generators. The New York complaint contains similar assertions.

The presumption that renewable portfolio standards and RECs already found a judicial safe harbor may be misplaced. No court has agreed that renewable portfolio standards/REC programs are immune from a dormant Commerce Clause challenge. To the contrary, renewable programs that favor in-state generators may be vulnerable to such a challenge. Indeed, the Seventh Circuit commented in an opinion that Michigan’s renewable energy standard, which limited participation to domestic generators, “trips over an insurmountable constitutional objection. A state cannot, without violating the Commerce Clause, discriminate against out-of-state renewable energy.”

The plaintiffs in both the Illinois and New York cases allege that the ZEC programs impermissibly discriminate against out-of-state generators. The same could be said, however, of New York’s and Illinois’ REC programs. New York limits participation to generators that sell power into the NYISO. Under the Illinois statute, RECs are eligible to be counted against the renewable portfolio standard only if they are generated from new facilities located in Illinois. The statute does authorize an Illinois agency to qualify RECs from facilities adjacent to Illinois, but only if the agency is satisfied that the out-of-state generator promotes the health, safety, and welfare of Illinois residents—a vague standard that courts may regard skeptically. Generators in states not physically adjacent to Illinois evidently would be ineligible for Illinois RECs even if they could deliver power to Illinois. Given the similar geographic limitations in the states’ ZEC and REC programs, a ruling invalidating the ZEC program on dormant Commerce Clause grounds may also undermine the REC programs.

The plaintiffs’ preemption argument, if adopted by the courts, may trigger a similar unintended consequence. Even though the ZEC programs largely eschew the features that doomed the Maryland and New Jersey new generation programs in Hughes v. Talen Energy, the plaintiffs argue the ZEC programs are improperly tethered to the generators’ participation in the wholesale markets. The plaintiffs also cast a wider net, arguing that the ZEC programs are preempted because their operation impermissibly interferes with the wholesale energy markets. In the Illinois suit, for example, the plaintiffs allege that the ZEC payments “will disrupt the economically efficient functioning of the FERC-regulated energy and capacity market auctions. The artificial retention of uneconomic nuclear units in the market has a dramatic effect on wholesale market prices subject to FERC’s exclusive jurisdiction.”

Yet one could argue that renewable portfolio standards and renewable energy credits cause the same disruption in the wholesale power markets. Perhaps the strongest support for that proposition comes from the PJM Market Monitor, who ironically has submitting filings siding with the plaintiffs in the New York and Illinois cases. Although the PJM Market Monitor limited its comments in the litigation to the allegedly pernicious effects of the ZEC programs on wholesale power markets, it addressed in its recent State of the Market Report the similar impact that renewable energy portfolios have on those markets.

According to the Market Monitor: “[R]enewable energy mandates at both the federal and state levels have a significant impact on the cost of energy and capacity in PJM markets.” The Market Monitor added, in language echoing the plaintiffs’ complaints in Illinois and New York, that renewable energy credits “affect the offer behavior and the operational behavior of these resources in PJM markets and thus the market prices and the mix of clearing resources. RECs clearly affect prices in the PJM wholesale power market. Some resources are not economic except for the ability to purchase or sell RECs.”

Given the above pronouncements, a finding in the New York or Illinois litigation that the state’s ZEC program is preempted because it has too great a negative effect on wholesale power markets or improperly allows otherwise uneconomic units to sell into the market would open the door to a similar challenge to the state’s renewable energy programs. To avoid such a consequence, renewable energy advocates may be well-served to defend the ZEC programs.