NJ’s Proposed Nuclear Bailout Explained: A Closer Look

December 21^st UPDATE: After yesterday’s hearing, the Senate Environment and Energy Committee and the Assembly Telecommunications and Utilities Committee passed the nuclear bailout bills. The full Senate and Assembly are likely to vote on the measure at one of their three remaining sessions on January 4^th, 8^th or 9^th.  

The New Jersey Senate recently introduced a standalone bill to subsidize failing nuclear plants. If enacted, this would be the first state measure to subsidize nuclear power plants in isolation, with no commitment to scale up the energy efficiency and renewable energy resources needed to ultimately replace the aging plants.

As set out in our issue brief, the purpose of subsidizing nuclear power plants is not to prop up an uneconomical resource indefinitely. It is to avoid an abrupt closure that could harm plant employees, the communities in which the plants reside, and the environment, by crafting a transition plan to address these issues within a defined period of time. Best practice requires that states mandate a clear showing of financial distress by plant owners and narrowly tailor any financial support in order to avoid overpaying for the values the plants deliver to the state.

Unfortunately, the New Jersey bill fails on every count, as I plan to testify today at the joint hearing of the Senate Environment and Energy and Assembly Telecommunications and Utilities Committees. Here’s a closer look:

Christie’s Trump Card: Baseless Certification Required

Rather than following New York and Illinois in defining and valuing “zero-emission credits” based on the value of avoided carbon emissions, the New Jersey bill creates a completely new structure for a nuclear subsidy, a “nuclear diversity certificate,” justified on the basis of environmental, fuel diversity and resilience grounds. Note the “and.” The state can only provide financial support to nuclear plants if the Board of Public Utilities makes a factual determination that nuclear plants provide resiliency benefits. But the bill doesn’t define what resilience is, and expert analysis from firms like the Rhodium Group have shown that system outages are generally caused by transmission line failures and almost never stem from a shortage of generation (nuclear, or otherwise). In fact, while “resilience” can be used to describe the ability to withstand extreme weather or quickly start the system up thereafter, New Jersey’s nuclear plants faced problems when Hurricane Sandy hit, and nuclear plants are among the slowest to restart.

Outgoing Gov. Chris Christie is essentially requiring the incoming Murphy administration to validate a baseless assertion that nuclear plants make the system more “resilient,” and align itself with the Trump administration and its outrageous scheme to prop up failing coal and nuclear plants (described here, and also based on the groundless assertion that such plants provide resiliency benefits) in order to avoid the abrupt closure of nuclear plants in New Jersey.

The fuel diversity requirement in the bill is also troubling; it requires the Board to find that a nuclear plant “makes a significant and material contribution” to the diversity of the electricity resource mix delivered to the state. The Board will be hard-pressed to find two nuclear plants totaling 3500 megawatts (MW) critical to the diversity of the sprawling 202,000 MW PJM wholesale market that serves New Jersey customers, and in which those plants represent only 10 percent of total nuclear generation and only 2 percent of dispatchable (i.e., not variable) capacity.

Subsidizing PSEG’s Profitability

Under the legislation, New Jersey customers could send over $300 million per year to the owners of profitable nuclear plants because the standard for compensation is not that a plant is actually losing money, only that it “is not covering its costs including its cost of capital.” The cost of capital is essentially the opportunity cost—how much could PSEG make if it invested its capital elsewhere? A major purpose of restructuring the electricity markets in New Jersey was to allow competitive wholesale markets to determine the profitability of generation resources and to get the state out of the business of setting profit margins on power generation. When nuclear plants were swimming in profits, PSEG was under no obligation to share the winnings with consumers; now that the market has turned against nuclear power, the company should not rely on consumers to bolster its earnings.

New Jersey Consumers Likely to Overpay

Several provisions in the bill make it likely that consumers will pay more for these plants, and for a longer period of time, than is needed to secure the benefits they provide because in the bill:

• There is no time limit. As long as the plant is licensed, it could qualify for a subsidy;
• Plants qualify for subsidies based on projected, not actual, costs. There also is no claw back provision, so if payments are made to plants that turn out to be profitable after all, the plant owner is not required to return those funds to customers.
• Subsidies are provided for a minimum period of three years. if a plant is projected not to cover “its cost of capital” in one year, and projected to cease operations in three years, it still could secure a subsidy for a full three years.

Employees and Communities Will Not Get the California Deal

While it’s gratifying to see the language from our issue brief appear in the final paragraph of the bill, close inspection reveals a critical flaw in the provision that purports to protect plant employees and host communities. Instead of adopting employee and community protection plans now, as PG&E did in the Diablo Canyon Proposal in California, 10 years in advance of closing the plant, the New Jersey bill requires a protective plan only if the plant is going to close in advance of its license expiration date, and then only 90 days in advance of filing notice of such closure. In California, PG&E not only made a $350 million transition plan in advance, it figured out how to fund the plan as well. This bill leaves the question of cost for another day. The overwhelming majority of the $320 million per year may go to shareholders; the bill does not require PSEG to direct a penny of the funds toward worker and community transitions.

And if any protections do materialize, you don’t have to guess who will be asked to pay for them. This is not a good deal for New Jersey. Better to slow down this process and take the time necessary to ensure this is done right, rather than rush it through in the last days of the lame-duck Christie administration.