Pennsylvania’s First Nuclear Subsidy Bill, Explained

Legislators in the Pennsylvania House of Representatives have introduced House Bill 11, a much-anticipated bill to add nuclear power to the state’s Alternative Energy Portfolio Standards Act (AEPS). An early draft of the bill was discussed by the Kleinman Center’s Christina Simeone here. A similar bill is expected soon in the state Senate.

As sponsored by Representative Thomas Mehaffie (R-106), the "Keep Powering Pennsylvania Act" falls far short of the clean energy goals that Pennsylvanians want and the protections they need. HB 11 does improve on the previous version by capping payments to nuclear generators and providing for lower subsidies if a carbon price takes effect in Pennsylvania. However, it still doesn't limit carbon pollution, still does nothing for renewable energy or energy efficiency, still allows payments to nuclear operators without a showing of financial distress, and still makes no provision for the workers and communities that will be affected when nuclear plants close.

What would House Bill 11 do?

HB 11 would require Pennsylvania’s electric utilities (technically, electric distribution companies, or EDCs) to buy 50 percent of the electricity they distribute from generation sources included in a new “tier” of the AEPS (Tier III). Nominally, Tier III includes both nuclear power and renewables, but for reasons explained below, it's likely that only nuclear plants would be selected for Tier III compliance.

Currently, the AEPS has two tiers. Tier I includes renewables, along with biomass, landfill gas, coalbed methane, fuel cells, and biologically derived methane. Tier II includes waste coal, municipal garbage, and other non-renewables. EDCs – which, under Pennsylvania’s Competition Act, buy electricity for their customers on wholesale markets, rather than producing it themselves—comply with the AEPS by buying “alternative energy credits,” each representing one megawatt-hour of electricity generated. (Alternative energy suppliers register with the PUC to get saleable credits for their generation). Electric generation suppliers (EGS) that sell electricity in Pennsylvania's retail market also have to buy AEPS credits. The AEPS requires that by 2021, 8 percent of the electricity distributed by EDCs and EGS come from Tier I sources, and 10 percent from Tier II sources. The costs of these credits are passed on to consumers as a cost of electricity generation.

HB 11 would require EDCs to purchase credits from nuclear power plants, with the costs passed on to Pennsylvania consumers as "nonbypassable" distribution charges. As a result, the costs would be borne both by consumers who shop for electricity and customers who don't, just as with Tier I and Tier II credits. That said, HB 11 appears to leave open how these costs would be allocated among the various classes of electric consumers (residential, commercial, and industrial) that EDCs and EGS serve. This allocation would be decided by the Public Utility Commission (PUC).

Would renewables be eligible for Tier III credits?

The answer is: yes, in some circumstances, but eligibility for Tier III isn't the same as actually getting Tier III credits, and as HB 11 is written, renewables probably would not get credits.

Under HB 11, generating sources qualify for Tier III if, among other things, they prevent or avoid emissions in Pennsylvania both of carbon dioxide and of criteria pollutants (e.g., ground-level ozone and particulate matter); they have not received any kind of subsidy from any other state on account of its environmental attributes; they are not owned by a vertically-integrated utility (such as Virginia and North Carolina have) that builds its own power plants and passes on the costs to customers.

Together, these conditions would give generation located in Pennsylvania a significant advantage over generation outside its borders. And that would create more opportunity for nuclear power than for renewables, both because there’s a lot more nuclear generation in the state now (around 83,000 MWh per year) than renewable generation (less than 8,000 MWh per year) and unlike the rest of the PJM region, Pennsylvania is seeing relatively little new large-scale renewable development. Almost all of new power projects being built in Pennsylvania are gas-fired power projects.

If a source is deemed eligible for Tier III credits (a decision to be made by the PUC), the PUC would rank each eligible source “for participation in the Tier III program” based on “how well the alternative generation source satisfies the criteria specified under this act.” We don’t know how the PUC would conduct this ranking, but it’s a safe bet that the "how well" language would be interpreted as "the more electricity a source generates, the more pollution it avoids and the better it satisfies the eligibility criteria." In that case, all the state’s nuclear plants would all get picked first, since even the smallest of those plants (Three Mile Island, with its one reactor) generates much more electricity than the largest utility-scale wind or solar farm.

This would leave little room for renewables in Tier III. Again, HB 11 would require EDCs to buy 50 percent of their electricity from Tier III sources. According to the PUC (see page 20), in 2017 EDCs distributed about 150,000,000 MWh of electricity. Pennsylvania’s nuclear plants currently generate about 83,000,000 MWh of electricity per year (i.e,. more than half of what EDCs distribute). It’s true that HB 11 would require Tier-III-eligible sources to be ranked by an estimated generation calculation that may result in numbers lower than actual generation number, and that that this could create some headroom for renewables. But it wouldn't be much.

What would Tier III compliance cost Pennsylvania electricity customers?

Maybe the most significant difference between HB 11 and the draft version from February is the introduction of a price floor and cap for Tier III credits. As in the draft, the price of Tier III credits would be pegged to the price of Tier I credit futures through a complicated formula discussed in the Kleinman Center's blog. But now the price of Tier III credits could not exceed  65 percent of the average price of Tier I credits retired in 2017 ($7.90, based on the PUC’s 2017 AEPS report, which shows an average retired Tier I price of $12.16) or less than 50 percent of that price ($6.08). Assuming annual generation of 75 million MWh from Pennsylvania’s nuclear plants, the annual cost of Tier III compliance would be somewhere between $450,000,000 and $590,000,000, which is roughly in line with the $500,000,000 figure that Representative Mehaffie cited when he introduced the bill.

What would happen if Pennsylvania adopts a price on carbon pollution?

HB 11, like the earlier draft, provides that the Tier III program would expire “after an effective cost of carbon emissions exists in this Commonwealth that is equal to no less than an average of $15 per ton.” New to HB 11 is a mechanism to adjust the price of Tier III credits downward if carbon pollution were priced at less than $15 per ton through Pennsylvania’s participation in the Regional Greenhouse Gas Initiative (RGGI) or a similar program. While the language isn’t clear, the apparent intent is that the closer a RGGI price got to $15, the closer the Tier III credit price would get to $0.

What is NRDC's position on HB 11?

NRDC opposes HB 11. We evaluate state policies to transition away from uneconomical nuclear plants according to how well they satisfy the "best practices" described in our nuclear transition issue brief and in a letter that we recently sent to the General Assembly. While HB 11, as introduced, improves on the draft version by putting a ceiling on credit prices and creating a mechanism to better account for the introduction of a carbon price, it still requires no showing of severe financial distress and still gives the PUC relatively little discretion to adjust prices downward. Nor does it place a cap on carbon emissions, expand renewable or efficiency goals, condition credits on better waste management, or address the needs of workers and communities dependent on nuclear plants. In short, HB 11 fails to put Pennsylvania on track for a just transition to a clean energy economy.