Nuclear power plants that have been the source of substantial baseload generation face financial challenges in competitive wholesale power markets. Falling revenues are a consequence of three coinciding factors in the mid-2000s: falling natural gas prices and increased natural gas generation capacity, increases in wind generation capacity arising from renewable portfolio standard (RPS) regulations, and stagnant electricity demand. New York and Illinois have implemented new regulations requiring utilities and load-serving entities to purchase Zero Emission Credits (ZECs), with the proceeds returned as revenue to participating nuclear power plants. We use a difference-in-differences regression analysis to examine ZEC program effects on generation, wholesale and retail prices, and air quality. We find that nuclear generation increased in both states as a result of the ZEC programs, increasing renewable generation in Illinois and reducing coal generation in New York. Wholesale prices fell in both states, while we see evidence of varying pass-through of the cost subsidy and wholesale price reductions as retail prices fell slightly in Illinois and rose in New York. Finally, we find improvements in local air quality in both states, as well as a significant decrease in emissions of carbon dioxide in New York in the short-run from the ZEC program.

Every generation technology has a portfolio of features -- energy density, cost characteristics like marginal cost or economies of scale, ability to ramp up and down quickly (flexibility), criteria pollutant emissions, and greenhouse gas emissions. Wholesale power market designs generally reflect short-run marginal cost, yielding economic efficiency but not really reflecting the other features of generators. As concerns about the environmental impact of electricity generation and consumption have increased over the past 50 years, environmental regulation of power plant emissions has increased, first in the form of EPA Clean Air Act regulation of criteria pollutants and then in the development of renewable portfolio standards (RPS) at the state level. As state RPSs have induced investment in first wind and then solar generation capacity as the levelized cost of each has fallen over the past decade, participation of these low-carbon and low-marginal cost resources in wholesale power markets has changed the supply curve and security-constrained economic dispatch order. At the same time, innovation in shale gas extraction has increased natural gas supply over the past 15 years, reducing the marginal cost of natural gas generation.

In most wholesale power markets these supply changes have resulted in both lower market-clearing prices and lower greenhouse gas emissions, largely through coal-fired generation exiting the market as the marginal cost of other resources fell below the marginal cost of coal generation. But another effect of falling market-clearing prices in these markets has been the reduction of revenues to large baseload low-carbon generation from nuclear plants. The existing approach to environmental regulation has focused on increasing renewable generation and has not included a carbon emissions tax that would flow through wholesale power market processes. Thus nuclear power plants increasingly compete against other resources with low marginal cost, and even when natural gas generation is the marginal unit that sets the market-clearing price, that price is typically lower than it has been historically. Nuclear power plants earn less revenue than in the past and under existing market rules and environmental regulations have not been able to earn revenue for their low-carbon characteristics.

ZECs are a novel regulatory instrument designed to attenuate that revenue problem for nuclear power plants. New York and Illinois were the first two states to implement ZECs. How has this regulatory change affected average prices and quantities in wholesale power markets and retail markets? Have these changes led to any changes in ambient air quality and in greenhouse gas emissions? These are the questions we explore in this project.