Department of Energy Issues Updated Guidance for Civil Nuclear Credit Program Applicants

Background

The CNC Program was established by the Bipartisan Infrastructure Law (BIL), which appropriated $6 billion for fiscal years 2022 – 2026 to fund the Program and prevent closures of nuclear power plants. Under the CNC, the U.S. Department of Energy (DOE) is authorized to provide financial support for those existing nuclear reactors which are projected to cease operations due to economic factors. We previously described the CNC Program in greater depth in February 2022, when DOE released a Notice of Intent (NOI) and Request for Information (RFI) describing and seeking feedback on its plan for implementing the CNC Program, and in May after the DOE announced that it was seeking applications and sealed bid submissions from reactors wishing to participate in the CNC Program and published its initial CNC Program Guidance.

New Guidance and Updated Competitive Market Requirement

Under the BIL, to be eligible to receive credits under the CNC Program, a reactor must “compete [] in a competitive electricity market.” While the BIL did not further define this requirement, DOE’s February 2022 NOI and RFI set out a number of commercial arrangements that the DOE was considering in determining whether the applicant was competing in a competitive market, including market dispatch by an Independent System Operator or a Regional Transmission Organization, participation in a selection mechanism for electricity services (for example, a capacity market or a day-ahead market), or a merit order dispatch by a vertically integrated utility. However, the initial CNC Program Guidance issued in April 2022 proposed a more narrow and specific eligibility criterion—a nuclear reactor must demonstrate that it “will receive 50 percent or more of total revenue from sources that are exposed to electricity market competition” to be eligible for credits issued during the first award cycle. DOE’s Guidance further defined such revenues as those derived either from participation in organized wholesale markets or from bilateral agreements with non-affiliated purchasers on competitively negotiated terms. Further, DOE’s Guidance specified that a reactor which recovered more than 50 percent of its costs from cost-of-service regulation or regulated contracts would not meet the competitive electricity market requirement (and thus could not be eligible for CNC credits in the first award cycle). The DOE did not provide an explanation for the basis of the 50 percent requirement.

Following the issuance of the initial Guidance, the DOE received feedback that the 50 percent criterion was too narrow, unnecessarily excluding at-risk reactors that the BIL intended to support. For example, in a letter to Secretary Granholm, the Office of the Governor of California argued that “this exclusion is overly broad, especially where cost-of-service does not cover the costs for which funding is being sought.” In response, the DOE updated the Guidance, revising the competitiveness criteria to focus on the materiality of market-based revenues. The revised Guidance specifies that to be eligible for the CNC Program, an applicant must show that the nuclear reactor will receive a “material amount of its total revenue” from sources exposed to electricity market competition (still defined as revenues derived from wholesale markets or competitively negotiated agreements). In its proposal to update the Guidance, DOE explained that materiality would mean that “the revenues earned in the market and exposed to market risk are sizable enough to influence the economics and retirement decision.”

In addition to removing the 50 percent restriction, DOE’s revised Guidance also requires an applicant to demonstrate that cost-of-service regulatory mechanisms, which might otherwise reduce the amount of revenue exposed to market risk, be unavailable, exhausted or otherwise unaccounted for. DOE’s update did not explain the basis for this change, but it is likely that the requirement was added to prevent situations where reactors choose to rely on federal CNC Program credits when state-level regulatory recovery is available.

Finally, DOE extended the deadline for submission of certification applications and sealed bids to September 6, 2022, and revised the award period to begin on the date of final award selection, rather than beginning with the first fiscal year in which credits are allocated.

Analysis

A major impact of DOE’s updated Guidance is that it may expand the potential pool of eligible reactors for CNC Program credits. For example, the letter from the Governor of California explains that the Diablo Canyon Nuclear Power Plant did not recover more than 50 percent of its revenue from competitive markets (and thus could not qualify for the CNC Program), but still faced significant costs which it could not recover from cost-of-service regulation. The updated Guidance may potentially allow Diablo Canyon to qualify for the CNC Program. Other plants facing economic retirement may similarly be in a situation where they recover less than 50 percent of their revenue from competitive markets, but the portion of revenue which they do recover from competitive markets is significant enough to impact the reactor’s economic viability. Under the new Guidance, these plants would be eligible to apply for first-year awards under the CNC.

The change may also better-insulate eligible reactors from fluctuations in competitive market prices. For example, if a reactor receives a portion of its revenue from competitive markets, the reactor’s percentage of competitive revenues may decrease if market prices go down. This means that, under the previous standard requiring at least 50 percent of revenues be derived from competitive markets, a reactor could lose eligibility at the same time it faces greater economic pressures from declining market prices, as declining market prices cause its overall percentage of market revenue to drop below 50 percent. DOE’s change to a materiality standard will avoid this circumstance.

However, the DOE’s new requirement that applicants show the unavailability of cost-of-service regulation could introduce a new challenge for some applicants subject to certain state regulatory frameworks. Depending on the state regulation, certain recovery methods, such as tracking or balancing accounts or construction work in progress (CWIP) recovery, may be available but not mandatory. Applicants that had planned to seek CNC credits rather than pursue recovery via one or more of these cost-of-service regulations may now need to demonstrate why these recovery methods are unavailable or non-viable. Further, even reactors that do not have access to cost-of-service recovery may still need to update their applications and sealed bids to address this requirement and demonstrate the unavailability of cost-of-service recovery.

Conclusion

The previous deadline for submission of certification applications and sealed bids for the first award period was July 5, 2022. DOE’s updated Guidance extends the application deadline to September 6, 2022. The extension provides an additional 63 days for owners and operators of eligible nuclear reactors to submit their applications for certification and sealed bids for credits.

Application information and bid submissions should be submitted here. Pillsbury’s top-rated nuclear team stands ready to assist applicants with interpreting the revised Guidance and drafting applications.