Ruling will have ramification in NJ, where PSEG Power has already broached subject of state incentives to keep its nuclear units up and running

In a legal test of a state’s ability to subsidize nuclear power plants, a federal court has dismissed a challenge to a decision by Illinois to award incentives to two plants owned by Exelon.

U.S. District Court Judge Manish Shah said the program set up by Illinois falls within the state’s authority over generation facilities and is not pre-empted by other federal statutes.

The case has implications for New Jersey, because PSEG Power, the operator of three nuclear units in South Jersey, is trying to convince policymakers to grant similar or other incentives to its plants to avoid their closing because of falling power prices.

The future of nuclear plants is emerging as one of the biggest questions in the energy sector. Cheap natural gas is undercutting the economics of nuclear power, leading to the premature closing of six plants across the nation. Nuclear energy advocates say the plants are not properly valued as a carbon-free source of electricity, which are critical to combatting climate change.

Without incentives, Exelon had threatened to close two of its plants in Illinois, saying it had lost more than $800 million over the past six years. Faced with the loss of 4,200 jobs, the Illinois Legislature approved so-called zero emission credits to avert the units’ retirement. The credits, ultimately paid by ratepayers, will amount to $235 million over 10 years.

Legal challenge

Independent power producers, including Princeton-based NRG Energy, and consumers challenged the program in court. Both essentially raised the same issue, saying the incentives violate interstate commerce and the Federal Power Act, as well as citing another case that went to the nation’s highest court involving New Jersey and Maryland’s efforts to subsidize new natural-gas plants.

In a 43-page decision handed down last Friday, the court rejected their arguments, ruling the plaintiffs lacked standing and failed to state a claim. The Electric Power Supply Association and some of its members already have filed an appeal of the ruling.

“The larger issue is this: if upheld, the Illinois decision would effectively strip FERC (Federal Energy Regulatory Commission) of its authority to regulate wholesale markets, would harm ratepayers, and threaten FERC’s ability to put in place rules protecting competitive electricity markets,’’ said David Gaier, a spokesman for NRG Energy.

The Exelon angle

In a statement, Exelon called the decision good news for the environment and consumers. The zero-emission credits employ the same mechanisms used to support other sources of clean energy, a spokesman said. “These programs internalize the cost of pollution into the market and preserve the most cost-effective source of carbon abatement available to consumers,’’ said Paul Adams, the spokesman.

But Stefanie Brand, director of the New Jersey Division of Rate Counsel, argued the ruling raises more questions than it answers. “There’s a long way to go before it is determined where ZECs are legal,’’ Brand said. “There are a lot of arguments on appeal.’’

While PSEG has been lobbying for help for its nuclear units, which provide roughly half of the state’s electricity, there has been no legislation introduced similar to that approved in Illinois. The company declined comment on the Illinois case.

While the court’s decision is a positive for companies looking to get help for nuclear plants, Paul Patterson, an energy analyst for Glenrock Associates, said the biggest issue is to convince states to give subsidies to the sector. “That’s a policy question,” he said.

New York also has adopted a program to give subsidies to economically troubled nuclear plants, which also is being challenged in court by the Electric Power Supply Association.