Bacon's Rebellion

Grid Pro Quo

The EPA wants to restructure Virginia’s electric grid. Skeptics argue that slashing CO2 emissions will drive electric bills higher. Environmentalists disagree. Who’s right?

by James A. Bacon

President Barack Obama’s Clean Power Plan gives Virginia fifteen years to cut CO2 emissions by 38% from 2012 levels. Not only will the plan usher in a better world of cleaner air, bountiful “green” jobs and diminished global warming, supporters contend, Virginians will use less electricity and enjoy an 8% reduction in electric bills by 2030.

The State Corporation Commission (SCC) has nothing to say about global warming or green jobs, but the staff has commented upon the Clean Power Plan’s impact on electric bills:  Rates under the plan could be 20% to 22% higher for a typical Dominion Virginia Power customer than under a business-as-usual approach. That’s on top of the 14% that electric rates have increased since 2007, including rate adjustments for lower fuel prices that took effect this month, and it doesn’t include the impact on Appalachian Power or smaller utilities.

Who’s right? Will electric bills go up or down?

What we have here is a battle of dueling experts – Obama’s Environmental Protection Agency (EPA) and its allies in the environmentalist community on the one side, and the state regulatory commission and the electric power industry on the other. Whom do we believe?

It’s hard for citizens to know. The issues are anaesthetizingly complex, and few people have the patience to wade through both sides of the issues. For each assertion that one party makes, someone provides a counter. Peel away one layer of the debate, and there always seems to be another.

That’s why God created Bacon’s Rebellion. My goal in this article is to clearly delineate the main points of contention. You may not change your mind – who ever does? — but at least you will leave with a clearer idea of what the issues are.
Because this piece is so long, I have broken it into digestible chunks. Use these links to navigate the article.

The Clean Power Plan and how it works
McAuliffe administration asks EPA to modify Virginia targets
The SCC response
SELC sides with EPA
Nukes vs. Renewables
Wholesale electricity to the rescue
Energy efficiency to the rescue
How reliable is renewable power?

The Clean Power Plan and how it works

The purpose of the Clean Power Plan is straightforward: It is designed to radically curtail the CO2 emissions blamed for global warming by setting CO2 targets for each state. Nationally, the plan aims to cut CO2 emissions by 30%, but state targets vary widely. Under proposed regulations, Virginia would have to slash 2012-level emissions by 38% by 2030, with a majority of the cuts occurring by 2025.

While the EPA sets targets for each state, it theoretically allows states flexibility as to how they achieve those targets. The agency provides four broad strategies, which, it contends, should achieve the goals at a reasonable cost. States can mix and match as best fits their circumstances. The strategies include:

EPA projections of Clean Power Plan impact on Virginia electric rates. Source: Southern Environmental Law Center. (Click for more legible image.)

While electric rates might go up marginally under the plan, the EPA contends, households actually would have lower electric bills because investments in energy efficiency would mean they consume less. Depending upon the approach taken, electric bills could be 8% lower by 2030.

Draft targets were announced in 2014. The EPA is scheduled to finalize the plan this July, and the states are required to submit their state-level plans by 2016.

McAuliffe administration asks EPA to modify Virginia targets

Virginia has cut carbon-dioxide emissions significantly since 2005 — more than most other states.

While supporting the intent of the Clean Power Plan to address global warming, the McAuliffe administration objected that the EPA methodology for allocating cuts gives insufficient credit to Virginia for past progress in reducing carbon intensity – Virginia cut CO2 emissions 39% between 2005 and 2012, mainly by replacing coal-fired capacity with gas — and requires the state to achieve more stringent standards than neighboring states. When compared on a metric of pounds of CO2 emitted per megawatt-hour of electricity generated, Virginia must reduce its emissions to half the levels of Kentucky and West Virginia.

“The disparity in state goals leaves Virginia at a competitive disadvantage to its neighbors and numerous other states because they will be able to comply with the Proposed Emission Guidelines more cost-effectively,” wrote Michael G. Dowd, director of the state Department of Environmental Quality’s air division, last year.

Tight deadlines are another problem. “EPA should expect that some states will be late in submitting plans and reports, or submit deficient plans and reports due to no fault of their own,” the DEQ observed.

While it is theoretically possible that the EPA will modify Virginia’s CO2 targets in response to the comments of the McAuliffe administration and others, no one I interviewed for this story was willing to speculate about the likelihood of that happening. Says DEQ spokesman Bill Hayden: “We’ve let EPA know what we think should happen. We have not had any response yet.”

“The cost of compliance is still a moving target,” says Michael Kelly, director of communications for the Attorney General’s office, one of whose missions is to represent the interests of Virginia rate payers. “There will be a lot of different paths to compliance.”

Speaking earlier this month at the Virginia Energy and Sustainability Conference, Governor Terry McAuliffe said that he had taken up the issue directly with EPA Director Gina McCarthy. “I am confident this message has been received loud and clear,” he said, “and I expect that the final rule will address these concerns.”

The SCC response

In October, the State Corporation Commission submitted a comprehensive response to the EPA’s draft rules. The staff argued that it would be exceedingly difficult under the Clean Power Plan for Virginia to meet the EPA’s emission targets and maintain the reliability of the electric system. Furthermore, the cost to ratepayers would run into the billions of dollars.

The SCC staff estimated that the plan would cost ratepayers between $5.5 billion and $6 billion just for Dominion to comply. To get to that number, the staff calculated the cost by which adopting the “fuel diversity” scenario described in Dominion’s 2014 Integrated Resource Plan, a strategic planning document, exceeded Dominion’s low-cost “base” option. Then, because emissions under the “fuel diversity” plan still exceeded the EPA’s proposed standards, SCC staff modified that plan to include an additional 69 megawatts of onshore renewable wind generation.

Although the Clean Power Plan doesn’t specify that Dominion must shut down any of its four coal-fired power plants, the SCC argues that the only practical way to achieve the CO2 targets is to eliminate generation from three of them. Ironically, Dominion had spent hundreds of millions of dollars retrofitting those plants to meet a previous round of EPA mandates cracking down on toxic emissions. Dominion would be hit with as much as $2 billion in stranded costs, if the plants were shut down immediately, and $1.6 billion if the shutdowns could be delayed for five years, as the plants depreciated. Ordinarily, those so-called “impairment” costs would be passed on to customers, but Dominion agreed in a deal enacted by the General Assembly this year to absorb the risk of write-downs occurring prior to 2021. After that date, exposure would shift back to ratepayers.

Ratepayers would take another hit from higher wholesale prices purchased by Virginia utilities and passed on to Virginia retail customers, the SCC argued. As for the EPA’s claim that electric rates would go up but bills would go down, the SCC found it “extremely unlikely that either electric rates or bills in Virginia will go down as a result of the Proposed Regulation.”

Such an outcome would be possible only if the cost of achieving energy savings was less than that of generating the same amount of electricity or purchasing it on the wholesale market. The SCC is dubious that such savings can be found on a large scale. States the letter: “The Virginia SCC Staff is unaware of any electric energy efficiency resource deployable in Virginia that both: 1) has a cost less than its associated avoided variable operating costs, and 2) is scalable to a level that would meet the Proposed Regulation.”

SELC sides with EPA

The Southern Environmental Law Center (SELC) has taken the lead among Virginia environmental groups in backing the Clean Power Plan. When asked about the nitty gritty details, other local environmental groups defer to SELC, which has invested more heavily than others in studying the issue. The Charlottesville-based group hired the ICF International engineering firm to compile data for an SELC report, “Clean Power Plan Impact Analysis Support,” quantifying the impact of the Clean Power Plan on Virginia.

SELC argued that the societal “co-benefits” from reducing CO2 as well as other chemicals generated by coal combustion – sulfur dioxide, ozone, NOx, Hg and HCL – would amount to thousands of dollars per ton. Indeed, according to the SELC analysis, benefits to the environment and public health would swamp any costs associated with implementing the program.

However, the SELC report conceded that the environmental benefits would be global in nature, and that it was difficult to estimate the environmental and health benefits to Virginians specifically. Although the EPA had cranked out benefit-per-ton estimates for several multi-state regions, the SELC report stated, “The regional benefit-per-ton estimates do not reflect the state-level variability….” Also, the report acknowledged, “Potential co-benefits associated with carbon policies diminish rapidly as these policies become more stringent – the benefit-cost ratio decreases as lower cost controls are exhausted.”

Using data collected from EPA’s modeling analysis of the impact of the Clean Power Plan, SELC compared compliance costs of a base case scenario and two Clean Power Plan scenarios, with the difference between them representing the cost impact. As for the implications for rate payers, SELC agreed with EPA that the increase in electric rates would be modest – in the range of 2% to 3% by 2030 – and that actual electric bills would be roughly 8% lower when the savings from energy efficiency are taken into account.

How did SELC get such a different number from the SCC for the impact on electric rates? Angela Navarro, staff attorney and leader of SELC’s energy efficiency program, explains: The SCC based its analysis on the Integrated Resource Plan (IRP) that Dominion filed in 2014. The $5.5 billion estimate is based upon the “fuel diversity” scenario, which comes close to meeting the EPA targets. That scenario assumes construction of the North Anna Three nuclear unit. A new nuclear unit is probably the most expensive resource the utility can build,” Navarro says. “That’s the fundamental difference.” SELC’s report assumes that renewables and energy efficiency will be built instead of nukes.

But that’s not all. The SCC also failed to consider a regional approach to compliance– purchasing renewable energy certificates or credits from the PJM multistate electricity marketplace, from third party owners or from other utilities. In some instances, she says, Dominion could purchase electricity from other power producers for less than it would cost to build and generate that electricity itself.

This year, Dominion and Appalachian Power will file updated IRPs, which will include a Clean Power Plan option. Those plans will be filed in July, and the SCC will hold a hearing next year, Navarro says. “I hope we’ll hear the commission staff change their tune regarding the cost of the Clean Power Plan. There are other ways for Virginia to comply.”

Nukes vs. Renewables

One of the biggest disagreements is over the role of nuclear power in driving down CO2 emissions. Although the Clean Power Plan envisions nuclear as part of the solution nationally, Navarro contends that nuclear power is extraordinarily expensive and that the impact of the Clean Power Plan can be largely mitigated by investing in energy efficiency, wind and solar rather than Dominion’s planned third nuclear unit at the North Anna complex. The fixed contract prices for solar and wind are beating even low-cost natural gas, and these resources are only becoming more cost-competitive, she says. Additionally, solar, wind and energy efficiency are flexible resources that can be easily scaled up or down, which is important in a changing regulatory climate.

Dominion disputes SELC’s assessment of nuclear power. Indeed, Dominion draws a diametrically opposite conclusion: Substituting renewable fuels for nuclear power would significantly increase the cost of Clean Power Plan compliance. The up-front capital cost of building a nuclear facility is higher than that of solar, concedes Katharine Bond, director of public policy for Dominion, but steady output, low operating costs and long life make it an important part of the fuel mix. Nuclear units run 95% of the time with zero carbon emissions. Compare that to wind and solar, which are intermittent power sources that operate on average about 20% of the time, are not always available when needed and require construction of expensive back-up capacity. Also figure that nuclear facilities are designed to last 60 to 70 years compared to a solar facility that lasts 20 to 30 years. Finally, factor in the cost of land. Nuclear power has a much smaller geographic footprint than solar. Says Bond: “If you have a solar facility generating at its peak on a sunny day, it would need 5,000 acres to equal to just one unit of North Anna.”

Solar and wind have a place in a utility system, says Bond, particularly if they can be placed in locations in the grid where the variability can be tempered. But it doesn’t match up well against peak demand. Solar production peaks in the early afternoon several hours before demand peaks in the early evening when it’s still warm outside and people get home and crank up their appliances. Solar won’t be of much help either when night-time temperatures drop below freezing during winter.

Ken Schrad, SCC communications director, says it is too early to speculate whether nuclear or renewable power would be more cost effective in a Virginia context. “The question of whether North Anna 3 should be built will depend on a number of factors including on-going changes in construction cost estimates, the final form of the EPA’s regulations and Virginia’s implementation plan, changes in coal and natural gas costs, and further developments in renewable generation and energy efficiency. In short, it would be very premature to reach any definitive conclusion regarding North Anna 3 at this time.”

PJM transmission system. Dominion Power territory shown in gray, Appalachian Power in light blue.

Wholesale electricity to the rescue

SELC also argues that the SCC underplayed the ability of Dominion and Appalachian Power to meet their CO2 targets by purchasing electric power on the wholesale market. Dominion and Appalachian both are part of the PJM, a regional transmission organization that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia. Because the supply and demand for electricity varies by season, time of day, weather conditions and local economic considerations, power companies find it advantageous to buy and sell electricity from one another.

A flaw in the SCC impact analysis, says Navarro, is that staff assumed that compliance with the new CO2 targets would have to come within the state of Virginia. But, in fact, Dominion and Appalachian Power may have the option to purchase renewable energy credits from the PJM marketplace, from other utilities or from independent power producers. That option is likely to be cheaper than building new capacity. PJM’s own analysis suggests that a regional approach to curtailing CO2 emissions would be more cost-effective than a state-by-state approach.

The SCC’s Schrad says it’s not that simple. First, the PJM analysis did not consider the cost of replacing coal-fired capacity with renewables and energy efficiency. Indeed, the study explicitly states: “PJM did not examine the additional costs related to capital expenditure on renewable resources, energy efficiency or new combined-cycle gas resources. Consequently, the wholesale energy market impacts … do not account for these capital costs, which may appear in retail electricity rates as determined by state commissions.”

Second, while true that Dominion Virginia Power will be able to purchase market-priced electricity through PJM, he says, “you need to remember that [Dominion] is a member of PJM and as such, has responsibility to provide adequate capacity of its own to PJM. Dominion’s coal-fired plants form a substantial part of the capacity the company is obligated to supply to the PJM market and enable the transmission grid to function properly. “[Dominion] cannot simply be a buyer in this market, but has supplier responsibilities as well.”

Dominion won’t be the only power company within the PJM system shutting down coal-fired capacity. Power companies across the grid will be substituting renewables and gas across the PJM region. To a greater or lesser degree, other states will be facing the same challenge as Virginia. There is no assurance that significant additions of renewable power and energy efficiency will be added at no additional cost to Virginia, Schrad says. And even if it is, there is no assurance that Dominion will be able to build the added capacity in the form of high-voltage electric lines to transmit a higher-than-planned volume of purchased electricity.

Finally, Schrad explains, the SCC did not look at a “regional” strategy for obtaining compliance because such an approach would require public policy decisions the SCC cannot make. Given the fact that Virginia has the lowest emissions target in the PJM system, staff also presumed that the Old Dominion would make an unattractive ally in compliance efforts. What state would willingly share Virginia’s outsized burden?

Energy efficiency to the rescue

SELC’s Navarro backs EPA’s assertion that more aggressive energy conservation can reduce the need to build expensive new capacity. There are many different approaches to investing in energy efficiency, from weatherizing homes, to installing building automation systems in commercial and industrial buildings, to exploiting smart-grid technology to reduce voltage waste in the electric distribution system. For instance, Navigant Research recently predicted that Conservation Voltage Reduction (CVR), which dynamically optimizes voltage levels to continuously reduce energy consumption during periods of peak demand, “can unleash unprecedented smart grid benefits.”

“Utilities can invest and customers can invest,” says Navarro. “What you’ll see from both sides of the equation is that it’s cheaper to reduce load than to build new generation to meet load. If you can reduce the large quantities of energy that Virginians waste, that’s a whole lot of generation you don’t have to build.”

In its own issue brief, the National Resources Defense Council (NRDC) agreed that Virginia has considerable untapped potential to improve energy. “The state has an energy savings goal of 10 percent by 2022, but this goal is voluntary, with no requirement for utilities or the state to achieve this level of savings for customers. … Other states have been able to achieve significantly higher levels of low-cost efficiency, to accrue substantially more customer and energy benefits. Virginia can do the same – meeting the level of energy efficiency suggested in the Clean Power Plan (still well below Virginia’s potential) would reduce the average customer’s bill by 6 to 8 percent.”

While energy efficiency isn’t free, it is cheaper than generating energy by any method, the NRDC says. “Investments in cost effective energy efficiency could save Virginia businesses $531 million in 2020 alone.”

The SCC staff took energy conservation into account when calculating its $5.5-billion impact estimate on ratepayers, says Schrad. Dominion’s “fuel diversity” plan already includes a significant energy-conservation component. “It is possible to further reduce demand through demand-side activities. The question is would such activities be cost effective?”

Even if the programs work as billed, that creates a new problem. “Under Virginia law … a utility that institutes energy efficiency programs is entitled to request recovery of its ‘lost revenues’ through a rate adjustment charge,” says Schrad. “These adjustment charges are not subject to the recent law that ‘freezes’ a utility’s base rates.” It would make no sense for Dominion or another power company to invest money in energy-efficiency if the end result were lower revenue and lower profit. That law was put into place to encourage Virginia’s electric utilities to invest in energy conservation when it makes economic sense to do so.

How reliable is renewable power?

The Clean Power Plan relies heavily upon renewable energy sources to drive down CO2 emissions across the electric grid. The SCC and Dominion both say that renewable energy sources are fine up to a point but create a big problem for reliability beyond a certain level. Wind and solar power are inherently intermittent – they generate electricity only when the sun is shining and the wind is blowing. As a consequence, they require expensive backup capacity in the form of gas-fired power, which can kick up or dial back in response to the ups and downs of the renewables. Not only is the EPA’s lead time too short to add the volume of wind and/or solar that would be required, the pipeline capacity doesn’t exist to supply all the gas that would be needed.

The NRDC contends that more precise weather forecasts and the second generation of “smart grid” technologies can stabilize the grid. “Changes in wind and solar generation tend to be gradual and predictable,” says the NRDC white paper. “This means that wind and solar need less backup generation than fossil fuels or nuclear sources.”

Increasing renewable energy output sevenfold (35,000 MW) in the PJM power-sharing region, which includes Virginia, would increase the needed amount of fast-acting backup electricity by only 340 MW – about one percent of the added renewable energy capacity, says the NRDC. By comparison, the PJM region currently maintains 3,350 MW of backup power —enough to power 3.3 million homes—to keep the lights on if a large fossil-fuel or nuclear power plant unexpectedly breaks down.

But the SCC says that each state has a different geography, different infrastructures and different political considerations, and that generalizations made from other states don’t necessarily apply to Virginia. “EPA lumps eight States into an ‘East Central’ region and then uses state RPS requirements established by six states other than Virginia,” states the SCC letter. “There are many reasons, including geographic and economic, why States have approached renewable generation differently.”

A personal note

It is all but impossible for members of the public to sift through these conflicting considerations. One is tempted to split the difference: The impact on ratepayers probably will be less dire than the SCC estimates but less rosy than the EPA/SELC forecast. But we have no way of knowing for sure.

If you’re persuaded that catastrophic global warming threatens the planet, you’re probably not inclined to quibble with a little uncertainty. In the end, the global stakes are so high that a few billion dollars — assuming you believe the SCC’s rate scenario — is a small price to pay over the next 15 years to help avoid calamity. If you’re skeptical about the claims made about global warming, or if you suspect that sacrifices made by Virginians will have a too-small-to-measure influence on global temperatures, you likely put pocket-book issues first. In that case, you’ll probably heed those whose full-time job it is to ensure the reliability of the electric system, not those whose priority is saving the planet.

In my nearly four decades as a journalist, I have concluded that, unless presented with incontrovertible evidence to the contrary, people believe what they want to believe. If you care about the issues enough to have read this far, you’re probably deeply committed to your pre-existing point of view. But at least you should have a better handle on why you believe what you believe.

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