Pushing Forward Virginia’s Solar Future

Dominion solar facility in Buckingham County.

A couple of years ago, the rap against Dominion Energy Virginia was that it was hostile to solar power. That line of thought is harder to maintain now that Dominion is committed to build at least 5,200 megawatts of solar power — roughly a quarter of its generating capacity — by 2042. Dave Mayfield at the Virginian-Pilot has taken notice:

After many years as a laggard, Virginia has lately been emerging as a leader in the field.

Last year, it placed 10th among the states in new solar capacity installed, up from 17th the year before, according to a report compiled for the Solar Energy Industries Association. North Carolina ranked second, behind California.

The association projects that Virginia’s total solar generating capacity will more than triple over the next five years to roughly 2,000 megawatts – enough to power upwards of 200,000 homes.

Some industry officials and clean-energy advocates expect even-sharper growth during that time frame, and say the solar expansion almost certainly will accelerate across Virginia in the decades beyond.

I nearly fell out of my chair when I read this: “I think you’re going to see a lot more discussion about Virginia being a hot state for solar,” said Ivy Main, affiliated with the Sierra Club’s Virginia chapter who writes the “Power for the People VA” blog. Main has been relentlessly critical of Dominion’s approach to solar over the years.

So the rap against Dominion has changed. Now the criticism is that, yeah, 5,200 megawatts is pretty good, but 25 years takes too long to reach that goal. And, yeah, Dominion is building more solar, but it’s not opening up the grid fast enough enough to homeowners, small businesses and independent solar producers.

Regarding the first criticism: I expect Dominion’s enthusiasm for solar will increase in direct proportion to the falling cost of solar generation, smart grid technology, and battery storage. Just as the utility has gone from a minimal commitment to solar two years ago to a large-scale commitment today in response to changing economics and market forces — especially growing demand by data centers and large corporations for renewable energy — this “problem” will take care of itself. The main brake on solar adoption will be Dominion’s comfort level with integrating a huge solar fleet into its transmission and distribution systems while maintaining grid reliability during periods of peak demand.

The second criticism, opening up solar production to outside competition, is a thornier issue. Many companies would like a piece of Dominion’s electricity market (as well as that of Appalachian Power’s and that of the electric co-ops). These interlopers are nimble and innovative, and, given current price trends, they likely would be able to sell solar for less than the cost of generating electricity from coal, nuclear or even gas — if not now, then five years from now. If competition opened up as critics would like, Virginia’s incumbent utilities stand to lose significant market share.

But here’s the rub: Electric utilities are monopolies, and they are monopolies for a reason. They have the responsibility for maintaining the integrity and reliability of the electric grid. If the lights go out, the North American Electric Reliability Council, PJM Interconnection, the State Corporation Commission, and millions of customers will look to the likes of Dominion, Appalachian Power, and the electric co-ops to get them back on again. They won’t look to homeowners. They won’t look to the independent solar producers. They won’t look to the Sierra Club. The utilities are the ones with skin in the game.

Society and the utilities have struck a bargain: In exchange for ensuring the reliability of the system, society will grant them monopoly service territories and regulate them to provide an assured rate of return on their capital (absent incompetence on the utilities’ part). Reneging on that bargain and opening up the system to wide-open competition would undermine the utilities’ revenues and profits, exposing them to potentially massive write-offs. It should surprise no one that the utilities resist such an eventuality.

Ironically, Dominion led the charge for opening up the utility industry to competition some twenty years ago. The experience was widely judged to be a failure; little competition materialized. Then in recognition of that failure a decade ago, Dominion led the charge to re-regulate the industry in Virginia. We can debate the success or failure of the experience since then, but it does seem apparent that if the industry were deregulated in 2018, there would be plenty of competition on the power-generation side of the business — from merchant producers selling into the wholesale market, from entrepreneurs partnering with big corporations, from intermediaries buying wholesale electricity off the grid and re-selling it to retail customers, and from energy- and eco-conscious homeowners installing their own solar.

One approach to opening up the market for competition is to demonize the utilities. That’s a favorite trope of the Left, which is hostile to corporate power and profits to begin with. Another approach is to give thought to how to realign the incentives for Dominion, Apco and the electric co-ops to do the kinds of things society wants them to do — generate more renewables, allow more competition, invest in energy efficiency, etc. — and to realign them in such a way as to not trigger massive write-offs for power plants made obsolete by the changes. Virginia can choose an ideological route or it can choose a pragmatic path forward.

Under any scenario, building and maintaining the electric transmission and distribution remains a “natural monopoly” and would be subject to continued regulation. But deciding how to restructure electricity generation will be really complicated. In an ideal world, all power generators would sell into PJM’s wholesale market and the winners would be bidders who offer the best combination of price and sustainability. But if the incumbent utilities lose market share and revenues, who pays for cleaning up the coal ash ponds of coal-burning power plants? Who eats the cost of write-offs from obsolete generating units? Who pays to keep aging coal- or nuclear-power plants in reserve for back-up power? What are the implications of Virginia joining the Global Greenhouse Gas Initiative?

We haven’t begun to answer these questions. Indeed, only a handful of people are even asking them. After the exhaustive debate over the Grid Transformation and Security Act this year, there may be little appetite for any such conversations. But allowing for an appropriate respite from the recently concluded General Assembly session, perhaps we should begin the discussion.

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19 responses to “Pushing Forward Virginia’s Solar Future

  1. Jim, you have had a busy week raising some excellent questions about our future energy system. The fundamental issues were not addressed in the discussion about the latest energy legislation. Thank you for providing a forum to get the conversation started.

    You have noted that utilities will maintain responsibility for system reliability as the use of renewables increases. Diversity in the types of generation actually improves reliability. Although solar is a variable source of generation, it is quite predictable. Modern forecasting tools exist and are in use at PJM and utility control centers that allow for predictions of variations in solar output far enough in advance so that alterations can be made in the output of other generators to assure reliability.

    California has more solar capacity than Virginia will have for quite some time and reliability is not a concern. They are wrestling with other issues caused by a significant portion of variable capacity along with a significant portion of relatively inflexible capacity. But they are much less able to adjust for those variations using nearby ISOs than we are within PJM. Other top ten solar states are not finding reliability as a major challenge.

    You raise a crucial issue about who should be the primary developer of new solar installations. The natural monopoly for utilities relates to the wires not the generation. I believe that 19 states are operating successful energy systems where generation is handled in a competitive wholesale market, even if owned by utilities. The utilities are responsible for retail sales and reliability. This is basically how it is managed within PJM where all generators sell into the wholesale market and all Load Serving Entities (the utilities) purchase electricity at wholesale for resale to customers at retail prices. In Virginia, we allow utilities to put those generating facilities in the rate base, where ratepayers pay a set profit to the utility over the life of the power plant. In a sense, Virginia ratepayers take on the risk and subsidize the generating facilities whether they operate profitably or not.

    Solar is not nearly as costly or as complex to develop as a fossil-fired or nuclear power plant. Once they are built the cost of energy produced is essentially fixed. Our habit of assigning responsibility for building power plants to utilities is not necessary for solar. If the utility builds the solar facility in Virginia, putting the unit in the rate base requires that double the project cost is provided to the utility as profit. Ratepayers pay three times the cost for a utility-owned solar facility as they would for an equivalent facility built by a private developer.

    States developing a modern energy system, such as New York, have not allowed utilities to put solar facilities in their rate base. Utilities are free to compete on a level playing field with independent developers through their unregulated subsidiaries. This keeps the costs low for customers and gives innovative new companies an opportunity to compete without the regulatory barrier to entry that has favored utilities.

    Modern grid designers also recognize the benefits of having Distributed Energy Resources (such as small-scale solar) within the distribution system. This increases grid reliability and resiliency. The large utility-scale solar facilities connected at the transmission level do not provide the same advantages. We need a balanced mix of these types of installations.

    The new energy bill gave APCo and Dominion primary responsibility for solar development and energy efficiency in Virginia. Allowing utilities to put the billions invested in these projects in the rate base triples the cost to ratepayers. The path we have charted will be more costly, less innovative, and provide fewer customer choices compared to a more modern energy system design.

    But that leaves the crucial question. If utilities lose some of their revenue to other providers and do not have the ability to recover more profits by putting these new types of energy projects in the rate base, how do they survive?

    This is the essential issue and we have avoided addressing it in Virginia. The utilities understand the threat and have obtained legislation that continues the old cost-of-service regulatory scheme at least until 2028. Utilities are typically regulated to balance the interests of the shareholders with the interests of the ratepayers. We have forsaken that in Virginia and legislated a solution that almost entirely favors the shareholders. As a former utility executive, I am concerned that it will eventually harm the utilities as well.

    There are solutions that can bring things back into balance. Other states are well along the path to doing that. We can benefit from their successes and missteps to design a modern energy system here in Virginia. But we need to get moving. It is vital that we find a way to maintain healthy utilities to manage the grid and maintain reliability. But we must find a way to do so that creates a strong economy, lowers energy costs and is attractive to innovative new companies. Most of the benefits of developing a better energy system should not flow to shareholders who mostly live outside of Virginia. A well designed solution will address the needs of all of the stakeholders.

  2. This is a topic where Tom and others are far more qualified to comment then I am on the technical aspects, but I can add something. I have seen no interest on the part of the utility to have these conversations, not honest ones. They would much rather decide what they want, draw up a bill in secret, line up the votes while it remains secret and then drop it into public view on the last possible day for bill introduction.

    I have wanted for years for them to engage in the kind of discussions you describe, and I think they know I am not actually their enemy – but there is no interest. And no need, on their part.

    We tried to do it through one particular association, but the utility demanded that we not share any proposals or discussions with the utility lawyers we trusted the most. Clearly they were inviting me to come to the table at a huge disadvantage, which I resisted. I had a duty to my client and I am not a lawyer and don’t work on this stuff without one handy.

    What you are advocating requires an atmosphere of good faith and a situation with leverage on both sides, and we do not have that in Virginia now. It is almost totally one-sided. They don’t need to negotiate with anybody until or unless the General Assembly actually cares. This year too many in the General Assembly only cared about the various items of boodle needed to seal their votes. Including solar boodle. We got their attention on one aspect of the bill – the double recovery – and Dominion actually lost a roll call vote. (That’s a story still not told…the look on their faces staring at that monitor is a happy memory.)

    You can dismiss me as some left winger if you want, but I got this experience and formed these opinions actively lobbying on these issues for 12 sessions now (and this year’s victory over the double recovery was not completely unique – I have personally saved each and every one of you money on your bills several times). Yeah, that’s me, the left wing former VP of the State Chamber. As of next week I have no client on the matter and may never again. So no way I will be involved in any such discussions, should they occur here or in a parallel universe. But absent good faith and real leverage, it would be a sham anyway.

  3. Originally, a year or two back, I was under the impression that Dominion had the ability to keep 3rd party generators – solar and gas out of … Virginia or their service area ..and essentially that protected their business model/monopoly and that was the source of angst among those who wanted much more solar.

    But somewhere along the line – that impression was wrong and/or something changed… because now we seem to have a plethora of 3rd party/independent generators locating ,seemingly, throughout Virginia AND able to sell their generated power to others – in Virginia and outside of Virginia – perhaps limited to PJM.. I plead ignorance.

    Just standing back a bit – one might be convinced that if any independent producer can sell to PJM – that – that essentially damages Dominion’s monopoly.. ergo their business model.

    Having listened long and hard to the more informed commenters here.. it’s become patently obvious that the whole electric power conundrum is a tangled mess to understand … or perhaps it is my own shortcoming…

    but it sure looks like whatever power Dominion might have .. it’s not absolute in terms of keeping out competitors…

  4. Larry, it depends on what your impression was, but it appears wrong to me. DVP has not had for many many years the ability to “keep 3rd party generators” out of their service territory. Non-utility generators have been building plants in DVP service territory for decades. Indeed, during the 1990s, DVP essentially quit building power plants and simply entered into contracts with such generators.

    What these developers can’t do, however, is SELL their generation directly to customers in DVP service area. The so-called “competitive supply experiment’ was mostly designed to convert DVP into an unregulated monopoly–it was never intended to truly lead to competitive power supply alternative in Virginia.

    And you are fundamentally right in that electric power law and policy is mind-numbingly difficult to understand.

  5. The drive for competitive supply 20 years ago was started by the customers, not the utility. I was watching this from the AG’s office, doing another job there but aware because I was a member of senior staff and privy to the internal debate. Which is still privileged information (and I wouldn’t really trust my memory now).

    Every effort at amending this complicated set of statutes seems to revert to a push by the utility to be unregulated or at least less regulated. It made great progress toward that goal again this year.

    Yes, lots of independent companies can and have set up generation, and in some cases Dominion or APCo use it. Or they sell through PJM. I remain intrigued by Hadwin’s vision of a separation of the wires side and the generation side of the business, but again – that was once being pushed by the utility and it was opposed by many of the customers and rejected by the SCC. (I was not focused on that particular issue at the time so I’d need to dig into the history.)

  6. so… independent generators can set up shop in Dominion service areas and either sell it to Dominion if Dominion wants it or make it available to PJM for other buyers ….

    said another way – independent generators can build plants in Dominions territory- sell that power to PJM…. and a company – in Virginia – can buy PJM-power that was originally generated – in Virginia by an independent producer?

    ???? no? yes? maybe? only for solar not other generation?

    • All large-scale power producers must get PJM’s approval to attach to the transmission system. As Acbar has noted, utility-owned or independent power producers sell electricity at wholesale to PJM. The Load Serving Entities (the utilities) purchase electricity at wholesale from PJM and resell it to their customers plus transmission, distribution and other charges.

      PJM requires the LSEs to own or have under contract enough generation to meet their peak load plus a reserve. The generation does not have to be in Virginia, it can be located anywhere in the PJM system. The price is adjusted with Locational Marginal Pricing.

      Independent Power Producers are funded by investors looking for a low-risk, steady return. Usually only new sources of generation that are under long-term contract get built by the independents. Although, many new gas-fired units have been proposed somewhat on spec near the gas producing regions in hopes of taking advantage of the current low price of gas.

      If the unit is above the size threshold (100 MW I think), the SCC must authorize the location of the plant, otherwise it is the DEQ. It will be in some utility’s service territory but the output will not be sold at retail, so that doesn’t matter. Southern Company had planned to build a large combined cycle plant in Pittsylvania County near the Transco pipeline in southern Virginia, but those plans were recently cancelled.

      There are some special circumstances, that Jim reported about a short time ago, where an independent power producer (IPP) can sell directly to a customer, but those are limited in Virginia.

      In other states, IPPs (especially solar producers) can sell directly to customers. The utilities are paid the transmission and distribution costs to transport it. In New York, solar facilities are not allowed to be placed in the rate base to keep the cost low. The utilities can purchase the energy through NY’s version of PJM (NYISO) for resale to their customers. Or they can can transport the electricity from the IPP to their contract customer. The utility gets paid for the use of their wires and earns money handling the billing and payment transactions between the parties.

      This arrangement works well and does not inflate the price of solar as putting it in the rate base does. But regulations must be adjusted to create this new role for the utilities and pay them differently so they can prosper in this new system.

      • The jurisdictional split between the SCC and the DEQ arises only for renewable generation facilities. The DEQ can issue permits for plants of up to 150 MW if built by non-utility developers. Utility construction, all fossil construction and utility-scale solar or wind requires SCC approval.

    • Yes, that’s correct, Larry. Such plants can also contract directly with other utilities as well.

      But no, it is not correct that a retail customer can buy power directly from PJM. It must purchase from its local incumbent utility. Now, in truth, those utilities sometimes facilitate the purchase of power actually generated by third parties, but it is a rare arrangement. Think about the Amazon deal to “buy the output” of the solar facilities on the Eastern Shore. There was a lot of contractual wrangling to make this purchase appear to be coming from those green sources, and DVP was right in the middle of it.

      • We agree, R., that’s the way it generally works in Virginia. In a true “retail access” state, as generally the case northeast of Virginia, the local incumbent utility has a wires monopoly but not a supply monopoly; however, most customers will stick with the local supplier even if retail access is available, unless the local utility’s rates are not competitive.

        The one significant complicating factor here is that independent renewables generation creates not only the usual wholesale energy, and some wholesale capacity as well, but also “Renewable Energy Credits” or RECs. The RECs are not sold through PJM wholesale markets but through State-run exchanges (the one in NJ is a well-known example) or pursuant to two-party contracts with utilities engaged in selling renewables-derived power. Thus we have the potential for multilateral arrangements where, for example, the retail customer (Amazon) supplies below-market financing to an independent generator builder (“Big Sun”) in exchange for Big Sun’s RECs, which Amazon sells to DVP; and then the customer receives repayment of its financing and/or a share of the energy and capacity sales to PJM, or, Dominion purchases the completed solar plant from Big Sun; and separately, the customer cuts a deal for special retail rates with DVP pursuant to DVP’s retail tariff.

    • Yes. Solidly, yes. All generation; no exceptions. That was the big change implemented by the FERC in the 1990s.

      This concept, which replaced the old vertically-integrated model (every utility, except the coops, owns its own generation and sells only to itself) had nothing to do with the VSCC; however the VSCC went along with it at first, then tried to reverse course by denying DVP permission to spin off its rate-based generation to an unregulated subsidiary where it would have operated competitively for sales entirely in the wholesale marketplace. Since then, the VSCC has also insisted that DVP’s new generation (e.g., those gas and solar plants) be ratebased. But that’s a choice made by the State of Virginia in its regulation of the retail rates of utilities selling to Virginia retail customers.

      Meanwhile, the feds regulate the wholesale electricity markets. The ability of independent generators to build anywhere in Virginia, and to sell into the PJM wholesale energy market and the PJM wholesale capacity market, is a matter of federal law and federal rules.

  7. For Larry’s first comment … what changed was … as the new industries of solar and wind, and now storage, developed, the prices went down dramatically and rather fast. Even offshore wind’s price has dropped 45% since Block Island last year.

    I see confusion around the fact that it is not just the source of generation, but the structure of our grid, that is required to change, and when our utilities are not the sole generators of electricity, their monopoly contract needs to be changed. Distributed generation, on-site and nearby, combined with the ability of building owners to replace a large amount of electricity demand through efficiency, means the future grid must be flexible and will require a whole lot less electricity from central generation plants.

    Our utilities will lose revenue from not being able to ‘sell more’, their monopoly profit source. Renewable technologies mean the monopoly compact as originally conceived is no longer necessary or viable, and with the introduction of the regional girds like PJM, the local utility remains only responsible for local distribution.

    The monopoly compact … protected territory in exchange for rate regulation … was developed because competition was thought impossible because of the high ‘cost of entry’ into the market, defined by wiring every customer. Also, electricity is deemed a needed resource by all in the community. Today we need to think of the system as a new and different structure. Our utilities won’t like the change but …

    • Let me add a little to your comment, CA&W. The utility compact not only protects the service territory of the utility in exchange for rate regulation, but it also imposes on the utility the obligation to serve. That is, it has to plan and build a system to provide power to every person and business in the service territory, not just those that are cheap and easy to connect. In recognition of this duty, the utility is granted the extraordinary power of eminent domain because the construction of linear facilities (transmission lines) necessary to extend into the far reaches of the service territory could not otherwise get built. Some of the utility’s reluctance to embrace competition in the generation space is the protection of this investment made for the benefit of customers.

      And some is just plain old greed–the ultimate desire of nearly every business is to have an unregulated monopoly after all…..

    • CA&W, let me second Rowinguy1’s comments, with a caveat. Somebody said earlier, the “natural monopoly” part of the electric utility business is the wires business. At both ends there is no “natural monopoly” — either for generation, which works well as a competitive business, or for retail sales, where you can allow customers access to different suppliers and yet have the same local distribution company deliver it.

      What makes this complicated is, we have a division in the law over who regulates all this: since the 1930s, federal jurisdiction covers wholesale markets and transmission wires; and state jurisdiction covers distribution wires and retail sales. During the 1990s, the feds deregulated independent generation and established wholesale energy markets and independent system operators to run those markets. The States could, and Virginia did, continue to leave generation in a utility’s rate base for retail ratemaking purposes — which kind of negated the purpose of deregulating the generation market after all, to allow competition, but some utilities like Dominion have held onto a sweet deal that way. Even so, even Dominion is required by federal rules to sell 100% of its generated energy into the PJM wholesale market whenever its generation is “dispatched” by PJM, and the Dominion retail sales utility, the “LSE,” buys 100% of its energy from the wholesale market from whoever happens to be generating moment to moment. That’s the way PJM works. Dominion is already in competition with all the other generators out there including the all independents — that’s why it is so pointless, even counterproductive, to continue to recover Dominion’s generation costs through its retail rate base.

      That said, TomH and Rowinguy both focus our attention on two things: (1) how, in a competitive generation world, should the utility go about making enough money for shareholders that electric utility stocks will remain attractive to investors? (they are, after all, the source of all that capital investment); and (2) how properly compensate the utility for all that existing investment in generation built for ratepayers under the old rules, like the billions spent on nuclear in the 1960s and 70s?

      I happen to think the competitive generation model works, and companies which engage in it thoughtfully and build merchant generation will do well. It’s easier and less risky to have a regulated rate of return guaranteed by regulators — if the regulator lets you get away with it! Yes, there have been some notable unregulated independent generating company failures, because they got overextended and bought or built too much generation to make money at it, based on overly rosy projections of customer demand that have not occurred. But there are success stories. Meanwhile, there is nothing like a regulated, guaranteed rate of return to produce an unbeatable profit margin — if the regulator lets you get away with it.

      As for what to do with that existing generation investment: it will, after all, phase itself out. Most generation is built to last 40-50 years and its investment is amortized financially over that time frame. 50 years ago today is 1968: most of those old coal units were built before that, and most nuclear was just coming on line in the next few years. Those old plants are for the most part fully amortized; only plant additions/renovations are unamortized. So I say, honor those ratemaking commitments and leave those plants in rate base until they are fully amortized, if not already; then spin off the units for deregulated operation or retirement as the economics of their operation in today’s competitive market dictates.

      The new grid offers many challenges to a utility trying to build for the future, and if it forecasts wrong, it risks losing a great deal in a competitive energy market. I don’t feel ratebasing of all generation investment is justified any longer; but our State commissions are correct that utilities need the encouragement of regulators to invest wisely and in their customers’ best interests. One aspect of this should be investment in energy efficiency; another is to facilitate customer-owned distributed generation; another is to encourage battery technology investment. We used to include renewables investment but that no longer requires encouragement the way it did even just five years ago; what’s lacking now is better support for smaller scale distributed renewables (“rooftop solar”). But stop this harassment of the utilities we call “net metering,” which IMHO is an unwarranted and entirely destructive ratemaking subsidy that only polarizes the already testy relationship between incumbent utilities and customer-owned DG — it does little good in promoting DG and, over time, can do great harm.

  8. I have a dumb question. How much electricity does the whole state of Virginia use?

    I’ve been to the EIA and other places and I got a number but I don’t know how to really understand that number…

    I think it’s 10 – something…

    anyone got info?

    thanks

  9. 112,009 million kilowatt-hours ?

    • That sounds about right. Say all of Virginia consumes 12,000 megawatt hours on average through the day. That’s 12,000,000 kilowatt hours. Times 24 hours a day, that’s 288,000,000 kilowatt hours per day. Times 365 days per year, that’s 105,120,000,000 kilowatt hours. Pretty close to the actual number.

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