Who’s right in fight over carbon compliance costs?

The House of Delegates, on a party line vote last week, rejected amendments by Gov. Ralph Northam aimed at undoing budget language that would bar Virginia from linking to a network of carbon-trading states, the Regional Greenhouse Gas Initiative, without approval from the General Assembly.

The outcome leaves the Democratic governor with the option of vetoing the GOP budget language, though it remains unclear whether he will do so. The state intends to link to RGGI, a cap-and-trade framework for power plant emissions, via a regulation coming up for a final vote before the State Air Pollution Control Board later this month.

Meanwhile, the Department of Environmental Quality, which has been developing the proposed regulation for nearly two years, and the State Corporation Commission, which is tasked with regulating utilities, have been trading barbs over estimates on how much joining RGGI will cost Virginia ratepayers.

In its response to comments on the draft rule, the DEQ fired back last week at the commission staff, which put out a memo in February attempting to justify its determination that joining the program (in the manner Virginia intends) will cost customers of Dominion Energy, Virginia’s largest utility, an average increase of $7 over 25 years on the typical monthly residential bill. DEQ’s modeling shows a modest decrease (54 cents) in electric bills between 2020 and 2030.

The agency, in an uncharacteristically acerbic tone, also swatted back at Dominion’s objections to the draft rule, which, ironically, come after previous pronouncements from the powerful utility that it had accepted carbon regulation as “settled policy.” (This may have something to do with the fact that the proposed Virginia carbon cap has been decreased from 33 million to 28 million tons starting in 2020 to more accurately reflect actual carbon emissions and the big spending on energy efficiency and renewables Dominion pushed through the General Assembly last year)

“SCC staff relies on modeling that was conducted in private by Dominion, the state’s largest utility and one of the parties to be regulated by the proposed electricity sector cap,” the DEQ wrote. “To the extent Dominion’s modeling assumptions were disclosed, they suggest that Dominion and in turn SCC staff significantly overstate the potential costs of the program.”

Trust me, that counts as a “zing” in this realm.

The RGGI model and electricity markets are complex, as are the regulatory and compensatory structures utilities operate within. And to make things even trickier, Virginia is attempting to link to RGGI via administrative action expressly to avoid having to go through the Republican-controlled General Assembly, meaning the state will employ a consignment auction for carbon allowances rather than run the auction itself (and directly collect the proceeds) as other states do.

That said, here’s what the dispute appears to largely boil down to:

‘Paying twice?’

The commission staff knocked the DEQ’s analysis for failing to treat Dominion as the vertically integrated utility it is, meaning both an owner of generation assets that sells electricity as well as a purchaser of power from the grid.

According to the commission, DEQ left out the stranded cost of fossil fuel power units the SCC says will have to close prematurely because of the carbon rule (specifically two aging units each at Dominion’s Chesterfield and Clover power stations). That works out to a $781 million hit for ratepayers, the SCC claims. Then, the commission says, Dominion will have to build some $1.3 billion worth of generation to replace those units.

“Dominion’s customers essentially pay twice,” SCC spokesman Ken Schrad said. “First, they must pay for the capacity of the retired units that they will no longer receive due to RGGI. Secondly, they must pay for the costs of new capacity constructed sooner than otherwise necessary to replace these retired units.”

The DEQ, however, says that since coal power is getting crushed by natural gas as well as advancing renewables, it’s unrealistic to assume those aging coal units will stay running even absent carbon regulation.

“In DEQ’s analysis, both Chesterfield and Clover retire for economic reasons even if Virginia does not implement a cap on carbon emissions,” the agency wrote. “The chief difference between Dominion’s modeling and DEQ’s modeling is the timing of the retirements of Chesterfield and Clover. As noted above, Dominion’s analysis rests on the unlikely assumption that these aging coal plants will operate well into the 2050s.”

Information from the U.S. Energy Information Administration says operation of the Chesterfield units has decreased by about 50 percent over the past decade, while the operation of the Clover units has fallen 33 percent.

And DEQ says the SCC and Dominion made some other big mistakes in their modeling, including overestimating the expected costs of the allowances that must be purchased by emitters for each ton of carbon.

“SCC staff acknowledges that Dominion assumed an allowance price higher than the price expected by DEQ, the RGGI states and other independent analysts,” the agency wrote. “SCC staff also acknowledges that this assumption contributes to their conclusion that bill impacts will be higher.”

‘More confident in our modeling’

Under Virginia’s proposed rule, allowances will be doled out to power plants at no cost by the state based on how much electricity they generate  — an attempt to avoid “leakage,” in which carbon regulation in one area spurs increased fossil-fuel generation in places where it is not capped.

Those covered utilities must then consign the allowances to the RGGI auction. The proceeds return to the emitters, who are intended to use them “for the benefit of their customers,” with the SCC in charge of making sure that happens, according the DEQ. The power plants must also buy allowances for every short-ton of carbon they emit.

“In effect, the value of the allowances will be used to offset the cost of the program,” the DEQ says.

Overall, the cost to Virginia ratepayers will be the delta between the value of the allowances the power plants get from the state and what they need to purchase to cover their emissions. The emissions cap will shrink by three percent a year and the number of allowances issued will also be reduced.

“Sources, operating rationally, will decide whether it is better to purchase allowances or reduce their emissions to eliminate the need to purchase allowances,” said Chris Bast, DEQ’s chief deputy director.

Bast said the SCC analysis “fundamentally misunderstands how carbon trading works.”

“As the details have trickled out from the SCC model, we’ve become more and more confident in our modeling,” he added.

Schrad, the SCC spokesman, said last week that the commission isn’t backing away from its memo.

“The commission understands there will be differences of opinion regarding the multitude of assumptions required to perform a cost analysis,” he wrote in an email.

“People acting in good faith can look at a great quantity of data and arrive at different conclusions. Despite the differences in each agency’s respective analyses, the SCC staff respects the integrity and work of DEQ’s staff as it develops proposed emissions trading regulations for Virginia.”

So who’s right?

William Shobe, a professor of public policy and economics at UVA who helped design the carbon allowance auctions for the Regional Greenhouse Gas Initiative in 2007, reviewed the SCC’s take.

“There are just a number of mistakes that all seem to work in the same direction and that is overstating the cost to ratepayers,” he said.

Per Shobe, those errors include:

• Granting Dominion only 70 percent of Virginia’s allowances. The company will get 80 percent.

• Misunderstanding the “emissions containment reserve.” The ECR is a quantity of allowances withheld from circulation “to secure additional emissions restrictions if prices fall below established trigger prices,” according to RGGI. The ECR trigger price is set at $6 for 2021, rising at 7 percent per year afterwards. The SCC assumes that it will always set the price, Shobe says, adding that “every other available analysis of RGGI currently shows the allowance price falling below the ECR trigger.”

• Assuming the Chesterfield and Clover units will close because of RGGI. “Ratepayers are already paying more for the low capacity factors at these plants. That will almost certainly get worse without RGGI,” Shobe said, adding that renewables are a rapidly rising share of generation in PJM, the organization that coordinates movement of electricity in parts of 13 states (including Virginia). “It is possible that the year of actual retirement will be moved up a little bit due to RGGI, but much of the reduction in the use of these plants, and hence much of the costs to ratepayers of not using them to capacity, is completely independent of whether Virginia joins RGGI or not.”

• Incorrectly modeling Virginia’s rule. “They appear to be unaware that allowances are allocated to generators on the basis of the previous year’s output of electricity,” Shobe said. That’s “extremely important” because the commission’s projections add allowance costs to Dominion’s bids into PJM, resulting in the gas and coal plants not being used as much, he added. However, if it cuts generation in a given year, the utility has to take into account the potential loss of a free allowance in the following year. That means that for Dominion, the true allowance cost is “much, much smaller than the figure used by SCC staff, and this mistake drives all of their results,” Shobe said.

• “Super weird” assumptions about renewables: Shobe says the SCC model makes some strange projections about what Dominion will build, including that it will only build the 5,000 megawatts of solar and wind called for in the Grid Transformation and Security Act, the utility bill signed into law last year.  “Then it stops cold, with almost no solar built over the next decade,” Shobe said. “Even Dominion appears to believe that solar already has the lowest levelized cost of energy, and costs are falling relative to coal and even gas. The whole idea that we will just abruptly stop building solar in 2030 and will build one (natural gas) unit every other year on to infinity is just the stuff of imagination.”

In sum, Shobe says Virginia’s DEQ has written a “nice regulation” that keeps utility ratepayers in mind while embarking on a “modest beginning” in the fight against climate change.

“We’re not doing as much as some states but we’re making a good first effort,” he said.