Energy’s Innovation Race

Rendering of a GE combined-cycle natural gas-burning plant.

Rendering of a GE combined-cycle natural gas-burning plant.

Foes of fossil fuels are wondering if natural gas production in the United States is peaking. While some observers depict the supply  of natural gas as lasting decades, maybe a hundred years, others see signs that gas wells in the Marcellus shale formation are playing out more rapidly than anticipated. As supply becomes constricted, prices will rise, punishing electricity consumers who in Virginia will relying increasingly upon natural gas for electric generation. To protect against inevitably rising gas prices, the argument goes, states should mandate the use of renewable energy sources such as solar and wind power.

Environmentalists aren’t the only ones making the argument that gas production in the Marcellus formation has peaked. Oil and Gas Investments Bulletin Publisher Keith Schaeffer, among others, makes the same case.

But that sentiment is far from universal. “The U.S. may have far more natural gas than anyone imagined, all reachable at a profit even with today’s bargain-basement prices,” states the lead of a Wall Street Journal article today. The article quotes Mark Papa, a partner of Riverstone Holdings LLC, an energy-oriented private equity investor, as saying, “There’s a large likelihood that the United States will be enjoying very low gas prices for a very long time, maybe 20 years.”

Fossil fuel producers are showing remarkable resilience in the face of incredibly low fuel prices. They are embracing new technology, pioneering new drilling methods and figuring out how to slash production costs. Meanwhile, designers of power plants that burn natural gas are developing combustion systems that can extract 50% more energy from a BTU of gas than the previous generation. Traditional gas turbines convert 32% to 38% of the heat content from gas into electricity. The latest gas turbines incorporating advances in materials and aerodynamics and running in combined cycle mode can operate at 60% efficiency under optimal conditions.

The competition between different types of energy source is good news for consumers. The price of solar power and wind power continue to drop as R&D efforts yield technology breakthroughs, as supply chains mature, and as the solar and wind industries move up the learning curve. If the gas production/ generation industry had remained static, solar and wind might well be broadly competitive today. But the gas industry continues to innovate as well. Wind and solar (and coal, too) are chasing a moving target.

There is something to be said for hedging Virginia’s bets by encouraging the diversification of energy sources used in generating electric power, as there is for investing in energy efficiency, another field rife with innovation. But there’s also something to be said for committing to the lowest cost energy source, especially if, like natural gas, it is clean burning and emits significantly less CO2 than coal. Rather than approach energy policy with preconceived ideas that one energy strategy or the other is “the best,” Virginia should aim for an energy strategy that is flexible, adaptable and capable of exploiting opportunities created by an innovative energy economy.

— JAB

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30 responses to “Energy’s Innovation Race

  1. I view natural gas as a strategically important fuel source for the USA. Natural gas is under-utilized due to the long standing assumption that prices would skyrocket. The only skyrocket turned out to be a nose-dive to lower prices. I never anticipated fracking, rather I thought we’d have to import LNG to meet our natural gas needs. Only a few years ago, many US LNG import facilities were under construction, when the industry belatedly realized (expensive mistake) that we did not need to import natural gas anymore (new paradigm).

    When I lived in New Jersey, the state adopted an official policy that ALL future power plants in New Jersey would be coal-fired to achieve energy diversity (too much NG and nukes they felt). To paraphrase Martin Luther King, like everyone, I would like to see energy diversity. Diversification has its place. But too often diversification is used as a justification for an unwise investment in an energy source someone is trying to promote.

  2. I’m still waiting for Clean Coal Technology….

    that would be the gold standard of “diversity”, eh?

    I’m also amused by the folks who are “disturbed” by wind turbines and high voltage power lines but apparently not so upset at mountain tops being blasted off and streams so full of acid they cannot support life.

    some day – we run out of natural gas – or at least it becomes so scarce that it’s impractical to use to generate electricity. It may not be in our lifetime (or it might) – but the question is – what do we do then?

    do we go back to coal? have we developed nuclear that is safe feasible to build near population centers? what fuel will be available to supply peak demand ?

    it makes no sense to use up natural gas as fast as we can.

    it makes no sense to export it or use it inefficiently …

    if we go to LED lights and other energy efficiency – as well as use wind/solar where it is available and not any more expensive than Nukes – we can extend the longer-term availability of gas.

    In other words, we should not only not squander it – we should develop strategies to use less of it – to extend it’s availability farther into the future.

    we spend a bunch of time talking about how entitlements will drown the younger generation. Try $500-$1000 a month electric bills if you really want something to worry about.

    • My personal Clean Power Plan would have clean coal (gasification) and other advanced technologies as options. I do worry about scarcity of resources in the future. In that sense, using coal allows saving natural gas and oil. The way I look at it, we have some cost-effective energy options: natural gas, on-shore wind, solar emerging, some other renewables. Then we have very expensive options: off-shore wind, nuclear, clean coal. The selection among the expensive options is going to depend on policy and politics. Clean coal is out of favor at the moment.

  3. Were we not already supposed to have run out of oil by now? Are these the same Malthusians predicting that natural gas will peter out? To insist on diversity makes no more sense than to insist on one particular fuel source – the market is a wonderful mechanism for sorting these things out, even when you have multiple goals (cost, reliability, low CO2) to filter with.

  4. “There is something to be said for hedging Virginia’s bets by encouraging the diversification of energy sources used in generating electric power, as there is for investing in energy efficiency, another field rife with innovation.”

    Jim, that’s a major understatement. Hedging bets by greatly enhanced renewable and conservation efficiency measures is a no brainer. Especially because the market simply isn’t capable of incorporating the global climate change impacts of more fossil fuel use, including natural gas and its apparently inevitability-associated release of high GHG methane.

    I don’t see Dominion or other fossil fuel interests making this case in Virginia in any way comparable to that of other states in the North East, or west coast. But even for those (I would say badly-reasoning/informed) climate change skeptics, hedging our bets by renewable and, energy conservation measures is a conservative strategy that should be appealing across the political spectrum. Sadly, of course, it isn’t. (But maybe we’re making some progress; are we not hearing less about our need for the tar-sands fed Keystone Pipeline, or am I missing something?)

  5. I think Bacon has got it about right.

    The first duty of a public utility selling electricity (a product essential to our civilization and everyone’s well being ) is the utilities ability to sell its product with reliability at lowest cost and least public harm.

    Despite all the hype to the contrary, all the hopes and possibilities for the future, and improvements to date, wind power and solar have not and may never arrive at the point where we can safely shift our primary reliance onto those sources of power generation.

    Only gas prudently supported by other fossil fuels and nuclear fills both today’s need and any reasonable assurance for our future. I saying this I also factor out any over reliance on global warming as a determining factor in fixing the mix. We have not the means or scientific basis today using solar or wind to affect the outcome global warming in any meaningful way.

  6. Thanks for highlighting this topic, Jim. Diversification is good, and I’m all for renewables in that mix; despite my negative comments about wind, I’m a big solar fan and even wind has its place. But what gets me is the mindless preaching about “reducing our carbon footprint” etc. etc. while merely substituting one form of CO2 generation for another as though it were a solution. Natural gas is short-chain hydrocarbon fuel. Coal and oil have longer chains and more impurities, that’s all. All of them create CO2 when oxidized (burned). If you really want to make a difference in carbon emissions, you’ve got to go nuclear base-load, plus renewables to the extent reasonably feasible (the low-hanging-fruit for renewables are limited), and save the fossil-fuel generation for cycling uses. But we probably lack the political will ever to do that. Meanwhile — natural gas, for all its being a much cleaner technology and fuel, is a fossil fuel.

  7. Anyone know :

    1 – is clean coal “real” or just a PR concept?

    2. – if real – how it compares on cost? is it cheaper than nukes ? natural gas? renewables?

  8. Hey – I would have had NO PROBLEM what-so-ever with true Clean Coal.

    I kept hearing about it over and over and I thought – since Germany was doing similar things that 70 years later – technology would crack that nut and we’d truly have a 1000 year supply of “clean” electricity.

    so what happened?

    • Yes there is such a thing as clean coal. For example, for decades in South Africa, coal was used via gasification to make hydrocarbon liquids via the Fischer-Tropsch process. We have some US examples where the coal is used to make “natural” gas for homes and the CO2 is completely sequestered for oil field use. Gasification makes a concentrated CO2 stream that can be easily sequestered. My layman’s interpretation is that utility management has no interest, is the reason it is widely considered non-existent technology. Interesting question as to cost comparison with nuclear, but probably nuclear has more US gov’t low interest loan support. All these guys low-ball the cost estimates so its hard to say. I know there are several US clean coal proposed projects on hold, I think one going ahead. I am not the expert, yet.

      Here is a very interesting recent report on Natural Gas exports which supports the opening statement I made above about NG imports/exports.

      http://www.bloomberg.com/news/features/2015-09-02/america-s-most-unlikely-energy-project-is-rising-from-a-louisiana-bayou

    • “Clean” coal is definitely a marketing ploy. There is nothing “clean” about coal, from its mining to the expensive technology required to remove the pollutants it produces (SO2, NOx, mercury, cadmium, arsenic, and especially CO2). The current technologies mostly involve some style of coal gasification, which allows onsite CO2 removal and sequestration. The produced gas is then burned like natural gas. The technology is still in the development stage and very expensive.

      However, coal is still by far the most widely used fuel in the world for electrical generation. China, which has large deposits of coal but still needs to import it, uses highly super-critical coal plants to reduce emissions and CO2 production.

      The U.S. has plentiful supplies of coal and coal companies are flat on their back – so the U.S. hopes to export it.

      • I do not see clean coal as a marketing ploy at all…except that utilities like to call regular coal combustion “clean coal”. The big problem with coal, in a global sense, is coal combustion…if we move to a cleaner technology (eg; gasification) we potentially remove many of the issues with coal combustion. Granted there are still the local issues with mining/extraction. I agree there are potential development issues with clean coal technology, unclear to me where we stand exactly.

        • TBill,

          You are correct. My over-reaction is to people’s use of words that convey the opposite impression than what is actually happening. Coal built our electric generating industry. Actually, even before that it was used to produce “town gas” for home lighting and streetlights. Hydro and coal built the early utility industry.

          Until the past few years coal powered almost two-thirds of our nation’s power plants. If effective and affordable techniques can be found to use it, it might still have value, especially in developing countries. Mining still poses many hazards to humans and the environment, however.

          The cost of solar has decreased by 80% in the past five years and is expected to decrease by another 50 % over the next 5-6 years. If this cost reduction comes to pass and some form of affordable storage exists, it will be difficult for other technologies to compete with a form of generation that has no fuel costs.

  9. “The U.S. may have far more natural gas than anyone imagined, all reachable at a profit even with today’s bargain-basement prices,” states the lead of a Wall Street Journal article today. The article quotes Mark Papa, a partner of Riverstone Holdings LLC, an energy-oriented private equity investor, as saying, “There’s a large likelihood that the United States will be enjoying very low gas prices for a very long time, maybe 20 years.”

    I am a little skeptical about natural gas supply estimates coming from Wall Street. It was Wall Street’s promotion of rapidly declining shale gas wells that got many companies into a bad financial situation that investment bankers were then happy to bail them out of through mergers & acquisitions. Many leading producers are drilling at a loss in the Marcellus because they need the cash flow to pay their loans. They are all highly leveraged and some are close to the edge (numerous shale oil producers in the Bakken have already filed for bankruptcy). Investors are now rewarding financial stewardship over raw production, which is why rigs counts have fallen so low (they are only drilling in the most productive locations).

    That said, because their businesses are at risk, drillers have continued to innovate. Cost and production efficiencies improved a great deal over the past several years. Initially, three wells could be drilled from one rig. Now ten or more laterals (wells) can be drilled from a single pad site and they can be drilled farther horizontally – reducing costs and increasing production.

    But actual well data (not Wall Street hype or EIA “projections”) are showing that since the second half of 2014 these productivity gains have begun to decline. Experts suspect this may be due to drilling in less productive areas (because they already drilled the most productive ones) and because the longer laterals are cannibalizing gas from other wells. The Marcellus production declines by 30% every year, because of the rapid decline of even the best wells. In 2014, over 1000 new wells were required just to maintain previous production levels. The trumpeted increase in Marcellus production last year was not because it was so easy and cheap to get the gas; it was because so many new wells were drilled.

    I think shouting about “20 years of cheap gas” in order to do a deal or prop up the stock market does a disservice to us all. Billions are being spent on long term projects because business leaders are acting on the assumption that gas will be plentiful and cheap for a long time. No one really knows for certain right now. There is substantial, unbiased evidence that affordable gas will run out faster than we are assuming. An industry insider has said, “We can have cheap gas, or plentiful gas, but we won’t have cheap plentiful gas”.

    In Virginia, it appears that Dominion and the SCC are moving with the herd on this. We should not make choices with limited information. Modeling software exists for various energy and price scenarios and this could be used to evaluate a variety of IRP and CPP scenarios. It would at least illuminate the conversation.

    When California made such a hash of their utility regulations 15-20 years ago, gas had recently been allowed for use in electric generation again. Everyone thought that natural gas would be the savior. When demand rose faster than expected and supply did not meet expectations, prices of wholesale electricity soared in California. The governor was eventually recalled from office, businesses and residents moved away and the state has still not regained the prosperity it had before the debacle. Energy regulation is a complex business, now more than ever.

  10. “The latest gas turbines incorporating advances in materials and aerodynamics and running in combined cycle mode can operate at 60% efficiency under optimal conditions.”

    The higher efficiencies in combined cycle units are primarily due to the use of two modes of generation. Typical gas turbine plants (like those used for peaking units) are like big jet engines. Natural gas is burned directly in a turbine and the rotation of the turbine turns a generator. The hot exhaust goes up the chimney. These plants are cheap and can quickly come up to full power (which makes them useful to meet peak loads), but they are not especially efficient. It was discovered that all of that hot exhaust gas could be captured and the heat extracted to make steam; which is then run through a conventional steam turbine to generate more electricity (hence the name combined cycle). More of the energy value of the fuel is extracted this way so the plants have a higher efficiency. But they are more complex, more expensive and take longer to build, and do not respond to load changes quite as rapidly as one-stage gas turbines, so they are now more typically used as base load plants ( as long as the fuel is cheap).

  11. “Despite all the hype to the contrary, all the hopes and possibilities for the future, and improvements to date, wind power and solar have not and may never arrive at the point where we can safely shift our primary reliance onto those sources of power generation.”

    Currently in the U.S. (not necessarily Virginia) the cheapest source of new generation is wind ($0.02-.03 /kWh in the Great Plains), utility scale solar ($0.04 /kWh in the southwest), then combined cycle gas (final price depends on fuel price). New nuclear, offshore wind and coal with carbon sequestration are all way off on the most expensive end of the scale. The cheapest source of power is energy efficiency, but it is usually not included in generation comparisons.

    Solar for residential or commercial use (in appropriate locations) is cheaper than Dominion retail prices today. If roadblocks such as opposition to net metering and difficulties and delays in attaching consumer systems to grid were removed by Dominion, solar could be contributing to economical energy generation in Virginia today. A study of the 32 largest utilities in America placed Dominion last on the list for the use of energy efficiency and renewable generation, even though they are the 12th largest electric utility in the U.S.

  12. Conventional uses of natural for residential, commercial and industrial uses are expected to be essentially flat for the next 25 years. Nearly all increases in demand for natural gas will be due to its use for electrical generation and LNG exports. LNG exports will take overall gas demand above even the EIA (very optimistic) supply scenarios beginning about 2025. We know what happens when demand exceeds supply – the cost goes up. Experts say that more gas is available in the shale plays, it is only a matter of what price you are willing to pay to extract it; although, we will probably also continue to see a contribution from technology improvements.

    What happens to our new base load gas plants when the fuel cost doubles or triples? We know what happens; the costs get passed through to the ratepayers. But what happens to employers whose cost of doing business has now dramatically? Do they lay off employees or move to another state. What happens to the family budget when energy costs have canceled the vacation or reduced the amount of groceries that can be bought.

    From a policy making point of view, it makes no sense to take a flexible fuel such as natural gas, which will be so valuable in balancing and enabling an economic and reliable contribution from renewables and sending it overseas. We are fighting trillion dollar wars to secure our oil. Why would we squander a strategic resource such as natural gas? Perhaps, because everyone wants to be fooled by the faulty notion of a cheap “100 year supply”. Bad policy results from bad information

  13. pretty compelling perspective … and it appears that because of lateral drilling – that drillers will seek to extract gas quickly less they lose it to others …

    and this:

    ” In Virginia, it appears that Dominion and the SCC are moving with the herd on this. We should not make choices with limited information. Modeling software exists for various energy and price scenarios and this could be used to evaluate a variety of IRP and CPP scenarios. It would at least illuminate the conversation.”

    and this is my problem with the SCC and the CPP.

    there could have been, should have been – an informative discussion about the consequences – benefits AND risks of closing coal plants and going to natural gas.

    instead, we got basically a “we don’t like this and we’re not going to abide it” political statement – from folks that are supposed to be objective and dispassionate – provide the analysis… let the numbers inform the debate – moe the debate forward – let people understand what happens to longer term electricity generation with gas – if we also start exporting it – …

    the pipeline is starting to look more and more – like a bad idea.

    • Larry,

      I know I keep singing the same tune, but imagine if through energy efficiency, we saved the amount of generation equivalent to many of those coal plants that are scheduled for retirement. This can be done in a matter of a few years compared to the 8+ years it takes to plan, permit and build a new gas-fired plant. It is by far the cheapest option, and customers’ bills actually go down as a result. The costs are also lower for everyone else because no new rate increase riders are needed to pay for new plants and we don’t have continuous fuel cost increases. Energy prices are cheaper for both businesses and homeowners so we are more prosperous and economically competitive.

      We have all of the technology we need to do this right now, although it does keep getting better and less expensive. The only thing required is an easy financing method so people don’t have any upfront costs, they would pay as they save, and eventually the costs would be paid off (usually in just a few years) and then they would continually save. Avoiding new generation in this way can also be used as a credit for CPP. A gas plant which replaces a coal plant provides just a 50% reduction in CO2. Energy efficiency (or renewables) provides a 100% reduction in CO2.

      The primary issue which is stopping this is a proper utility business model and rate structure that allows a utility to prosper while lowering customers’ costs. The price of building and maintaining a smart grid is less if the grid does not keep getting bigger because we have built more power plants. It would also make Virginia a center for innovation and attract the types of businesses that every community desires. It is truly a virtuous cycle, if we start doing more with less.

      • Give me some concrete energy efficiency ideas that are significant. The one area I see is transportation, we could probably save a lot of CO2 with more state support of high MPG cars. But that does not impact power. I am all in favor of energy-efficient buildings, but I don’t see that making a big dent.

  14. so is Dominion generating power only for Dominion territory and the other dozen or so cooperatives getting their power from PJM, ODEC and 3rd party or is Dominion generating the lion share for Virginia to include all the cooperatives?

    I agree about the consumer level efficiency and up-front capital costs but I’m not sure whose job it is to provide loans… and I certainly think if one presented DOminion with the idea that they should, in addition to finding capital for their own plants – also provide capital to rate-payers… they’d probably not like that idea much.

    I tend to think if someone could install solar – and sell the excess without a penalty – and come out ahead – they would.

    people like to save money – and there are a good number around who have the capital if it makes good financial sense.

    we chose a backup generator over solar… because we live in the woods and a lot of trees would have had to come down to get enough southern sky.. but if we lived with a good southern exposure – we would have done the numbers.. and seriously contemplated. Where we live , I’ve actually seen more solar come down (older units) than new ones installed. In fact, residential solar around Spotsylvania is pretty rare.

    • “so is Dominion generating power only for Dominion territory and the other dozen or so cooperatives getting their power from PJM, ODEC and 3rd party or is Dominion generating the lion share for Virginia to include all the cooperatives?”

      I don’t know the particulars of any company’s generation and capacity plan. Each utility must have capacity that is owned, contracted from others, or available from PJM to meet their peak load plus reserves.

      A coop could generate some of their own power or have wholesale contracts from other sources (independent providers, other coops, other investor owned utilities, or from the PJM pool). PJM (as the Independent System Operator – ISO) holds an annual capacity auction several years in advance, as well as an every five-minute (spot price) auction and a day ahead auction. Power producers bid the prices they are willing to sell output from specific plants and resellers (coops, muni’s and IOU’s) bid for those resources. The lowest cost source of power is auctioned first, then as all of that capacity is spoken for, the next cheapest source of power goes on the block. PJM manages the auctions, reconciles all of the transactions, collects the bills and makes the payments. PJM’s costs are covered but they do not make a profit from the activity.

      So you can see that who is providing power to whom – to some degree changes every day. I suspect Dominion keeps its lowest cost power for its own customer’s use. Since Dominion is guaranteed a retail price, the cheaper they can generate that power the more profit they make. If Dominion makes much more profit than the last rate case provided for, then the SCC is supposed to authorize refunds to the customers. Except for a refund scheduled shortly, these refunds will be halted until 2020-2022.

    • “I certainly think if one presented Dominion with the idea that they should, in addition to finding capital for their own plants – also provide capital to rate-payers… they’d probably not like that idea much.”

      The point is they would be providing capital for efficiency instead of for a new plant. So there is no added pressure on finding capital. The tricky point is how they get a return on capital spent for efficiency and for how long.

      Let’s say if they built a new plant for $1 billion, they would receive revenues to cover all of their costs, plus a 10% return to shareholders for 20 years (I don’t actually know how long the SCC allows these assets to be kept in the rate base, this is just an example). If the SCC created a rate for energy efficiency that replaced the need for a new plant and also allowed for cost recovery, plus a 10% return to shareholders for 20 years, then from a narrow financial perspective either investment would have the same return to shareholders, but the customers would save a lot of money.

      There are some complications to this simple example. Independent Energy Service Companies (ESCO’s) could also finance the energy efficiency measures, probably at a higher interest rate than the utility charges, but for smaller projects they wouldn’t expect a 20 year return, so the total cost to the customer would be less. But the utility would only see a loss of revenue and no return to the shareholders.

      This is especially important to a company like Dominion. Dominion Resources is the parent company (a holding company) that owns many separate subsidiaries. Some are regulated (Dominion Virginia Power) and others are not (Dominion Transmission which is a 45% owner in the pipeline project). They can do business with one another. For example. DVP could pay Dominion Transmission to transport gas for its power plants, even though those plants will be adequately served by the Transco pipeline. FERC sets the rates for the cost of interstate gas transmission fees. As is the case with interstate electric transmission FERC’s rate of allowable return is higher than that set by the SCC.

      Another advantage for a utility holding company is that the regulated utility is the cash source for investments by the unregulated sister companies. A regulated monopoly is guaranteed a certain rate of return, so it generates cash in a fairly predictable fashion. Unregulated, for-profit companies aren’t given such guarantees. With the holding company structure, Dominion’s unregulated subsidiaries have an advantage over their rivals. I suspect this is why Dominion is so antagonistic to any proposals to promote renewables and efficiency measures that might reduce their cash flow.

      Unfortunately, this pits Dominion’s interest against that of its customers and the overall health of the state economy. Many utilities do not use the holding company structure, although this has changed recently as the large multi-state utilities, such as Duke, Dominion and others, bought previously independent utilities in several states.

      Regulators in innovative states are searching for ways to align a utilities interest with that of its customers so that everyone can benefit. Whether there is a desire to do that in Virginia remains to be seen.

  15. TomH, I take it that you agree with Larry’s comment, “if one presented Dominion with the idea that they should, in addition to finding capital for their own plants – also provide capital to rate-payers… they’d probably not like that idea much.” You both are forgetting an important aspect of being a regulated electric utility: the utility is in competition for business customers and some residential customers with other energy types, and also is in competition implicitly with other electric utilities whose rates are compared and studied intensely by regulators as well as investment analysts. Dominion has electric rates among the lowest in the country and competes effectively for new business loads that could go to other energy sources. True, Dominion also sells natural gas at retail in certain portions of Virgina, but not over most of Virginia. Thus not only Dominion’s regulators but also Dominion itself as a corporate matter has an incentive to support energy efficiency measures that customers can take. It helps the customer and makes Dominion look good on the scale that matters most: how Dominion compares with its peers.
    As you said earlier, energy efficiency “is by far the cheapest option” when compared with new generation, “and customers’ bills actually go down as a result” which makes it quite popular, both with customers and regulators. But there are limits! There is only so much efficiency that’s reasonably accessible. Then, after the low-hanging-fruit is plucked (and it should be!), the costs of additional efficiencies ramp up and soon pass the customer’s cost-break-even point, or at least point of diminished interest. You can argue for the utility to subsidize the cost of customer energy efficiencies beyond that, to the extent the cost to other ratepayers is less than the benefit from deferring the cost of new generation; however deferrals do not take place in a vacuum but in the context of an IRP which reflects the negative impact of deferring modernization, required compliance with changing regulatory impacts like the EPA rules, etc. Also, some customer-initiated efficiency improvements can actually make the grid a little more costly to operate due to, for example, changes in the required levels of reserves or in the need for reactive power on the distribution system. I suspect these problems are actually more significant and difficult to resolve than the one you cite, deciding “a return on capital spent for efficiency and for how long.”

    • “You both are forgetting an important aspect of being a regulated electric utility: the utility is in competition for business customers and some residential customers with other energy types, and also is in competition implicitly with other electric utilities whose rates are compared and studied intensely by regulators as well as investment analysts.”

      By far the most important aspect of being a regulated electric utility is keeping the lights on. In designing a fleet of generating units and its associated grid, having adequate capacity to meet peak load and overall system reliability (brownouts, blackouts and storm recovery) are the crucial elements for a utility. It is for this reason they are granted monopoly status. Utility personnel take this very seriously and it is a major reason they tend to be conservative in their approach to new ways of doing things. Regulators seldom reward them for taking chances in order to do things better, but they severely penalize utilities when they make mistakes.

      Typically utilities do not compete for business. In regulated states, marketing and advertising expenses (to gain new business) are usually not recoverable in the rates. In the historical regulatory regime, rates are a function of costs. Investment analysts are concerned with rates to the extent that they affect the rate of return to shareholders. Utilities worthy of investment may have higher rates because of the region they serve, while utilities with lower rates may not be as worthy of investment.

    • “Dominion has electric rates among the lowest in the country”

      This has bothered me for some time, because it simply does not hold up to scrutiny. It is an example of – “if you repeat something long enough people will believe it”. Utility rates in the U.S. are often a function of weather. In areas where there are extremes of weather, such as long cold winters, rates are higher. The peak loads are severe and occur only in one season, this requires many plants to be built that are only needed for a portion of the year, so the return on those investments is low. Storm damage is more frequent and much more expensive to repair in blizzard conditions.

      In our area, the summers are not hot for too long and the winters are not very cold. Although we are a winter peaking region, the summer and winter peaks are very similar, allowing plants to be used for much of the year, giving them a much better return on investment. We live in the sweet spot for utilities. Dominion is hoping that people will think the rates are due to efficient management when they are really due to the fact that we are in Virginia. Dominion’s base residential rate is 11.43 cents per kWh in September 2015. When compared to their peers – utilities in states with a similar climate, such as West Virginia, North Carolina, Kentucky and Tennessee, Dominion’s residential rates and aggregate rates for all sectors are higher than the rates in every one of the other states. Dominion is not actually lying, our rates are below the national average, but not for the reason they want you to imagine. In 2014, twenty states had rates lower than Virginia’s rates for the same period. Rates among the lowest in the country are about 9.3 cents per kWh, about 19% lower than Dominion’s residential rates.

    • “But there are limits! There is only so much efficiency that’s reasonably accessible. Then, after the low-hanging-fruit is plucked (and it should be!), the costs of additional efficiencies ramp up and soon pass the customer’s cost-break-even point, or at least point of diminished interest.”

      This is certainly the conventional mode of thought, but it turns out not to be true. First let me give you some examples of low hanging fruit:

      Empire State Building
      A $13.2 million dollar retrofit program reduced the building’s energy consumption by 35 to 40 percent while saving $3.8 million annually in energy costs (about a 3 ½ year payback period) – and created 252 jobs to boot.

      In dense urban settings like New York City (or NoVa), commercial buildings account for up to 75 percent of energy used. “If you want a sound solution to the coal issue, you need to get serious about designing and running buildings very differently,” said Amory Lovins, RMI chairman and chief scientist. “This is not a problem of technology and economics, but of adoption.”

      Rosslyn, Virginia
      Closer to home is 1525 Wilson Boulevard, a twelve-story building in Rosslyn, Virginia comprised primarily of office with ground level retail, storage and a three-level underground parking garage. Constructed in 1987, the property is situated on “The Hill,” one of the strongest suburban office markets in the nation. Through a combination of energy efficiency strategies, including replacing HVAC and lighting systems and providing tenant education, energy use was reduced by 35% in just one year. This resulted in over $280,000 of annual energy savings, and eliminated more than 1,200 metric tons of CO2 emissions. The building is now in the top 3% of office buildings in the nation based on energy use.

      TUNNELING THROUGH THE COST BARRIER

      Economic dogma holds that the more of a resource you save, the more you will have to pay for each increment of saving. That may be true if each increment is achieved in the same way as the last. However, if done well, saving a large amount of energy or resources often costs less than saving a small amount. This assertion sounds impossible, and indeed, most economic theorists can “prove” it won’t work. Blissfully unaware of economic theory, however, intelligent engineers put it into practice every working day as part of an approach called whole-system engineering.

      If you build a house, you’ll be told that thicker insulation, better windows, and more efficient appliances all cost more than the normal, less efficient versions. Actual engineering practice, however, presents a different possibility. An only moderately more efficient house does cost more to build, but when designed as a whole system, the super-efficient house can often cost less than the original, unimproved version.

      Most engineers would agree with these principles in the abstract but have actually been trained to do something different. Perhaps the scheme is too simple. (As broadcaster Edward R. Murrow once remarked, “The obscure we always see sooner or later; the obvious always seems to take a little longer.”) Tunneling through the cost barrier requires not a change in what we know but a shift of what we already know into new patterns.

      For example, Motors use three-fifths of the world’s electricity. Their largest use, at least a fifth of their total output, is pumping. Almost every factory or major building is full of huge pumps, often running around the clock. In industrial pumping, most of the motor’s energy is actually spent in fighting against friction. But friction can be reduced—indeed, nearly eliminated—at a profit by looking beyond the individual pump to the whole pumping system of which it is a part.

      Another principle is to do the right things in the right order. For example, if you’re going to retrofit your lights and your air conditioner; do the lights first so you can make the air conditioner smaller and save even more money. Inevitably, great engineering is elegantly simple. Simplicity and elegant frugality are natural partners. Using less material means there is less to go wrong, less work involved, less cost, and better performance.

  16. re: ” Then, after the low-hanging-fruit is plucked (and it should be!), the costs of additional efficiencies ramp up and soon pass the customer’s cost-break-even point, or at least point of diminished interest”

    but the technologies are also evolving – it’s not a static environment – and that’s the problem because committing large sums of money to giant fixed facilities is opportunity lost on the demand side. The fixed investments become the enemy of adopting ever appearing “new” technology.

    Dominion can hold it off as long as it’s not economical because people cannot sell it back to the grid – but at some point – those technologies will become cost-effective regardless of sell-back and the result will be less electricity consumption for those that adopt the technologies and higher electric bills for those that don’t that have to shoulder higher shares of the stranded costs.

    I’m not making this up from my imagination.

    see: ” Energy-Pinching Americans Pose Threat to Power Grid – WSJ”

    http://www.wsj.com/articles/energy-pinching-americans-pose-threat-to-power-grid-1422910187

  17. If we pursue the 20th century path and if less than expected amounts of affordable natural gas are available, we will find ourselves with high energy prices in Virginia. If Dominion has not shifted business models and the SCC has not created rates to support them, customers will seek ways to save energy and lower their bills. This will lower Dominion’s revenues, put a greater burden on the remaining customers and begin the death spiral discussed in the article. This is very foreseeable; which is why utilities and regulators in numerous states are moving quickly to find new solutions. Do we want to be at the end of the parade or at the forefront? Our economic vitality hangs in the balance.

  18. I actually would have expected some analysis along these lines from the SCC in ANY discussion about closing coal plants and relying on natural gas.

    it would have been a much less political and much more informed analysis to discuss the CPP timeframe in terms of natural gas availability and high/low range potentials for pricing and that impact on electric bills.

    The SCC actually could have made a prima facie case AGAINST an accelerated move to gas – if there are doubts about it’s longer term abundance.

    What such an analysis would have had to ALSO inevitably deal with – is what happens if electric bills go up and technology advances for demand-side energy efficiency providing a way for consumers to lower their bills – by lowering their use of electricity.

    where was that analysis?

    where in the General Assembly is there a recognition of that issue?

    I had asked earlier where do the cooperatives get their power from.

    I think the answer to that question has implications for what happens in Virginia – beyond the sole interests of Dominion.

    Ultimately – consumers are going to embrace energy efficiency in their homes like they have with their cars.. its inevitable. The only uncertainty is how soon technological advances hit the marketplace.

    If you look at the energy issue in that light in Virginia – you have to wonder where the SCC is on it.

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