Clean Power Plan Will Cost Virginia “Billions” Says Dominion Chief

Thomas F. Farrell II, CEO of Dominion Resources
Thomas F. Farrell II, CEO of Dominion Resources

by James A. Bacon

Thomas F. Farrell II might have publicly stated his opinions about the Clean Power Plan before, but I haven’t read or heard them. Comments he made Friday at a conference sponsored by the Virginia Bankers Association and the Virginia Chamber of Commerce provide insight into what the CEO of Dominion Resources, Virginia’s largest power producer, sees as the nation’s energy future. Farrell’s bottom line: Seventy percent of the nation’s energy will continue to come from fossil fuels for decades to come.

“Our goal is to provide safe, reliable and efficient electricity in all types of weather at all times of day,” Farrell said, as quoted by the Richmond Times-Dispatch. It's not hard to read between the lines. The statement clearly referred to the intermittent nature of wind and electric power, clean power sources that the country will increasingly rely upon as the Clean Power Plan forces the shut-down of many, if not most, coal-fired power plants, and as cost issues and environmental concerns dog the expansion of nuclear power. Farrell stated that it will cost "billions of dollars" to reduce carbon dioxide emissions from Virginia power plants by 32 percent by 2030 from 2005 levels. Dominion Virginia Power has not released a precise estimate on how much the transition to cleaner power will cost because key regulatory decisions have yet to be made. But Farrell's comment suggests that he believes that however costs are allocated, they will be substantial. Natural gas is abundant, less expensive and emits less CO2 than other fuels, but Farrell warned that reliance upon one fuel source "leaves us vulnerable" -- presumably to supply shortages and price spikes. Meanwhile, solar has its own issues: (1) It generates electricity only when the sun is shining, which means it requires expensive backup energy sources, and (2) it consumes large amounts of land. Farrell faulted the Clean Power Plan for giving insufficient emphasis to nuclear power as a way to diversify fuel supplies. Dominion has reduced CO2 emissions by 20% at the cost of billions of dollars in recent years, Farrell said. "But that was the easy part. From here, it will be more difficult and much more expensive." Bacon's bottom line: Judging by the T-D account, Farrell didn't provide many hard numbers, but his skepticism that wind and solar can replace fossil fuels on a large scale comes through loud and clear. Wind power may be viable as a niche product along mountain ridges, but large-scale wind production offshore is many years off, if it can be accomplished economically in Virginia at all. Solar is looking more competitive when viewed on a life-cycle basis (zero fuel cost offsets lower up-front capital costs) but, without a means to store surplus electricity and limited means to import clean power from wholesale markets, Dominion, Appalachian Power Co. and other utilities will need to maintain fossil-fuel generators on stand-by. On the other hand, Farrell may have a hard time persuading Virginia regulators that nuclear power is a viable option, even if it does emit no CO2, provides fuel diversity and generates electric power continuously. Dominion has acknowledged that it could cost $19 billion to design and build a third nuclear reactor at the North Anna power station. The capital cost is several times more expensive per kilowatt hour than any other fuel source. In the end, each fuel source offers its own unique trade-offs of cost, reliability and environmental impact.

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22 responses to “Clean Power Plan Will Cost Virginia “Billions” Says Dominion Chief”

  1. LarrytheG Avatar

    re: ” Farrell stated that it will cost “billions of dollars” to reduce carbon dioxide emissions from Virginia power plants by 32 percent by 2030 from 2005 levels. ”

    2005? like 10 years ago?

    Boy do I wish we could have more open and frank discussions about this.

    there is no question that building gas plants and retiring coal plants is going to “cost” billions – every new gas plant costs how much?

    but how much of that would occur anyhow – as we continue to phase out coal plants from prior rules already passed before CPP?

    In other words – is CPP alone – the reason that coal plants – like Yorktown are closing down – and essentially getting replaced by gas plants? Surry power is getting diverted to Hampton and a new gas plant is being built to take over what Surry had been supplying (unless one wants to believe Surry has been sitting there all along not providing power -just waiting to replace Yorktown).

    Didn’t we decide some time ago that coal plants were going to be closed – older, dirtier ones first then the others because they still spew mercury into the air and they still kill and maim the elderly, young and sick with their effluents?

    when we say gas will “cost” billions – have we calculated the health costs due to coal? Are we “saving” health care costs here?

    and I still do not understand those folks who not understand that you pair up gas plants with wind/solar – so when one varies in output up or down -the gas plant compensates for it?

    this is the way that gas plants work with base load. When demand increases beyond what base load provides – the gas plants come on- when demand reduces – the gas plants reduce in response.

    what works with baseload plants – works with wind/solar…

    gas plants become the go-betweens…

    it works this way if you have a gas backup unit for your home.

    when the grid power drops – the gas generator comes on.

    if you had wind/solar at your house – you’d use that when you could then when it reduced – your standby generator would come on and make up the shortfall.

    the one thing Mr. Farrell is dead on correct about is the fact that natural gas is a finite fuel that we really don’t know how long into the future, it will be plentiful and cheap and if we run out sooner than later – what is the plan to deal with it?

    it’s not only about wind/solar. It’s about baseload. Without cheap and plentiful gas – you’d have to run more baseload – that, in turn, would run idle when demand slackened. It would not matter if it were coal or nukes – the same situation would occur …

    so the future is about using gas – frugally – where it makes sense – not only to top off baseleoad but also to run in tandem with wind/solar.

    DVP and Mr. Farrell actually have TWO basic goals – 1. is to provide reliable and cost-effective power but 2. is ” how can we make money for our investors”?

    and that’s perfectly fine and legitimate – that’s what makes the country the economic powerhouse it is – but please don’t mistake Mr. Farrell’s dual goals… when he starts throwing around the ” it will cost billions talk”.

    Roads and schools COST BILLIONS also .. but we don’t see that as a horrible thing.. necessarily…


  2. TooManyTaxes Avatar

    We are entering the last year of a presidential administration. We vote in November. And whichever party or candidate wins, we will see some shift in public policy direction. Or at least we have since 1797, when Washington left office and was followed by Adams. While energy policy may not make a sea change, some policies and regulations will change. Especially since much of what Obama did policy wise was done outside traditional notice and comment rulemaking. I suspect we will see renewed political and regulatory skirmishes over energy policy in the United States beginning next year.

    1. I don’t see Clinton or Sanders rolling back the Clean Power Plan, do you? They might tweak it here and there, but I can’t see them reversing it. I suppose a Republican president could issue an executive order reversing Obama’s executive order, but things have gone so far down the regulatory path that I’m not sure the Clean Power Plan could be undone.

      1. TooManyTaxes Avatar

        As I wrote, I don’t anticipate a sea change, but we will see new players all with their own policy views and egos. The King is dead; long live the new King/Queen. We will see some changes. If I could tell you what they will be, I’d no longer need to be a lawyer.

      2. Keep in mind 27 states representing 80% of the U.S. CO2 emissions are taking EPA to court over the CPP. When one considers the monumental task of fundamentally changing the way power generation is managed under CPP, it seems clear to me we at least need more time. We need to explore new ways to cooperate with other states. I am toying with a Bacon’s Rebellion blog entitled Re-unification of Virginia with West Virgina to show why it might make sense to mathematically “merge” our CO2 targets with WV. One key point is that WV has better wind resources, not too far from the Va. line!

        1. You are right about better wind resources over the hills there in WV. Plenty of coal, too. And shale oil and gas. And plenty of railroads and planned pipelines to deliver it all the way to Hampton Roads and to businesses along the way. And fossil-fueled power plants in both states to turn it into cheap electricity. East Virginia and West Virginia would make a natural partnership on many levels, but cutting fossil fuel consumption is not one of them.

  3. LarrytheG Avatar

    the continuing “strategy” of “wait til our guys take over” is a loser of a strategy and really – a loser of a mindset.

  4. This is so disappointing to read this. Imagine 70% fossil fuels for the next several decades. With nuclear at about 30% in Virginia that means business as usual for another 20-25 years.

    The CPP has much to work out, but at least it has forced a conversation in Virginia that might have otherwise been postponed for several decades. Solar and storage technologies have to prove their capabilities and their lower costs not just promise them, but there is more and more evidence that they might achieve this faster than most people expect especially with the extension of the tax credit.

    My main concern is that Dominion foresees a future that is very much like the past. And they prefer the largest and most expensive central station projects possible because that provides them with the greatest guaranteed revenue streams.

    My guess is that they use high discount rates when they do their comparison of various generation alternatives. Such as the median average cost of capital often used by regulators (which has been around 5.5%) or worse yet a shareholder preferred rate of return near 8%. They also probably expect regulators to use the same discount rates for comparison of alternatives. But it is the regulators job (both the SCC and EPA) to take a broader view of what is best for society, not just what is best for a utility and its shareholders. High discount rates heavily weight the near term and discount the future. This is particularly hard on projects like solar where nearly all of the costs are upfront. The long term value of solar with fixed costs of generation and no emissions has almost no value in these traditional utility calculations. No wonder Dominion says that solar costs more when most of its benefits are ignored in their calculations.

    New York REV is considering discount rates as low as 0.0% and up to 3% to more fairly represent the many benefits of energy efficiency and renewables that are not easily monetized. And this gives more weight to long term future benefits that will accrue to society with the use of these options.

    My greatest concern is that Dominion will use all of its political muscle to limit other parties participation in energy efficiency and distributed generation. If they only left these options open for competition, the market would quickly sort out the best options for citizens who are free to choose, not forced to accept whatever Dominion decides to offer.

    A related concern is that if Dominion continues on this path, they will be slow in making the improvements to the grid that make this world of choice possible. Utilities in other states see that this shift is inevitable and are participating in developing new regulations which serve both the shareholders and the ratepayers.

    Dominion could not only harm its own financial future but that of Virginia as well.

    1. Keep in mind Virginia CO2 per capita is rapidly decreasing as at least 45% of our coal capacity is slated to be shut by 2020. Also Dominion and other utilities are already in the process of replacing much of our in-state coal generation, as well as our very substantial coal power imports, with cleaner natural gas. Just saying it is not business as usual, rather it is a large fundamental change in the direction away from coal.

      You take issue with any use of natural gas to accomplish that task. But, specifically reflecting your views, EPA agreed with you and gave the final Clean Power Plan provisions to limit natural gas growth (called “leakage” prevention). EPA basically has authority to veto Virginia’s increased use of natural gas if they feel it is not consistent with the intent of the CPP. The intent of the CPP, that I do not personally agree with, is to discourage the construction of new, highly efficient natural gas power plants. Instead EPA wants to encourage greater use of existing natural gas plants. Keep in mind, any natural gas plants in construction by 2014 are considered “existing” for the purpose of the CPP.

      1. TBill,

        “Keep in mind Virginia CO2 per capita is rapidly decreasing as at least 45% of our coal capacity is slated to be shut by 2020.”

        True, but not all of it is due to the CPP. The mercury regs (MATS) were well on their way to shutting down many of the old, highly polluting coal plants without regard to CO2 emissions. The EPA felt the hazards of these plants were so clear that they did not consider cost in the development of the regs, so they are being challenged on that basis. It is likely the process will be adjusted and the regulations reissued.

        “You take issue with any use of natural gas to accomplish that task. ”

        No, I don’t take issue with any use of natural gas. If you have read a number of my other posts, I have noted that natural gas will play a very important role in bridging the old utility world with the new. That is why I have recommended (as has Larry) that we carefully husband our supply of natural gas for this purpose and for being a near term source for peakers until storage becomes a more cost competitive method of dealing with the variability of renewables. There are some uses for which natural gas is particularly well suited and we should reserve it for those.

        The new combined cycle plants are more efficient than the old coal plants, but they cannot be the sole answer to the CPP requirements. In addition to the Brunswick plant scheduled to be online this year, the Greensville plant in 2019 and the proposed combined cycle plants projected for 2022 and 2030 will make a much larger percentage of Dominion’s capacity dependent on natural gas.

        These plants have expected CO2 emissions of about 1000 tons/MWh, which exceed the rate based standards for Virginia, as I recall. So they move us in a direction superior to coal, but might be vulnerable to future penalties or carbon taxes after 2030 (which is not being discussed in the approval process for these plants as far as I know).

        They are also vulnerable to future increases in natural gas prices. The cheap money provided by the Fed encouraged overproduction of natural gas, which has pushed gas prices drastically lower in the short term. As inefficient producers declare bankruptcy (several have already) and LNG exports get underway, the supply situation will stabilize and prices will rise. The geology of the Marcellus is already exerting itself and natural gas well efficiency is beginning to decline despite great advances in drilling technology. Eventually, only higher prices will produce greater supplies. With so much capacity reliant on natural gas, there could be a real price shock to ratepayers. Even Dominion has acknowledged this.

        My position has been that energy efficiency measures, first targeted towards commercial, government and industrial facilities, would be by far the cheapest and quickest method of providing new generating capacity and of meeting the CPP targets. Everyone benefits from this low cost method, with creates many long-term jobs and economic and environmental benefits.

        This also buys us time for the costs of solar and storage technologies to continue to fall so that we can see the actual costs instead of just relying on projections to determine their true benefit. Major corporations throughout the U.S. are moving rapidly in this direction and if we want Dominion to be a home for some of them, we need a hospitable environment that makes it easy for them to achieve their goals of more responsible energy production.

        1. OK. Re: natural gas @ 1000 lbs CO2/MHhr is not really good enough for me I hope Dominion can do better. Seems to me increasing renewables to a substantial degree requires a national plan to build out wind in the wind belt belt states, and then build transmission lines to distribute. The Clean Power Plan in some ways hinders that bigger view by placing boundaries around the states. I realize EPA is hoping for regional cooperation, but that remains to be seen.

          A “risk” I see for Dominion, is a possibility that incentives will eventually cause the wind belt development to happen, then there would be excess power on the grid, reducing the need for new plants. Also nuclear could develop big to our South.

          1. The risk you foresee is very real I think. Not so much from the wind power. Most of that goes to the Midwest and the West. It is a long way and expensive to send it to the east coast. It is also more prevalent at night. The bigger need here is for daytime and peak periods. Solar is better for that and might be cheaper than wind within 5 years.

            Solar will displace natural gas plants because the marginal price of generation is essentially zero, which means the gas plants will run less often and Dominion will gain less revenue from them. It somewhat depends on whether DVP builds them as a rate base unit or as a merchant generator. But in any case if other generation, such as solar, fulfills the load the gas units will have a lower economic return and Dominion will ask for more money in higher rates. This problems gets magnified as gas prices increase.

            I don’t think the SCC is fully assessing the potential financial risk that Dominion is incurring by primarily depending on natural gas for the CPP with a little bit of solar sprinkled in. These plants usually take 30+ years to pay for and will last for at least 40 years. Who will pay if the new natural gas plants are economically competitive only in the first 5-10 years of their life? This might be an extreme scenario but with the speed at which cheaper energy efficiency and rapid to deploy solar is falling in cost there could a significant dislocation in central station power plant economics that deserves a closer look.

            Nuclear is making a comeback in the South with TVA and the new Vogtle units in Georgia. However, with Dominion projecting North Anna 3 at 10-20 times the cost of an equivalent gas combined cycle plant it is hard to imagine anyone being willing to pay for such expensive power.

    2. TomH, you say, “Dominion foresees a future that is very much like the past. . . . My greatest concern is that Dominion will use all of its political muscle to limit other parties participation in energy efficiency and distributed generation. If they only left these options open for competition, the market would quickly sort out the best options for citizens who are free to choose, not forced to accept whatever Dominion decides to offer.” I am more of an optimist about this. Distributed generation and energy efficiency is coming at Virginia from a thousand innovative directions and has federal law and, I believe, the SCC will prove to be, behind it. Dominion is an enterprise with many other irons in the fire and it will have to decide which fights to fight to the bitter end and which to walk away from. Given full rate recovery of DVP’s costs to abandon fossil fuels and to embrace distributed generation, it doesn’t make any sense for Dominion to hang on to central-station fossil-fueled generation, in defiance of public and regulatory opinion, when Dominion needs regulatory and legislative blessing to do so many other things that will require the expenditure of substantial political capital. What I see Tom Farrell doing is making it clear HE has brought us low cost electricity as pledged and HE did not ask for the CPP or solar power or distributed generation or any of the other changes rocking the energy landscape, let alone the costs all those changes will bring! [We have yet to resolve whether expansion of nuclear power will be part of Dominion’s proposed response.] “Don’t blame me” is the message I hear, loud and clear; but that is not the same as “no” to change.

      1. I hope you are right. I am also optimistic about the possibilities for a cleaner, affordable energy future. I would prefer to take the easier, faster way than the slower, harder way. It’s just that Mr. Farrell must be an intelligent man or he wouldn’t be CEO. Many others in his position are embracing the shift. Maybe not with gratitude, but at least with acceptance of what is changing and they are choosing to make the best of it. I guess we all view the world with our own lens. Those with power often prefer to bend the world to their desires rather than embrace the changes.

        Does PURPA allow for an independent power producer to sell directly to a customer in Virginia (Amazon for example) or are they limited to the wholesale market?

        1. Rowinguy Avatar

          PURPA does not allow IPP sales directly to end users; retail sales of electricity are subject to state law requirements. There are only limited opportunities in Virginia’s Electric Regulation Act for customers to purchase power from a source other than their incumbent electric utility.

          As far as I am aware, though, nothing in Virginia law precludes a home or business owner from implementing energy efficiency measures on his or her own, nor from self-supplying through installation of rooftop solar, for instance.

          1. How then does a third-party producer arrange for a PPA with Amazon as was originally underway in Virginia before Dominion bought them out?

            A resident does have the right to install solar on a house that they own, but a punitive net metering policy could make the economics unattractive or difficult to achieve (slow hookups, expensive extra safety requirements, etc.).

  5. >>the continuing “strategy” of “wait til our guys take over” is a loser of a strategy and really – a loser of a mindset.

    Perhaps, but isn’t also the thought:

    “Didn’t we decide some time ago that coal plants were going to be closed – ”

    It’s the old argument about Clinton’s sexual misdeeds and other pecadillos of the 90’s. “Move on, nothing to see here. It’s old news”

    How’s that now working out for ol’ Hillary?

  6. Dominion also discounts solar because they say it uses more land than a gas plant. This highlights their prejudice for central station plants as opposed to distributed generation which has many economic benefits, including not requiring new transmission.

    A significant share of the solar contribution could be put on commercial and industrial rooftops or on their property without requiring additional land. This keeps energy production close to where it is used, improves reliability, resiliency, and potentially frequency control and volt/VAR benefits when coupled with some local storage. These are real economic benefits that can be bid into the PJM auctions by an aggregator to further lower costs.

    This only requires a bit of innovation and an appropriate mindset to lower costs and improve the customer experience.

    1. TooManyTaxes Avatar

      A major weakness of distributed generation is that when your local facilities are down, the served community may be out of power for a very long time. Being connected to other power generation sources can be of significant value. I guess we just see this one differently.

      1. TMT,

        Perhaps we just have a difference of definition. When I speak of more distributed generation it is in addition to, not instead of, being connected to all of the grid based generation. For example, let’s say you have a group of commercial or government buildings that provide some of their generation via solar or combined heat and power generation (electricity, heat, air conditioning); when the sun is not shining or their small generating units need maintenance, they receive all of their power from the grid. If they can isolate themselves from the grid (via a microgrid) when a storm or other event takes their section of the grid down, they could still have some level of power to maintain operations (whatever they are able to generate themselves), so their reliability is actually enhanced not reduced. Their bills would be lower because their demand charges would be less, which are a significant portion of the bills for commercial and industrial customers. They also reduce costs for their utility by lessening congestion in local distribution, they could also provide voltage support if they had a bit of storage to even out the ups and downs of the solar generation.

        This is a much better situation for the customers (those with distributed generation and all other customers who pay less for a lower peak) and for the grid. Especially if it spread to many locations throughout the state. The major hitch is that it reduces revenue for the utility. This is what Dominion is resisting so much. But other states, New York REV in particular, are recognizing this and are devising ways to keep the utilities financially healthy and at the forefront of developing a 21st century grid. We can do the same here in Virginia if there is enough political will to get the process moving.

        1. TooManyTaxes Avatar

          TomH – thanks for the clarification. Your post makes a lot more sense to me. Redundancy, when affordable over the long run, is always good to have. Redundant sources of electricity in a post-industrial economy is even more important.

        2. TomH, I agree with your clarification to TMT. Distributed generation will not — at least any time soon enough to plan for — replace the need for the larger grid. It WILL change the way the grid is used substantially, even dramatically perhaps, but that should happen slowly enough to deal with the equipment changes through upgrades and retirements.

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