Introducing a Novel Concept: Cost per Ton of CO2 Reduced

tji_studyby James A. Bacon

A new Thomas Jefferson Institute for Public Policy paper about the impact of a Renewable Portfolio Standard (RPS) on Virginia warrants close examination. You may or may not accept the study’s conclusion that implementing a requirement for 6% solar and wind in Virginia’s electricity mix by 2025 would increase electricity rates in Virginia by 9.85%, depress gross state product by $3.4 billion, and cost 24,000 jobs. Frankly, those who want to believe the numbers will believe them, and those who don’t want to believe them will not. Experts can argue all day about the assumptions, methodologies, models and data inputs that go into studies like this and none of it will mean anything to politicians or the public.

But the author, Timothy J. Considine with Natural Resource Economics, Inc., does raise a really fascinating question. Forget the electric rates, forget the jobs. Let’s say your No. 1 priority is reducing carbon dioxide emissions. Is mandating a minimum percentage of wind and solar production a cost-effective way to achieve your goal?

In the study, “Evaluating the Costs and Benefits of Renewable Energy Portfolio Standards for Virginia,” excerpted from a larger study encompassing 12 states, Consadine makes what seems to be an uncontroversial point: The cost of achieving RPS goals will vary from state to state, depending upon the cost structure of existing power sources and the availability of wind and solar resources. He writes:

For states with a fleet of low cost electricity generation capacity, imposition of RPS could raise electricity costs significantly higher because higher-cost wind and solar generation displace low cost sources of power.

Implementing a 6% RPS goal in Virginia, Consadine says, would reduce annual CO2 emissions by 7.6 million tons per year in 2025 at a total cost (including federal subsidies) of $182 million inflation-adjusted dollars. The cost to achieve those reductions: $182 per ton. The CO2 savings would increase in subsequent years and the cost would decline as the benefit from “free” fuel kicked in, driving down the cost per ton of CO2 avoided down to $136 by 2040.

That compares to the Environmental Protection Agency’s estimate of CO2’s social cost per ton of $12 to $24 (assuming a 5 percent discount rate to reflect the fact that a dollar today is worth more than a dollar in the future). Even if your sole priority in driving energy policy is CO2 emission, you have to confront the finding that the cost of implementing a 6% RPS goal for Virginia would exceed the social benefit by a margin of about 10 to 1.

I’m in no position to appraise Consadine’s methodology for arriving at these numbers. I’m sure that RPS advocates could poke holes in his approach, that Consadine could rebut them, and that the RPS advocates could counter the rebuttal. But a 10 to 1 differential is massive. Assuming Virginia’s goal is to reduce CO2 emissions at the lowest possible cost, as opposed to simply subsidizing the renewable energy sector, I think that everyone, including the most ardent environmentalists, would be open to the idea that there might be more cost-effective ways to achieve that goal.

While Virginians need not accept Consadine’s numbers at face value — it is always important to subject such studies to critical analysis — we should embrace the concept of “cost per ton of CO2 reduced,” we should seek to identify the most cost-effective means to cut CO2 emissions, and we should debate whether it makes sense to implement policies that cost more than the EPA’s estimated social cost. Finally, we should recognize the reality that policies that might make sense in other states might not make sense here.

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20 responses to “Introducing a Novel Concept: Cost per Ton of CO2 Reduced

  1. I’d give credence to the study if other groups and especially groups that are non-partisan and non-ideological – sign on also…

    but I found this to be interesting in that it’s not a “study” than can be disputed – it’s a reality.. no matter one’s views about the politics of CO2:

    Bloomberg: FirstEnergy, Exelon nuke plants may not survive PJM auction

    Oct. 20, 2016 5:59 PM ET|About: FirstEnergy Corp (FE)|By: Carl Surran, SA News Editor

    PJM Interconnection, which operates the biggest power market in the U.S., will hold an auction in May 2017 to award contracts to suppliers, which could decide the fate of some nuclear power plants that have struggled to make money because of competition from cheaper gas-fired electric plants and renewables.

    A Bloomberg analysis says four of the nuclear plants submitting bids – FirstEnergy’s (NYSE:FE) Davis-Besse in Ohio and Eaver Valley in Pennsylvania, as well as Exelon’s (NYSE:EXC) Three Mile Island in Pennsylvania and Byron Nuclear Generating Station in Illinois – may not be able to supply power cheaply enough to make the cut, and could be forced to close if they fail to win contracts.

  2. This study, as with many others, makes the discussion of policy so difficult. Many studies use assumptions and data that favor a particular point of view. People end up waving their favorite studies at one another and no dialogue takes place.

    One curious note, the author includes the cost of subsidies for solar but not the higher subsidies for fossil fuels.

    I have been trying to look at actual experience rather than just estimates and projections to see which way the trends are moving.

    Dominion has recommended that Virginia elect to use the “rate” based scheme to meet CPP requirements rather than the more common and likely the less expensive “mass” based scheme. The “rate” method allows for compliance with the CPP while creating the possibility for an increase in actual CO2 emissions in Virginia.

    Dominion experts testified in the IRP proceeding that they hoped to add an excess of combined cycle plants so that they could export power to other states and make additional profits. They were somewhat chagrined to hear from the NRDC witness that 20 new natural gas-fired plants were planned in Pennsylvania to achieve the same end.

    My point is that meeting the CPP limits using natural gas will not necessarily result in lower CO2 emissions.

    Part of the reason the Dominion model did not select more solar was that Dominion included a $390 per kW penalty for grid integration for solar units. It is likely this study also included some such penalty. In actual experience, Great Britain has installed 12 gigawatts of solar capacity (almost double their goal) with zero expenses for grid integration. In dreary old England huge amounts of solar have been added with no added cost to the grid because solar is cheaper than other alternatives.

    Utilities (such as in Austin, TX) that have thoroughly investigated the Value of Solar (as opposed to net metering) have found that distributed solar provides a net benefit to the grid, even if some expenses for grid upgrades are required.

    Large corporations are on a path to use more renewables,not just because of the PR benefit, but because it saves them millions of dollars per year. Target has 147 MW, Wal-Mart 145 MW (25% of its global electricity use is from solar). Apple, Amazon, Costco, Kohl’s, Ikea, Macy’s, and many more are rapidly installing more solar capacity because it is cheaper for them. They have done a real-world analysis (not just theoretical) and have voted with their investments in solar.

    Utilities in California hoped to run natural gas-fired base load plants 90% or more of the time to make more money. The low cost of solar is turning off these plants in the middle of the day, even though the utilities are bidding lower and lower prices for these plants just to keep them running.

    We must take into account what is actually happening not just a rosy projection from a utility analyst about how much a new combined cycle plant might earn. Otherwise, we will grossly overbuild capacity and have to bear the stranded costs.

    I do not think we need an RPS requirement in Virginia. RPS can be useful in establishing an industry, but that has already occurred with solar. If we removed impediments such as the prohibition of solar PPA’s in Dominion’s service territory and made the processing and connection of distributed solar easier and faster, the lower price will bring solar in at a rapid pace. We will have all of the benefits of zero carbon emissions at no extra cost (actually a savings compared to the rising price of natural gas). Nuclear is not even in the conversation from an economic standpoint.

    We need to have serious, objective discussions about these choices before we blindly follow past habits and invest billions in conventional technologies.

  3. The carbon footprint of the average Virginian includes quite a bit a coal-power CO2 from out-of-state. If you say Virginia cannot replace out-of-state coal with in-state natural gas, because that can and will increase CO2 within state boundaries, well that is the Va. Sierra Club position.

    But the Clean Power Plan recognizes boundaries are arbitrary, and does not mandate that each state must reduce CO2, only that the U.S.A. overall must reduce 32% by 2030. As long as Va. installs CO2-efficient natural gas power plants, Virginia is meeting the demands of the proposed CPP regulation, on an efficiency (rate) basis.

    Admittedly some would like to see Va. go beyond the proposed EPA regulations and self-adopt very strict CO2 reduction regulations on a mass basis. But that is not the way Va. and Dominion are headed. That’s an obvious conflict happening in Virginia right now, at least as far as Va. eco-groups are concerned.

    Similarly, the Thomas Jefferson study makes sense if the goal is to reduce our Va. total carbon footprint.

    In other words, all we can hope to accomplish is to significantly reduce our carbon footprint. If someone says it’s not good enough to only significantly reduce our carbon footprint, but we must also reduce carbon emissions within our arbitrary Virginia state boundary lines…well they just added an enormous burden on the State with that last proviso.

  4. TBill,

    You are correct in saying that historically Virginia has imported a good deal of their electricity from coal plants located out of state, both from AEP and Dominion. Previously, the economics favored running the coal plants rather than building new units to replace them. The mercury, arsenic and toxic substances (MATS) regulations were well on their way to shutting down the most troublesome coal emitters. Then along came the Clean Power Plan to give natural gas a giant boost.

    You are also correct in saying that Virginia can meet the “rate” scheme proposed by the CPP. But they do this only by closing old plants. New natural gas plants are not regulated by the CPP using the “rate” scheme. New plants are regulated by a less stringent section of the Air Quality Act (111(b)). The CPP also says that you can only trade allowances and emission credits with states that are using a similar plan. If Virginia is surrounded by “mass” based states it could complicate the power transfer within PJM since the cost of purchasing these allowances is expected to be reflected in the auction prices at PJM. Studies at Georgia Tech and other locations have concluded that meeting the “mass” based guidelines should be cheaper for most states, especially in the South.

    If Virginia is the only “rate” based state in the region, independent power producers (IPPs) or utilities from adjacent states plus Virginia utilities hoping to make money exporting power will all want to build new natural gas plants in Virginia. We are seeing the beginning of that with three IPPs proposing new combined cycle plants in Virginia. That might not increase the net carbon production in the U.S., only so many new gas plants can built (not many if accurate load forecasts are used), but it would certainly significantly increase the CO2 released from Virginia. We would become like states that allowed their landfills to take in garbage from other states.

    I know it is difficult to find costs that people can agree with, but worldwide cost trends and actual experience in other states show that renewables and storage are decreasing in price in a similar fashion to computers and cell phones and will for some time to come. Dominion’s own IRP projections show that the cost of energy from the new Brunswick plant will be about 80% higher 10 years from now based on projected increases in natural gas prices.

    Between 2020 and 2025 these cost curves will intersect. After that time, the cost advantage of solar and storage compared to conventional generation will increase year after year. This will create a severe disruption in utility business models because conventional generation will be dispatched far less often because it will no longer compete on price. This is already happening in California.

    Much of the commotion generated by the CPP is a result of assumptions of the past being extended into the future. We have a much larger problem of how we keep our utilities financially healthy and our ratepayers paying reasonable prices for energy. Zero carbon generation from renewables and storage will be the cheapest source of generation after 2025. The carbon issue will take care of itself if we allow market forces to work.

    The greater concern is what happens if we rush to build huge amounts of natural gas generation and related infrastructure that will only have an economic value for 15 years? Especially since this is being pushed to bail out failing natural gas investments rather than as a means of providing the lowest cost source of energy in the future.

    We need wholesale changes in the way our utilities are regulated to allow them to prosper by doing what is good for ratepayers. Current rules are prompting them to select projects that appear to favor shareholders, but shareholders will suffer too when they have to bear some portion of the stranded costs. The burden on the State will come from an extension of old habits rather than a realistic look at the trends affecting our energy system. I think the business people are resisting this because it is being pushed from ideology. If they could take an objective look at the economics they would see the benefits.

  5. TZ, I love your saying, “People end up waving their favorite studies at one another and no dialogue takes place.” Yes, and that’s exactly Jim’s point when he says, “Experts can argue all day about the assumptions, methodologies, models and data inputs that go into studies like this and none of it will mean anything to politicians or the public.”

    But it seems unavoidable, the buck has to stop somewhere, and we have created the SCC to be where it stops in Virginia. Only, the GA gets involved in micromanaging the SCC. And then again, the federal EPA gets involved in micromanaging the States, only the CPP rules are a morass of equivocation intended to make the States feel they still have a role, only the choices set out by the feds pit State factions against one another and nothing gets decided, and the GA punts to the SCC to decide which way Virginia will go under the CPP, and the SCC tries to punt back to the GA to please make a decision on methodology before the SCC steps blindly on too many toes. Out of all of this, I look forward to a grand and glorious decisional sausage this December on DVP’s IRP filing this past summer, wherein Dominion punted the question of North Anna 3 to the SCC. Isn’t all this punting-to-avoid-making-a-decision fun !!

    There is one thing you say that may provoke a response here. You say, “The greater concern is what happens if we rush to build huge amounts of natural gas generation and related infrastructure that will only have an economic value for 15 years? Especially since this is being pushed to bail out failing natural gas investments rather than as a means of providing the lowest cost source of energy in the future.” LarryG has been making the same point here for some time. But why do you say, “to bail out failing natural gas investments”? They haven’t failed yet. Are you so confident that the cost of solar electricity production will continue to fall so far and so fast that it will truly become the lower cost means of electric generation even when paired with gas cycling units for those night-time hours? Or do you have another model in mind for supplying our electricity needs?

  6. [LG, I can’t post this immediately after your comment while the BR site-rebuild continues . . ..]

    LarryG, you have noted something in that Bloomberg report you mention that I wish more people would pick up on. First though, it’s important that the “PJM auction” the report is talking about is the RPM, or “capacity” auction, in which all the “load-serving-entities” or LSEs of PJM have to buy sufficient generating capacity to cover their projected peak load (including reserves) for the next three years — here is a more detailed description: The “capacity” market is different than the “energy” market, which is a by-product of PJM’s real-time locational-marginal-pricing dispatch. In the energy market, nuclear has a huge cost advantage and usually rakes in the dollars for its owners over and above out-of-pocket operating expense. However, as you know, nuclear generation is so expensive to build that its embedded (sunk) investment cost cannot be recovered from net operating revenues in the energy market alone; the balance must be recovered from the capacity market, in which all dispatchable generation has equal value (but the value of non-dispatchable generation like solar is discounted, due to its non-availability at night and on cloudy days). In the capacity market, there is money to be made for just being there, whether the unit runs or not. There’s not enough to be made, however, to offset the entire capital cost of a nuclear plant. The question for every nuclear plant owner is, will the net operating revenues from the energy market be sufficient to more than offset the cost of capital that’s not recovered from the capacity market? Therein lies the profit or loss. And if the sum is a loss, it isn’t enough merely to shut the unit down, because the absence of net operating revenue actually increases losses on the plant since the cost of capital continues unabated. The only way out for the nuclear plant owner is to sell the plant as an operating entity, even for less than it cost to build (or close it and sell its assets, servicing the remaining debt through ratebasing or bankruptcy if necessary). That’s how Exelon ended up buying a bunch of nuclear units at a discounted price from other utilities. But now, even at that reduced price, they can’t compete with cheap natural gas units.

    The PJM capacity market does not care whether the generating capacity is nuclear or natural gas fired; the market payment for “being there” is the same per megawatt. Relative to the embedded cost per megawatt, a natural gas plant is cheap, cheap, cheap to build compared to nuclear, so the payback on the investment is much faster. If your primary goal is to reduce carbon emissions, however, you should do what it takes to keep that nuclear unit running, even if you have to subsidize its cost somehow — such as through a “carbon tax” which, in effect, raises the cost of fossil-fueled plants to where the nuclear plant can compete again.

    Given all our concerns about carbon emissions, I think it would be criminal to shut down our existing nuclear plants any sooner than their age dictates just because of a temporarily depressed price of gas in the natural gas market. But, adding to the “nuclear problem” by building NA3 would be a whole ‘nother matter.

  7. Surely you all realize that this study is made up of imaginary facts? Virginia does not have a mandatory RPS, and the EPA has not imposed one on us. Why are you people wasting time discussing a bogus study? And Mr. Bacon, get a grip. You know we have no RPS. The fact that Dominion is funding your site surely doesn’t come with an agreement to promote the fossil fuel industry with studies based on premises you know to be invented out of whole cloth.

    • Ivy, I appreciate your joining a conversation on this blog, but I’m disappointed in your response. First, I did not say that Virginia has a mandatory RPS. Second, I made it ultra-clear in my post that the main conclusions of the study are debatable and sure to be contested. I did not endorse the conclusions in any way. Indeed, I said, “I’m in no position to appraise Consadine’s methodology for arriving at these numbers. … Virginians need not accept Consadine’s numbers at face value.”

      What I found useful was the idea of comparing the cost per ton of reducing CO2 to the EPA’s estimate of the social cost per ton of CO2. If the cost of reducing a ton of CO2 exceeds the social benefit of reducing it, perhaps the expenditure is not worthwhile. Perhaps there are other ways of achieving the goal of CO2 reduction more cost effectively.

      So, I would ask you, what is bogus about asking that question? Do you believe that Virginians should pay any price to reduce CO2, even if the cost exceeds the social benefit by ten times? Or only five times? Or even two times? Why wouldn’t environmentalists ask the same question? Why wouldn’t they want to find the most cost-effective means of reducing CO2?

  8. Acbar,

    It’s nice to have a conversation again. When I referred to bailing out failing natural gas investments, I was referring to Wall Street’s behind the scenes promotion of the CPP to increase natural gas demand so that investments in failing natural gas developers would now create a profitable return. Much of the utility planning response nationwide to the CPP has made it into the Natural Gas Power Plan, especially in Virginia.

    I don’t foresee that solar would be used for significant baseload use until the solar and storage prices are substantially lower in 2025-2030 and beyond. Although electric vehicles becoming cost competitive with internal combustion engine vehicles by 2025 could provide a large source of low cost storage for solar which could displace much of the expected baseload nighttime charging.

    The demand growth (1.5% for Dominion) is extremely suspect. The only growth in demand in the Dominion service territory is occurring from population growth not increased use per household. Even without an energy efficiency program, household appliances, lighting, etc. will continue to get more efficient, as will commercial and industrial usage. Major corporations (especially big box stores) are installing their own solar or buying it through PPAs. This will reduce Dominion’s load so that current units will be sufficient to provide reliable power for the next 10-15 years while the new technologies become much cheaper.

    Greensville is already approved. I don’t see the need to build anything new after that. The three new combined cycle units, Warren, Brunswick and Greensville will provide plenty of efficient and reliable baseload capacity until renewables and higher gas prices disrupt their business model. We will pay a price for them eventually, but we should not compound the problem by building more units. Energy efficiency can meet any expected growth in demand much more cheaply without any risk of stranded costs.

    It would be nice to have some new faster reacting peaking units that could match with solar but they could be obsolete by 2030 as low cost storage provides faster response and many other benefits (voltage and frequency control) far better than combustion turbines.

    This scenario makes CPP compliance and rate increases a non-issue (except for natural gas price increases). We will have plenty of baseload capacity just as we do now, because our load will not increase with appropriate energy efficiency measures. An effective energy efficiency program would actually lower demand. Well respected studies forecast that nationwide electricity demand in 2040 should be 9% lower than today, even with growth in population and economic activity.

    Older units will be used less as distributed and utility-scale solar provide energy at a lower cost. I am concerned about allowing utilities to rate-base solar generation. They should not be allowed to have the rate-payers cover their risk and pay them a profit that is not allowed for third-party developers. Already, they are lowering the apparent cost of utility-scale solar by not including the cost of transmission, which is usually not needed with small to medium size commercial and industrial installations. The smaller units placed on existing land uses also avoid the loss of farm land for solar units.

    Our sixty-year old nuclear units would be ready for retirement in the early 2030’s. By that time, low cost reliable renewable +storage +demand response solutions will be available. We can avoid the $500 million per year nuclear subsidies that New York is contemplating to help bridge the gap to avoid building more natural gas units.

    This seems to be a fairly simple way forward. It avoids the contentious and likely very expensive buildout of more natural gas plants, keeps rates low, and provides many new jobs for installing energy efficiency measures and distributed solar. And it assures a reliable supply of electricity, just as we have today.

  9. Jim,

    Maybe you can help me understand this better. Ohio is the fourth highest energy-using state in the U.S. Two years ago Governor Kasich put a two-year freeze on Ohio’s program to encourage renewables and energy efficiency. This week nine large businesses based in Ohio came forward to urge lawmakers to reinstate and strengthen the mandates. The businesses are: Campbell Soup, Cliff Bar, Gap, JLL, Nestle, Owens Corning, Schneider Electric, United Technologies, and Whirlpool Corp. Together they employ 25,000 people in Ohio.

    A Campbell Soup vice president was quoted as saying “Continuing to undo smart clean energy policies won’t help us build a stronger Ohio for tomorrow”, citing $4 million in savings from just one of the company’s solar projects.

    Owens Corning has a 2.4 MW solar parking lot canopy. Jeff Nobel, a Whirlpool vice president, said, renewable mandates “are a foundation for Ohio’s continued economic growth”. This freeze cost Ohio 1,400 jobs in the wind industry alone in 2015. Yet conservatives are often leading the charge to repeal or oppose measures that will promote development of a more modern energy system.

    I am trying to understand the opposition of business people and fiscal conservatives to programs that result in lower energy costs and more jobs. Is it because many of these programs are also supported by environmental groups? Or have they been swayed by the media scare tactics that have been employed by established energy companies claiming that they will result in higher costs? Or don’t they believe the results of these real businesses? I am trying to understand how to open a dialogue with business leaders that seem to be stuck in fixed ideological assumptions. Any suggestions?

  10. TZ, I take it the heart of your vision is: “Energy efficiency can meet any expected growth in demand much more cheaply without any risk of stranded costs. It would be nice to have some new faster reacting peaking units that could match with solar but they could be obsolete by 2030 as low cost storage provides faster response and many other benefits (voltage and frequency control) far better than combustion turbines.” Yea, verily! That and better battery technology might actually get us there by 2030 if not beyond.

    I tend toward the “or beyond” camp, but by not much more, assuming we can put a serious dent in the battery technology obstacles that continue to make lithium-ion batteries so much less than ideal — those include the graphite, lithium and especially cobalt required and the manufacturing costs to make a pure, stable product and the limited cycling life. Electric vehicle storage through overnight charging will certainly be attractive as a replacement for all those internal combustion engines — and they could provide a source of battery power for peaking or ramping (if we start building electric vehicles and charging-stations designed for two-way interface with the grid, which they aren’t today), but it isn’t obvious to me how EVs will help avoid overall growth in electricity consumption, or particularly, growth in the need for overnight (non-solar) generation on the grid, as we replace all that existing IC transportation with EV. I see greater promise ultimately in distributed solar generation (homeowner and commercial scale) packaged with distributed battery and heat-energy storage; we agree, utility-scale solar is simply less efficient and less land-use conscious than distributed commercial/industrial solar. The rate-basing of utility-scale solar is an unnecessary subsidy offset, in my mind, by the equally unnecessary subsidy called net metering; both should be phased out, even though utility-scale solar today seems to still be helping develop the technology. All that said, we are pretty much in agreement.

    You mention New York’s contemplated subsidy to nuclear “to help bridge the gap to avoid building more natural gas units” and how you hope we can avoid that. In the short run, let’s consider doing as NY contemplates rather than build more gas units while shutting down nuclear. But if neither is needed in the short run, let’s let the wholesale energy and capacity and carbon markets sort it out without additional subsidies and all their associated politics. Which leads me back to your last paragraph and what most of the readers of this blog want, “a reliable supply of electricity, just as we have today.”

  11. If I had to make a stab at answering your question, I’d guess that Republicans and conservatives associate solar, wind and energy-efficiency with liberals who, they perceive, want to cram these technologies down their throats on the basis of a a hyped fear of global warming. They don’t perceive the move to solar as being driven by market economics, and they don’t want to pay higher electricity rates to assuage liberals’ pieties.

    The key to reaching Republicans and conservatives is to divorce your case for restructuring the electrical grid from global warming (climate change, whatever you want to call it), and to justify it on the basis of economics: increased reliability and the lower electricity rates over the long run. You need to convince them that what may seem to be the most economical solution over the next 5 to 10 years (natural gas) may not be the most economic solution in the next 15 to 20 years. Alternatively, convince them that a solar-heavy distributed grid offers greater resilience in the face of natural disaster, terrorist sabotage, electro-magnetic pulses, or what have you.

    We need to talk.

  12. Acbar,

    “but it isn’t obvious to me how EVs will help avoid overall growth in electricity consumption”

    By 2025 we are also likely to see widespread use of autonomous driving technology. This disruptive technology will shift the automotive industry from primarily an ownership (or lease) model to “transportation as a service”, especially among younger drivers, This will shift the usage of cars from at most 5-10% of the day to perhaps 60-80% of the day. Many fewer cars can serve a much larger population. So even when a much higher percentage of the automotive fleet will be EVs, it will not necessarily greatly increase electricity use. Especially with two way chargers or wireless charging locations. The on-board batteries will be considered grid resources and allow the car owners to earn a bit to help make their car payments.

    If much of our electrical generation is carbon free by then it will greatly reduce carbon emissions since the transportation sector now emits more carbon than the energy sector.

    By letting energy efficiency postpone the need for new capacity, we will have plenty of time to let market forces sort out the best methods going forward. This avoids ill-considered decisions being made in a rush that will have long-term consequences.

    I agree that subsidy free markets with complete and transparent pricing will identify the options with the greatest value. I would like to see Value-of-Solar tariffs rather than net-metering. This would encourage distributed solar to be located where it does the most good for the grid. With VOS tariffs no subsidies are required from other customers for distributed solar. The tariff includes all of the grid costs and benefits of the installation.

    I don’t think the huge fossil fuel subsidies will disappear until the use of the fuel is nearly phased out. The nuclear subsidies are even bigger, but even with that new nuclear units cannot compete on price even with the financial boost from the capacity market. The energy market is rewarding rapid response and the inflexible operating ability of nuclear units just does not meet the needs of the future.

    We will see how the utilities respond when it comes down to choosing whether to reduce the capacity factor of their new combined cycle units or their old nukes. Currently, Dominion is bidding the price of the nuclear units for $0 in the energy auction just to keep them running all of the time. In states with greater solar penetration, power prices during peak daytime hours are being reduced because contributions from solar avoid the need for the most expensive peaking units and is lowering the auction clearing price at those times of the day. This reduces the profit earned by the baseload plants, including nuclear units. This is one of the primary reasons I think Dominion is making it difficult for third-party solar installations in Virginia. An Administrative Law Judge has recommend to the SCC Commissioners that third-party Power Purchase Agreements be allowed within Dominion’s territory. It will be interesting to see what happens to that.

  13. TZ, you say, “Currently, Dominion is bidding the price of the nuclear units for $0 in the energy auction just to keep them running all of the time.” I think most readers assume that Dominion is paid $0 if it bids $0, but in fact PJM pays every generator that is on-line the marginal price in the energy market from time to time, and since it costs Dominion a large sum to shut down a nuclear plant even briefly, it makes economic sense to “bid $0” (i.e., “must-run”). But you know how the “auction clearing price” works as you go on to describe a more subtle effect of solar penetration on nuclear earnings.

    Have you seen any study showing that “In [ISO energy markets] with greater solar penetration, power prices during peak daytime hours are being reduced because contributions from solar avoid the need for the most expensive peaking units and is lowering the auction clearing price at those times of the day”? Intuitively that should be the case only if, absent the solar increment, the day’s load profile would have required the system operator to call for peakers for a sustained period, thus setting the marginal price for that period — but my understanding is that rapid deployment of gas-fired cycling units has brought the clearing price in most hours down below CT cost levels already (that being the primary cause of lost nuclear-unit operating profit on energy); in other words, increased solar penetration would mostly displace the highest-cost gas cycling units at the margin, impacting the clearing price relatively little.

    On those “third-party PPAs”, are these simply PPAs we’d call retail wheeling elsewhere, or is the ALJ recommending Virginia allow solar equipment-leasing-plus-retail-sales PPA arrangements?

  14. Virginia has a voluntary RPS (Renewable Portfolio Standard) which is reasonably pro-active. My understanding from the UVa consultant group is that the Va. utilities have committed to meet the Va. voluntary RPS target by either installing renewable facilities, or alternately if necessary, by purchasing renewable credits from out of state.

    The RPS is an older, non-mandated legislation, and at the moment, I see little merit in worrying about volunteering for stricter, new RPS targets. The proposed EPA mandate known as the proposed Clean Power Plan is hard enough to manage.

    I really agreed with Acbar’s above description of the Clean Power Plan as a “morass of equivocation” that pits that purple state (of Virginia) against itself.

  15. ANY “study” that comes from right-leaning/GOP-favoring “think tanks” is, more often than not, not a useful informative discussion about policy and choices but usually propaganda statement infused with misinformation and disinformation.

    I don’t consider them credible unless other studies from less biased sources are in agreement on at least parts of it.

    Jim promotes them – even has he supplies “caveats” to cover the bases but here’s the test – at the end of the day – was there anything in the “study” that truly informed the discussion and generated more dialogue about how to proceed or was it basically an advocacy piece designed to further muddle?

    I’m still ruminating about the PJM and Acbars comments that essentially PJM has nothing what-so-ever to do with CO2 – just bottom-line costs that actually seem to run counter to goals to reduce CO2.

    so if this “study” is about reducing CO2 – why don’t they address the PJM issue ?

    Finally – per Jim’s suggestion to “reach” the GOP. You can’t “reach” folks who do not accept Global Warming as a dire threat even if we don’t know all we need to know about it’s dimensions yet. Of course such folks with those views consider ANY/ALL efforts at CO2 to be fundamentally wrong – from the get go – not needed and dragging down productivity…the economy…

    You deal with the adults in the room on this… and those who chose to not be adults are not taken seriously – because some of their efforts are actually to dismantle and harm – to vandalize – not to move forward…

  16. Acbar,

    Relating to solar disrupting the gas-fired power plant business case here is an excerpt from a Bloomberg analysis that I posted in the article about a new IPP plant announced in Virginia:

    According to a Bloomberg article, “the strategy for gas turbine developers in PJM is to jockey for position at the front of the merit order: build the most efficient combined-cycle possible, source the cheapest local gas you can find, undercut your neighbors’ costs (including coal units), and run all day, almost every day, with annual capacity factors as high as 90%. This strategy achieves the lowest-possible levelized costs of gas-fired generation.”

    The Bloomberg analyst goes on to say that things are different in California where the amount of solar contribution is much higher. In 2017, “Bloomberg Fair Value Curves suggest that around-the-clock average ‘spark spreads’ (ie. gas plant operating margins) will land in negative territory. Even the most efficient generators would lose money if they remained online year-round, as around-the-clock average power prices will fail to cover costs of burning gas, bearing a carbon allowance burden, and incurring non-fuel O&M charges.”

    Bloomberg experts were startled by this result. If gas units set power prices virtually year-round in California, how is it possible that power prices could so consistently fall to loss-inducing levels? Wouldn’t generators demand higher prices or simply shut off?

    What they found was “an entirely new paradigm for midday power price discovery in California – one that is intimately related to solar’s diurnal onslaught and to the ‘flexibility’ of the gas fleet. The short version: instead of resting on the short-run cost of gas-fired generation, midday power prices in California are increasingly influenced by gas plants’ operating constraints (like ramping, run-time, and startup costs). In particular, the costs associated with starting up and shutting off a gas unit appear to have the greatest impact on power prices.”

    Regarding the ALJ recommendation about PPAs after further review it turns out to be in APCo’s territory (CASE NO. PUE-2015-00040):

    Chief Hearing Examiner Ellenberg ruled against APCo’s proposed Rider saying it isn’t needed because PPAs are curently legal under the Virginia Code. This is a ruling much desired by the solar industry and environmental groups, and has been supported by the Attorney General’s Office of Consumer Counsel.


    “Ellenberg pointed to two statutory provisions that support the legality of third-party PPAs. First, Virginia Code §56-577 A 5 provides that customers may purchase renewable energy from third-party sellers if their own utility does not offer a tariff for renewable energy. Specifically, customers may:

    [P]urchase electric energy provided 100 percent from renewable energy from any supplier of electric energy licensed to sell retail electric energy within the Commonwealth . . . if the incumbent electric utility serving the exclusive service territory does not offer an approved tariff for electric energy provided 100 percent from renewable energy. . ”

    “Dominion challenged a PPA at Washington and Lee University back in 2011. The issue was temporarily resolved two years later when Dominion and the solar industry agreed to a pilot program that now allows a limited number of PPAs in Dominion territory, under tight parameters that exclude residential customers.”

    “If the SCC’s final order endorses the hearing examiner’s finding that PPAs are currently legal, the result could be to open up the Virginia solar (and wind) market to large amounts of private investment statewide.”

    Virginia utilities oppose this interpretation and have threatened to sue in the past (W&Lee), but an SCC ruling could at last open up the solar market in Virginia similar to other states.

  17. Larry,

    Although PJM does not have any regulatory relationship with the CO2 issue, the prices in their energy auctions will reflect the cost of dealing with the CPP. For example, for a coal plant to continue to operate the owner might have to purchase an allowance or an emission credit that allows that plant to continue to operate and still meet the CPP requirements. The price paid for that allowance or ERC will likely be included in the cost to operate that unit that is bid into the energy market. PJM on its own is neutral in any carbon issue, but its energy marketplace will reflect the costs of compliance with carbon or other applicable regulations.

    What is not yet clear is how the limitations the CPP puts on trading between states with similar plans (mass vs rate) will affect the way the costs of those trades are reflected in the energy market.

  18. TZ, thank you for the California perspective. Quoting Bloomberg, you say, “instead of resting on the short-run cost of gas-fired generation, midday power prices in California are increasingly influenced by gas plants’ operating constraints (like ramping, run-time, and startup costs). In particular, the costs associated with starting up and shutting off a gas unit appear to have the greatest impact on power prices.” Well, yes, and that will be the case in PJM also if solar penetration increases there. Start-up and shut-down costs are inevitably a consideration in the economics of “economic dispatch.” If system demand drops below the level of generator output from solar alone, then solar generation sets the marginal price of energy and the system operator must make a decision: take the gas unit off-line, or, keep the gas unit on-line for a payment below the cost to operate the unit (i.e., at a loss), because the cost to shut the unit down and then bring it back on-line a short time later would be greater than the loss. Obviously, someone building a new gas generator in California will be very concerned to minimize those start-up costs and make its new unit as efficient in cycling and ramping as possible in order to remain competitive and profitable.

    Your discussion of the solar PPA issue is helpful and I went to look at some of the SCC orders involved. It appears this APCO hearing examiner’s decision you mention is the result of some very arcane and somewhat inconsistent statutory language in the muddle created by the way the Virginia GA chose to ‘semi-repeal’ retail access; moreover, it is not the final word on the matter. It seems the Commission has rolled the issues over into another proceeding. The case to watch is a petition for a declaratory judgment in DIRECT ENERGY SERVICES, LLC, CASE NO. PUE-2016-00094, which is already partially briefed. In that case, “Direct Energy requests that the Commission issue an order that affirms the continued right of Direct Energy to sell electricity from 100% renewable resources to customers located in the service territory of Virginia Electric and Power Company (“Dominion”) in the event [whether or not] Dominion obtains Commission approval of a 100% renewable energy tariff pursuant to §56-577 of the Code of Virginia (“Code”).” This petition is a frontal assault on the “exclusive territory” objections of both Dominion and APCO to customer PPAs with solar equipment leasing entities in Virginia, so the SCC’s decision in the case is potentially very significant to the equipment-leasing approach to distributed solar in Virginia.

  19. Acbar,

    Thanks for this review. I would appreciate being kept up to date about any new information you come across either via this blog or privately.

    I am trying to learn more about the re-regulation legislation that the GA passed 7-8 years ago(?). Do you have good sources that summarize that process?

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