steamby James A. Bacon

Stakeholders in Virginia’s electric grid got a close-up look last week at the wild and woolly world of Clean Power Plan regulation. One of the few things that can be said for certain is that the plan will make a complex industry even more complicated. To make an informed decision about how to proceed, Virginia policy makers will have to acquaint themselves with, among other concepts, “ERCs,” “leakage” and “new source complements.”

Representatives of Virginia’s major electric utilities, independent power producers and environmental groups gathered in Richmond Friday at the Department of Environmental Quality (DEQ) to see if they could reach a consensus on whether Virginia should choose the “rate based” approach to reaching the plan’s aggressive CO2 reduction targets or the “mass based” approach. The proceedings were collegial, but nothing like a consensus emerged after several hours of discussion.

Adding to the complexity of choosing a regulatory path is the uncertainty of what legal fate will befall the Clean Power Plan. Just days ago the U.S. Supreme Court issued a stay, halting implementation of the plan, until federal courts had time to rule on its constitutionality. As of Friday, many people assumed that a 5 to 4 conservative majority would reject the plan on the grounds of constitutional overreach, allowing utilities and state regulators to continue business as usual. But the weekend death of conservative justice Antonin Scalia threw even that seeming certainty into question.

Virginia Clean Power Plan goals. Source: Environmental Protection Agency. (Click for larger image.)

Before the Supreme Court issued its stay, Virginia’s DEQ had until June 2016 to submit a State Implementation Plan to the Environmental Protection Agency, although the deadline could be extended one to two years, depending upon circumstances. A critical decision would be whether to go with a rate-based plan, which sets CO2 emissions goals on the basis of the number of pounds of CO2 emitted per megawatt/hour, or a mass-based plan, which sets CO2 goals based on total pounds emitted.

Under the rate-based plan, Virginia power plants would have to cut their CO2 emissions from 1,047 pounds to 934 pounds per megawatt/hour of electricity generated by 2030. Alternatively, under the mass-based plan, Virginia power plants would have to cut total CO2 emissions from 30.0 million short tons to 27.8 million by 2030.

In case the Clean Power Plan survives its legal challenge, DEQ is moving forward with its stakeholder consultations. At present, the regulated power companies — Dominion Virginia Power, Appalachian Power Co., and the Old Dominion Electrical Cooperative — are leaning toward the rate-based plan, although each company insists that its positions are preliminary, pending more thorough analysis. By contrast, some independent power producers such as Birchwood Power Partners, owner of a coal-fired cogeneration facility in King George County, and Covanta, owner of the Arlington-Alexandria Energy-from-Waste facility in Alexandria, favor the mass-based approach. Environmentalists favor the mass-based approach with a “new source complement” (explained below).

While round-table discussion Friday found no unanimity, it did surface several critical issues.

Ease of implementation. The most consistently cited reason to go with the mass-based plan is that the federal government has successfully implemented caps on other pollutants, such as sulfur dioxide emissions responsible for acid rain. In effect, there is a template to follow, which there is not with the rate-based approach.

Interstate trading. An advantage of the mass-based plan would be the ability to trade allowances with carbon emitters across state lines. By enlarging the pool of potential trading partners, in theory it should be possible to make more advantageous trades resulting in greater efficiency.

Allocation of allowances. Adoption of a mass-based plan would require DEQ to allocate CO2 pollution allowances — but on what basis? Will the allowances be auctioned off to those willing to pay the most for them? Will they be distributed equally among carbon emitters on the basis of CO2 released into the atmosphere? If so, is that fair to those who invested heavily in carbon reduction before the Clean Power Plan? Should there be set-asides for special cases? Can any of this be done in a way that is not dictated by ideology, special interest and politics?

Growth in electricity output. The most consistently cited reason to favor the rate-based approach (CO2 emissions per unit of electricity generated) is that it will accommodate growth in electricity demand and output. The question, then, is whether electricity demand will increase in Virginia between now and 2030. The utilities err toward the side of caution and assume that demand could increase as much as 1% per year; environmentalists respond that demand forecasts historically overstate actual demand, and that demand can be curtailed by energy efficiency and demand-side management plans.

Leakage and level playing fields. The mass-based approach comes in two flavors — one with a “new source complement” and one without. The Clean Power Plan would treat existing fossil fuel-burning power plants more stringently than new ones with the consequence that there could be “leakage,” in which operators shut down old plants and electricity production shift to new ones using the latest technology subject to different regulations. Adding a “new source complement” to the mass-based approach, which would include CO2 from new sources under the statewide cap, would help level the playing field and reduce leakage. A feared drawback of “new source complement” is that it would make it even harder to expand electricity-generating capacity.

ERC glut or shortage? Under a rate-based approach, regulators would assign each electricity generating unit (EGU) an allowable CO2 emission rate. If a generating unit manages to generate less CO2 than its target, it garners an Emission Rate Credit, or ERC, which it can use to offset the excess CO2 emitted by another generating unit. ERCs can be traded and sold. The idea is to steer capital to those units that can most cost-effectively reduce CO2 emissions. The problem is that the pros/cons of the rate-based approach is difficult to evaluate because no one knows how many ERCs will be generated or what the demand for them will be. A glut of ERCs would reduce their value; a shortage would increase their value. Making a supply/demand forecast all the most difficult is the fact that the interstate market for ERCs will depend on the number of other states adopting the rate-based approach, which itself is hard to predict.

Billions of dollars ride on the approach DEQ chooses. Under their worst-case scenarios, the big utilities would find many of their facilities uneconomical; shutting them down would create potentially billions of dollars in stranded costs that could be passed on to rate payers. Conversely, a worst-case scenario for some independent power producers would put them out of business enitrely. Both the utilities and independents are maneuvering to minimize their exposure, big industrial customers are seeking the least-cost approach, and environmentalists are pushing for the maximum CO2 reduction achievable.

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11 responses to “Navigating the Clean Power Plan Maze”

  1. Jim- Good overall introduction to the CPP issues and choices. Further adding complexity we might want to join with neighboring states or PJM. I get the impression Dominion prefers keeping it to a Virginia-only solution. But I am starting to see potential merit in combining with other states or PJM (assuming we move forward with CPP). It’s probably better to have more time to consider the options. Also presumably the SCOTUS may change the options, so I am re-thinking my New Years resolution to become a better technical expert on CPP, until we have more clarity.

  2. As I understand it, collaborating with other states makes more sense under the mass-based plan, which Dominion is tentatively against. Apparently, it is easier to trade “allowances” under the mass-based plan than to trade “ERCs” under the rate-based plan… although I could not explain why.

    1. It’s just so complex. The rate based approach does indeed make good sense for Virginia as we are headed. If we combined with other states, then the mass based approach might make sense, even to Dominion. I am thinking Dominion’s resistance to multi-state approach is not that choice, rather there would be the implication of ceding leadership of (eg; construction) plans to another body.

    2. Completely agree with TBill — it’s just so complex. My seat-of-the-pants preference would be the mass-based option mainly because of the trading advantages, but that’s without full information.

      My fear is that the politics of all this, including the SCOTUS fight, will shut down the evaluations that ought to take place while we have the time. The best forum to sort through this is the VSCC. I hope the GA assigns the task to, defers to, the SCC for a “professional opinion.” This WILL be upheld, although there are those who will grasp at straws and delay studying how to comply with the eventual final rule.

  3. LarrytheG Avatar

    I guess I’d put some stock in this:

    Report on Appendix A-1 of the Virginia Energy Plan:
    Impacts of Proposed Regulations under
    Section 111(d) of the Clean Air Act

    page 40 Conclusions and Observations

    ” The key underlying problem is the lack of expertise within state agencies to carry
    out the needed studies, or in the case of this study, even to evaluate contracted work for the
    most basic methodological flaws. A first step toward a solution would be for the agencies
    involved, DMME, DEQ and the State Corporation Commission, to submit their analysis or
    analysis done for them for peer review by experts in the field. This doesn’t eliminate the
    possibility of error, but it helps insure against obvious mistakes and it helps prevent the
    use of inappropriate methodology, such as that applied in this study. Peer review also helps
    ensure even-handedness in the analysis and helps the agency in correctly interpreting the

  4. Steve Haner Avatar
    Steve Haner

    Useful, Jim. As somebody who actually enjoys such obscure and arcane discussions, I wish I could actually observe these meetings over at DEQ. My quick impression as well was the rate-based approach was more appropriate for a state that was anticipating or hoping for substantial economic growth and substantial increased demand. And of course the utilities are in the business and growth is crucial to them. But this is the electric generation equivalent of rocket science. The agencies best suited for this review are DEQ and the SCC. Virginia does need to keep working toward a plan while the issue is resolved in court.

    I had expected and predicted that this would not proceed without a protracted battle in the courts (when arguing in 2014 and 2015 against an early over-reaction to all this.) But there was the Supreme Court with Scalia and now there will be a Supreme Court without Scalia and that worries me more than my electric rates.

  5. LarrytheG Avatar

    so what is to prevent the EPA from issuing new final rules now?

    and I think the conclusion in the UVA study was good advice (sorry about the spacing):

    “” The key underlying problem is the lack of expertise within state agencies to carry out the needed studies, or in the case of this study, even to evaluate contracted work for the most basic methodological flaws. A first step toward a solution would be for the agencies involved, DMME, DEQ and the State Corporation Commission, to submit their analysis or analysis done for them for peer review by experts in the field. This doesn’t eliminate the possibility of error, but it helps insure against obvious mistakes and it helps prevent the use of inappropriate methodology, such as that applied in this study.”

    I see the above concern as legitimate given the current approach.

    why not have experts in the field – brief the issue – peer reviewed to help assure objectivity ?

    I do not think Dominion nor the SCC should be putting their spin on the options…

    This should be about what is best for Virginians… not the utility and not the SCC’s view.

  6. The first CPP issue we have in Virginia is that I don’t think our Government is structured to address a state-sponsored CO2 target. In others words, right now I believe the GA is excluded from the CPP decisions, and our Gov has executive power.

    On the other hand, I am thinking DEQ reports to the GA, so I am not sure what the Gov can do unilaterally in this scenario. We probably need to give GA a say in the matter, as other states have done. Herein I am simply being realistic…whether we like it or not, we have a weak-Governor legal system, so that means GA gets a say here as usual.

    With the SCOTUS delay, I am not sure we will hear much about coordination in this GA session. Presumably Gov McAuliffe might veto an attempt by GA to gain a foothold. If so, that coordination may have to wait until the next Gov election. However, I am not entirely sure the Gov is opposed to a cooperative approach with GA. Those were the firework “sparks will fly” we were expecting before the SCOTUS CPP hold decision.

  7. Whenever there is a final set of enforceable regulations, whether during the current state administration or the next, it will be appropriate for the Department of Environmental Quality to be the lead agency in formulating the state compliance plan. They are the experts on pollutants and their abatement. The reason we have agencies such as this is to be a repository of expertise on matters that are beyond the everyday experience of the legislature.

    That’s not to say the General Assembly will not have a substantial, possibly outsized, impact on whatever plan the DEQ develops. After all, they may not all be scientists, but the Legislature controls the purse. I do not think the General Assembly should grant itself a “veto” power over the compliance plan. Injecting more politics into the process is highly unlikely to improve any end result.

    I also would ask Larry who he considers to be the “experts in the field” that he wants to “peer review” any plan developed by the agency charged with that duty.

    1. Looks like HB2 passed and is waiting for signature, which is GA approval needed for CO2 plans. Will be interesting to see how the Gov dispatches that one.

  8. VaConsumer Avatar

    It is disturbing to see that folks are still claiming the SCC has bias that precludes its ability to do its job. Over the last couple of decades it has been undermined to the point that it is forced to take inherently pro-utility positions, which is harmful to the whole of our population and economy.

    For too many years, we’ve ignored costs to society related to energy. As a result we have pollution and other negative externalities that affect us but that no one claims. Our pattern is one allowing entities to claim all the benefits while not balancing this with responsibilities for the negative externalities, often claiming it is not possible to reasonably estimate these. Time after time state committees have allowed our utilities to ignore negative externalities.

    Now we have people wanting to “balance” benefits with “costs.” What we need is to take the politics out of these decisions. We need to base decisions on facts that have no bias. When we allow the utilities to set the stage, which is the normal way things are done here now, they include the aspect of which solution will allow them to make the most profit. In fact, how they can make the most profit dominates the decision making process, not what is best for society/ the economy as a whole.

    It’s time to change the focus from what the utility wants/ benefits most from to what benefits society/ the economy as a whole the most. We need to depoliticize our government agencies and allow them to do their jobs to benefit the broad society and economy as a whole without having to first pledge allegiance to the dominant utilities.

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