Virginia’s Date with RGGI

RGGI states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont

There’s a good chance that Virginia will participate in the Regional Greenhouse Gas Initiative (RGGI) to cut utility CO2 emissions. The impact of the cap-and-trade system would be mostly symbolic.

Barring litigation, Virginia could start participating later this year in the Regional Greenhouse Gas Initiative (RGGI, pronounced Reggie), a cap-and-trade program designed to reduce CO2 emissions of electric utilities and large industrial customers by 30% over a 10-year period. All it will take is for the State Air Pollution Control Board to approve regulations, now undergoing public comment, that have been drafted by the Department of Environmental Quality (DEQ).

Cap-and-trade programs have proven highly cost effective at bringing down emissions in sulfur dioxide and nitrous oxide, and proponents say that a similar approach could work just as well for carbon-dioxide, widely held to be the primary driver of global warming. Cap-and-trade, they say, avoids the inefficiencies of bureaucratic command-and-control regulations. Instead, the auction arrangement steers power output to entities that can reduce CO2 emissions the most cost effectively. Not only will RGGI cut emissions, they contend, it will flatten electric rate increases, lower electric bills, and stimulate economic growth.

There’s just one problem. Virginia’s largest electric utility, Dominion Energy Virginia, doesn’t believe it. In fact, in its 2018 Integrated Resource Plan, the utility fired a broadside against the regulatory initiative. The company maintains the following:

  • The program could impose $530 million in additional costs on Virginia customers between 2020 and 2030.
  • In effect, Virginia will subsidize other RGGI states through lower compliance costs to the tune of $876 million over the decade.
  • Virginia’s linkage to RGGI will not reduce CO2 emissions. To the contrary, the auctions will increase CO2 output by 5.7% more than it would have been otherwise.

PJM service territory

A big reason RGGI proponent’s optimistic forecasts won’t pan out, Dominion says, is that there is a geographic mismatch between the RGGI states and PJM Interconnection, the wholesale market of which Virginia is a part. The nine RGGI states are concentrated in the Northeast; the 14 states of PJM are located in the Mid-Atlantic and the Midwest. The only overlap between the two are Virginia, Maryland, and Delaware. Because Dominion, Appalachian Power Co., and other electricity producers don’t control which power sources are dispatched to meet electric demand — PJM does — generators in Virginia would suffer a cost disadvantage compared to competitors in neighboring states not subject to RGGI, such as North Carolina and West Virginia.

“The effect of RGGI-equivalent reduction requirements in Virginia is likely to limit the dispatch of highly-efficient and lower-emitting [natural gas combined-cycle] facilities in Virginia and to encourage the dispatch of higher-emitting resources and increased emissions in neighboring states outside of the RGGI region,” states the IRP.

But environmentalists insist the cap-and-trade program will be beneficial. “Carbon pollution is a big contributor to climate change. Cap-and-trade is a market-based way of dealing with that environmental problem,” says Will Cleveland, an attorney with the Southern Environmental Law Center.

“We think this is a really good opportunity,” says Harry Godfrey, Virginia director of Advanced Energy Economy. “To the extent that there are still older, coal-fired plants online, we foresee … less utilization of those assets in the future. But we see less utilization anyway. All of our analysis shows a coal-to-gas shift. … Our analysis shows that you can limit cost impacts, and even reduce rates in the process.”

How RGGI works

In 2009 ten Northeastern and Mid-Atlantic states accounting for one-eighth of the U.S. population and one-seventh of its economic activity created the Regional Greenhouse Gas Initiative as an interstate cap-and-trade program. Broadening the geographic scope of the trading system beyond the boundaries of a single state, it was thought, would create a bigger pool of CO2-cutting opportunities.

Under RGGI’s “direct” auction trading system, RGGI sets a regional limit on the total amount of CO2 that power plants in member states are allowed to emit. Owners of fossil fuel power plants with capacity greater than 25 megawatts are assigned an allowance to release a certain amount of CO2. Then they are required to purchase pollution permits at quarterly auctions sufficient to meet that output. The plan is for RGGI to ratchet the CO2 allowances by 3% each year over a decade. Utilities and big industrial producers who can’t find ways internally to cut their CO2 emissions can go to the auctions to buy extra allowances. Power generators who can find ways to cut emissions economically can sell their excess allowances to those who need them.

In the first auctions between 2009 and 2011, RGGI sold 395 million tons worth of CO2 allowances. The cap was a generous one, so the auction price for allowances was low — ranging between $1.86 and $3.35 per ton — according to the Center for Climate and Energy Solutions. As the CO2 allowances tightened, prices increased, reaching a high of $7.50 per ton in 2015. Prices fell after the Trump administration nixed the Clean Power Plan but the next round of CO2 emissions cuts — 30% by 2030 — likely will push the price back up.

RGGI states have shifted from coal to gas, hydro and renewables since 2005. Source: “The Regional Greenhouse Gas Initiative:
Lessons Learned and Issues for Congress”

Auction proceeds are divvied up between the states, which have used the funds to invest in initiatives such as weatherizing homes, upgrading HVAC systems,  promoting wind and solar, or helping low-income citizens with their energy bills.

Because of restrictions of state law, Virginia will not be a full-fledged RGGI member. But the commonwealth still will have a say in how RGGI operates, says Michael Dowd, director of the air division at the Department of Environmental Quality (DEQ)“We’ll be at the table when RGGI states get together and discuss how the auction should be run, how the accounting mechanisms work.”

The biggest difference between Virginia and other RGGI states is that Virginia’s “consignment” auction revenues will not flow into state coffers. Money will go back to the power companies that paid for them; in turn, regulated utilities will be required to rebate the funds to rate payers. The downside: Virginia loses the ability to fund its own energy-efficiency programs as other states do..

The auctions for CO2 allowances have cost owners of fossil fuel plants in the RGGI region nearly $2.8 billion over nine years, says the Analysis Group consulting firm in an April 2018 report, “Economic Impacts of the Regional Greenhouse Gas Initiative on Nine Northeast and Mid-Atlantic State.”

But the Analysis Group argues that RGGI states have enjoyed significant benefits over and above the CO2 reductions. States the report: “These investments keep more of the RGGI states’ energy dollars in their region, and reduce the amount of that leave the region to pay for fossil fuel resources produced outside the RGGI states.”

Energy customers benefited to the tune of $220 million between 2015 and 2017 as their overall energy bills dropped, the study says. The savings breaks down to $99 million for electricity customers and $121 for retail oil and natural gas customers. Small increases in electric rates were more than offset by reduced electricity consumption.

Most important of all from an environmental perspective, CO2 emissions in member states have declined 50% since the formation of RGGI (although the Analysis Group acknowledges that factors other than the cap-and-trade scheme contributed to the decline). The gains were achieved mainly through a shift to low CO2-emitting power sources like nuclear, wind and solar at the expense of coal and oil.

Crucially, according to the Analysis Group report, “RGGI’s implementation has not adversely affected power system reliability in New England, New York, or PJM.” The report provided no documentation for the statement.

System Reliability

While the Northeast region survived the extended deep freeze known as the Bomb Cyclone for eleven days in January, it did so just barely, according to an analysis conducted by the National Energy Technology Laboratory (NETL), “Reliability, Resilience and the Oncoming Wave of Retiring Baseload Units.”

Average daily electric load increased 23% during the Bomb Cyclone. The New England ISO (independent system operator) was hobbled by natural gas delivery constraints. As a consequence, “fuel oil provided almost all the surge capacity in the Northeast, barely enabling ISO-NE, in particular, to meet demand, as it experienced rapid depletion of its fuel oil storage reserves.” The spot price of natural gas in New York shot from around $6 per million BTU to $175.

Said the NETL study:

Having enough fuel oil was, in part, a testament to ISO-NE’s Winter Reliability Program of storing fuel oil at dual-fuel facilities. However, the stores of fuel oil were 51 percent depleted by this event, with some plants nearly or fully exhausting their on-site supplies. Additionally, refueling these depleted fuel supplies is a complex and logistically intense operation; ISO-NE is serviced by a single 50,000 barrel per day oil pipeline to which only two of the region’s 83 dual-fuel capable units are connected, which also services home heating oil and other petroleum product demands in the region, necessitating the delivery of fuel oil for power via truck and/or rail, creating supply issues should a similar event last for a longer period.

The PJM system, which drew upon extensive coal-fired generating capacity held in reserve, fared better than New England. Even there, despite access to abundant gas supplies, the spot gas price surged so high that PJM had to dispatch coal- and oil-fired units that twice as much CO2 per unit of heating value.

However, NETL’s immediate concern is not the immediate future. Rather, the study asks what will happen as coal- and nuclear-fueled power plants continue to shut down and are replaced by wind and solar, which have zero surge capability, and natural gas, which has pipeline capacity constraints, especially in RGGI states in New York and New England. The NETL report did not address how a 30% reduction in CO2 emissions in the RGGI states might impact the availability of coal and oil reserve capacity in the future. Neither did the RGGI-friendly Analysis Group study.

Dominion’s analysis

Dominion’s 2018 Integrated Resource Plan does not address the reliability issue either. But it does argue that RGGI will not have the desired effect in Virginia. The reason is that Virginia is part of the PJM wholesale electricity market, and PJM, not the utilities, control which power plants feed into the system.

“PJM is a multi-state region. Units are dispatched economically to meet load demands on a regional basis,” explains Bob Thomas, Dominion director of energy market analysis and integrated resource planning. “To the extent that generators have an extra RGGI ‘tax,’ by definition, they will be at a disadvantage to generators outside the state [that do not participate in RGGI].” As a consequence, out-of-state power sources (which are higher carbon) will generate incrementally more, and Virginia power sources (which are lower carbon) will generate incrementally less.

RGGI acknowledges that such “leakage” can be an issue, Thomas says. RGGI’s most recent monitoring report, dated August 2016, found that imported electricity increased 34% between a 2006-2008 baseline and 2012-2014. The leakage did not lead to increased CO2 emissions mainly because much of the imported electricity came from Quebec hydropower. There is no comparable source of hydropower accessible by Virginia. While there is substantial zero-carbon wind power in the PJM system, the electricity would have to be wheeled in from Midwestern states and be subject to transmission-related congestion charges.

Thomas acknowledges that RGGI states have reduced CO2 emissions, but he argues that the cuts might have occurred without the CO2 auctions. The Obama administration enacted the Mercury Air Toxics Standards in 2011, cracking down on the emission of mercury and other heavy metals from utility smokestacks. Those rules imposed significant new burdens on coal plants. Around the same time, the fracking revolution pushed the price of natural gas far lower. The result was a massive shift nationally from carbon-heavy coal to carbon-light gas generation. Likewise, working independently of one another, RGGI states have been pushing renewable energy sources.

Plan B — Dominion energy requirements

Dominion ran several scenarios to see what impact RGGI regulations would have on Dominion’s fuel mix. The scenario most closely resembling the regulations being drafted by DEQ appear in the IRP as “Plan B”: participation in RGGI allowing unlimited electricity imports.  The gap between projected energy capacity and the “energy requirement” line (representing forecast demand) is marked as “market purchases” — essentially purchases of electricity from the PJM wholesale market. Dominion would engage in some market purchases in the absence of RGGI, as seen in the Plan A scenario, but not nearly as much. The carbon intensity of the purchased power would exceed that of Dominion’s own power. The net effect would be to transfer lower-carbon electric generation from inside the state to higher-carbon generation outside the state, thus defeating the purpose of RGGI. Adding insult to injury, by Dominion’s calculation, the auctions would cost Virginia rate payers an average of $50 million extra per year over ten years.

Disputing Dominion’s forecast

William Shobe, director of the Center for Economic and Policy Studies at the University of Virginia’s Weldon Cooper Center, disagrees with Dominion’s analysis. The utility’s forecast inflates future electricity demand in its Virginia service territory, which throws off the rest of its RGGI-impact calculations, he says. Industrial demand for electricity is falling due to a change in Virginia’s industrial mix. Building shells sand appliances are steadily becoming more efficient. When property owners retrofit older buildings with LED lights and more efficient heat pumps, there is tremendous room for reductions.

“Actual electricity demand growth over the next several years will not come close to Dominion’s inflated 1.3% growth. Something like 0.5% to 0.7% is much more likely,” Shobe writes Bacon’s Rebellion. And that includes growing demand from data centers, which Dominion cites as a driver of demand. “Without growth in demand, Dominion fossil fuel capacity is over-built.”

With or without RGGI, says Shobe, Dominion will either try to export power into PJM wholesale markets, which are awash in new capacity, or cut back utilization of existing plants. Because their variable costs are zero, new solar and wind always will be dispatched. “That leaves existing coal and all that bright shiny new NGCC (natural gas combined-cycle) capacity Dom has just built. Which plants will be cut back? Coal, of course.”

If there’s a problem with RGGI, suggest Shobe, it’s that the cap will be set too low. The Department of Environmental Quality, which is guilty of its own forecasting errors, is proposing a cap of either 33 or 34 million tons. “That is actually quite high,” Shope says. “If the cap is greater than about 30 million tons, Virginia will likely be a net exporter of allowances into RGGI at least for the first few years and the cap, and maybe for quite some time. … This delays compliance costs until well into the future.”

Shobe calls Dominion’s demand forecast “a work of fiction.” Dominion’s econometric model is “shockingly poor.” “If an undergraduate handed this in as a final project for a class, they would be retaking the class.” A more realistic forecast, he contends, would show “much lower levels of leakage, much lower rate impacts, and lower costs of compliance generally.”

Dominion’s Thomas is familiar with Shobe’s criticisms, but he sticks with his methodology. “Our load forecasting process is well documented. It’s been reviewed by [State Corporation Commission] staff on numerous occasions, and reviewed by an independent source, Itron,” a technology consulting firm that serves the utility industry.

Bottom line

Market forces are propelling the switch from coal to solar, wind and natural gas, which means CO2 emissions will continue to decline whether Virginia participates in RGGI or not. Observers with perspectives as divergent as Bob Thomas and Bill Shobe agree about this. The question is whether RGGI’s caps will accelerate or retard cuts to CO2 emissions. One way or the other, CO2 output will decline substantially.

Meanwhile, DEQ is structuring Virginia’s participation so that rate payers will not bear any direct costs from the auctions, although a less efficient energy mix could in theory boost their fuel costs. Dominion provides a high-side estimate, about $50 million a year for ten years. Environmentalists think the number is inflated. In either case, $500 million is a modest number compared to the anticipated multibillion-dollar cost of modernizing the electric grid, disposing of coal ash, re-licensing four nuclear power units, installing millions of solar panels, and building a fleet of offshore wind turbines over the next couple of decades. Amid all the other forces at work, the cap-and-trade auctions will be background noise.

Perhaps the biggest impact of RGGI participation will be political. Governor Ralph Northam will be able to cite a tangible action he took to combat climate change. Environmentalists will notch a victory in their global warming crusade. Dominion will be able to blame the auctions for rising electric rates. Most Virginians won’t notice a difference.

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42 responses to “Virginia’s Date with RGGI

  1. I’m going to have to dig into this a bit, and its interesting, but I remain a skeptic. There is this three letter word that nobody wants to use in this discussion and that word is “tax.” If the Air Board can adopt a reg to join RGGI, it also has the authority to just adopt a reg and require reduced emissions without joining the compact or putting the carbon credits up for auction. Yes, cap and trade is a very effective strategy but really this is a carbon tax.

    Now, this proposal has the revenue being returned to the utilities who then return it to the ratepayers some how. One point – if it flows back through the fuel factor that tilts the playing field in favor of some the larger customers. And there will be enormous pressure put on the SCC or the General Assembly to either 1) use the money for energy efficiency programs or 2) use it to lower costs on low income households or 3) actually move it into some other category – say transportation or general spending.

    During one of my debates with Dominion, when I worked for that little boat factory in Newport News, the utility circulated a chart showing how Virginia industrial electric rates were lower than those in Maine and Connecticut and Rhode Island where our chief competitor was in operation. That was by far the biggest home run pitch they ever floated at me, as I told all the legislators that was not only true but something they really wanted to maintain. The Navy knows exactly what industrial rates are at all its suppliers.

    That VEDP slide I recently posted about the best states according to location services did not, repeat not, include Virginia among the states with the most attractive energy costs. No RGGI state was on that list. So damn straight Virginia wants to keep below the costs paid by General Dynamics in the RGGI states.

    • Posted on behalf of Acbar:

      Steve, we can talk about a dozen ways to add costs to Dominion’s rates, and parse out till we’re blue whether these are “taxes” or not — but we agree, THE bottom line constraint on Dominion’s rates is the competition from other energy suppliers. Some competitors are electric companies located elsewhere, and some are the familiar alternatives of natural gas, coal and oil, propane, and, now, solar. Dominion can manipulate the GA to obtain rate freezes. Dominion can thwart retail access, thus deny customers (with sunk investments in Virginia who can’t afford to relocate) the practical ability to obtain their electric supply from middlemen who buy it where it’s cheaper.

      Dominion can keep short term generation investments in its retail rate base for 40-50 year guaranteed amortization at guaranteed rates of return, rather than accepting the risks and rewards of merchant generation operating in the wholesale markets. Dominion can build gas pipelines with itself as the prime customer. But what Dominion cannot do is change the fact that customers can go elsewhere, or buy energy in other forms, if Dominion loses its competitive edge.

      • Oh please. The rules say if a big customer leaves it must give D five years notice before coming back. That is a risk a major facility cannot take. Most other states do not impose that restriction.

        • The 5 year rule only applies to a customer choosing an alternative supplier of electricity — aka retail access. The only vestige of that left in VA is the loophole for renewable resources.

          Dominion cannot otherwise dictate terms to a customer that wants to increase or decrease consumption from the grid. It is obliged by law to supply any retail customer within its assigned service territory the customer’s “requirements.”. There are contracts covering the length of commitment for stuff that the utility has to build just for that customer, like substations and transformers, but that’s different.

          • Steve Haner

            For once, Acbar, I’m pretty sure you are wrong and large general service customers are generally still under the onerous 5-year rule. As VA industrial rates have gone from being among the lowest to hovering slightly below or above various competitive states, more big customers are taking the chance on another supplier. I hope the shipyard tells Dom to take a hike (but don’t expect that). But that competitive concern is why the recent bill included a 2 percent rate reduction for large general service customers if they promised not to leave. They didn’t pull that number out of the air. (We may be talking past each other because I usually agree with you!)

  2. I don’t have time at the moment to address this in detail. But I do want to clear up some major misleading statements on the part of Dominion.

    1. Dominion argues that “Virginia is part of the PJM wholesale electricity market, and PJM, not the utilities, control which power plants feed into the system.” implying that we are somehow different from the utilities in the RGGI states.

    Utilities in the RGGI states are either members of New England ISO, New York ISO, or PJM (ISO). The wholesale electricity market is controlled by the ISO and units are dispatched by them just as in the case of Virginia utilities.

    2. Because the GA has not authorized full participation in RGGI, the interim regulations established by the DEQ say that Dominion will get its carbon credits for free, as opposed to paying an auction price which goes back to the states to pay for energy efficiency measures and assistance deploying distributed solar facilities.

    Virginia will lose out on zero cost funding for energy efficiency programs, one of the main reasons that ratepayers in RGGI states have saved $2.3 billion in energy costs since 2009. We will be left with energy efficiency in the hands of our two major utilities who will earn twice in profits what they invest in energy efficiency programs.

    3. The carbon targets set for Virginia in 2020 are about the same or higher than our carbon output now. Dominion has dropped the two new combined cycle plants it had planned when the Atlantic Coast Pipeline was announced. The remaining gas-fired units still in the 15-year plan will run just 5-10% of the time. They are making a big fuss about little if any impact on their operations. they appear to be against any type of regulation that they can’t get the GA to control.

    Energy efficiency, renewables, economics, and MATS (air quality) regulations have been the major factor reducing CO2 output in the RGGI states. Even though RGGI has greenhouse gas in its title, they are only focusing on carbon at this time, giving gas-fired units a major loophole to walk through, so the greenhouse gas effect of our energy sector may not be declining as significantly as RGGI makes it appear.

    In Virginia, our cost of solar and energy efficiency will be substantially higher than other states because the GA has given our two big utilities a major gift by allowing them to control much of this activity and earn a substantial profit from it. Other states, operating with a more open market that allows for more consumer choice and lower cost providers, will be able to achieve better results at a lower price. I’m surprised that business interests and libertarian economists don’t speak up about this.

    Mr. Shobe from UVA is precisely on target when he says Dominion’s demand forecast continues to be highly overstated. Despite expert testimony to the contrary for a number of years, Dominion continues to use outdated modeling techniques that inflate demand forecasts.

    • And while I always bow to Tom’ superior understanding of this industry, and agree with much (much) of the above – there it is. He like others wants to take those auction dollars and use them for various energy efficiency programs. Why not set and enforce the lower emissions targets without the money?

      • Steve,

        That is certainly an alternative. Perhaps a better one than asking Virginia to follow the RGGI limits without participating in the market process by actually paying for the carbon credits and returning the money to the state.

        Currently, closing inefficient coal plants is a money maker for Dominion. The fossil-fired plants scheduled to be put on the shelf over the next few years contribute just 1% of Dominion’s annual energy output. But they are still in the rate base. Given the new energy bill, any adjustments to the rate base are years away. So Dominion saves money by laying off, or reassigning workers, avoiding operating and maintenance costs, while still collecting money from the ratepayers for them.

        Many business leaders and economists seem to prefer market-based regulation. But as currently proposed, Virginia’s hybrid participation in RGGI would not be that. I believe that Virginia DEQ has the authority to impose state emission limits.

        I’m not sure what form those would take. My opinion is that if you try and set emission limits in order to affect climate change, do something that makes a difference. Exchanging less carbon for more potent methane is an exercise in appearances and could possibly be considered a subsidy for gas.

  3. re: ” I’m surprised that business interests and libertarian economists don’t speak up about this.”

    Me too – although the biggies like Amazon and Microsoft are !

    The planned 3500 acre solar in Spotsylvania says they plan to sell half of it to Microsoft … but I do get confused… on this because it seems that they could buy it from virtually anywhere. Why is it attractive to do so in Virginia when the two utilities with the GA’s help have managed to muck up the free market?

    • “Two utilities with the GA’s help have managed to muck up the free market?”

      What free market? The electricity business is built around regulated monopolies. Dominion and Apco want to protect their regulated monopolies, upon which their business models are predicated.

      Now, if the people of Virginia decide that regulated monopolies are not the way to go, that’s fine. Change the law. But don’t bash the utilities for wanting to preserve their monopolies and not see its customer base leak away.

      Back in the 1980s/90s there was a body of thought that electricity generation should be deregulated because there was plenty of competition when it came to putting electrons onto the power grid. However, the transmission/distribution grids needed to remain monopolies because no one wants competing sets of transmission lined, distribution lines, and substations. If that’s the kind of system you want, say so. Do recognize, however, that there are complications that need to be worked out — stranded investments, free-riding on the grid, ensuring reliability, and so on.

      Personally, like to see the electricity market open up to more competition — if the sticky details can be worked out.

      • Jim,

        I believe it is important to maintain the monopoly aspect of the “wires” side of the business. Utility monopolies were initiated to overcome the inefficiencies of many companies trying to build multiple sets of wires to serve customers in the early 1900s.

        My comments were intended to encourage a more open market where one already exists. There are many skilled purveyors of energy efficiency solutions that can provide a better result at a lower cost than can our utilities, that have a 100-year habit of trying to increase electricity use.

        The same applies to third-party providers of renewable energy facilities, batteries, demand side management solutions, etc. These firms can sell energy directly to customers or to the utility at a lower price than the utility can provide, with its high guaranteed rate of return. Customers would pay less for their energy if it was not entirely under the control of the monopoly powers.

        Opening up the market reduces revenues for utilities, although it increases jobs and build a stronger state-wide economy. We need new rules to pay utilities differently for the valuable services we need them to perform.

        Intelligent regulation can create many new income opportunities for utilities, as are being developed in other states. Utilities can earn more by serving us better. By truly modernizing the grid, for example, rather than the expensive projects of uncertain value that are identified in the latest energy bill.

        Value of Solar tariffs, rather than net metering, avoid free-riding and pay fairly for the costs and benefits that distributed energy creates for the grid.

        At least 19 states have disconnected monopoly power over generation from the monopoly granted on the retail “wires” side. Utilities are still responsible for planning and reliability in these states, but they have many choices for reducing energy use and buying the cheapest sources of generation, whether they provide it (as a merchant generator) or it is provided by others. The utilities are guided by market forces as well as by regulatory requirements.

        This would benefit Virginia in many ways and still preserve a profitable important role for our utilities.

      • Jim, you say, “What free market? The electricity business is built around regulated monopolies.” No, no, no Jim, this is GENERATION you’re talking about, and the feds over 20 years ago declared the operation and pricing of wholesale generation sales to be unregulated, but it’s Dominion that insists on seeking the voluntary vertical integration and retail rate-basing of its Virginia generation, at ratepayer expense and ratepayer risk of obsolescence, even when Dominion is a member of the 14-State PJM wholesale energy and capacity markets and thus perfectly postured to deregulate its generation and to compete and keep 100% of the profits for shareholders, if it dared to do so. The very fact that it isn’t doing that, suggests that Dominion is no more sanquine about the long term future of fossil generation on the grid than many commenters here.

        “Personally, (I’d) like to see the electricity market open up to more competition — if the sticky details can be worked out.” THE DETAILS HAVE BEEN WORKED OUT ALREADY. That’s what PJM’s wholesale marketplace is! It’s Dominion that’s taking its ratepayers for the big ride, by participating in PJM yet refusing (with tacit SCC assent!) to shift the full risk as well as the full reward of new construction and market participation (and possible obsolescence of fossil gen. as the grid shifts to renewables) onto its shareholders. I don’t blame Dominion for this egregious behavior; I blame the SCC and the GA for continuing to reward it.

  4. Virginia’s CO2 footprint (within state boundaries) is quite small, due to our historic focus on nuclear power and import power being our major supplies. Therefore I see no urgent need for RGGI, and I foresee it will hurt Virginia’s economy, not just due to the extra fees, but more hurt due to liberal demands that natural gas use in Virginia must be terminated to save us from certain doom. To the extent liberals are in charge now, I am not optimistic about Virginia’s future economy. I like some liberal ideas, but on energy/job policy we are probably heading for difficult times in the future, and it will be self-inflicted damage (unnecessary).

    • TBill,

      Virginia’s CO2 output is over 42% of the CO2 output of the other nine RGGI states combined. I doubt that you would consider that “quite small.”

      However, RGGI has reduced its CO2 emissions to a greater degree than required by the RGGI limits since 2009, for reasons due to lower cost renewables, energy efficiency and reduced gas prices, plus MATS regulations closing coal plants.

      Absent any regulations, an energy policy in Virginia that allowed customers to choose the sources of energy efficiency and generation (from third-party solar for example) would reduce our energy costs and CO2 output.

      Leaving these choices in the hands of the utilities, that keep an eye on which options yield them the most profit, our energy costs will be higher.

  5. If anyone thinks this program will help small business and residential consumers, they probably believed Obama when he said his reform plan would reduce annual insurance premiums for the average family.

    I’ve read post after post after post that market forces are bringing renewables to the market. So is that true? If so, why do we need an overlay organization to bring us carbon trading? Let’s let some organization outside the control of government effectively increase taxes on energy use. Let’s raise people’s cost of living and watch special interests pocket the money. And then Larry can call for another surcharge on people’s bills to fund energy for poor people. It’s a fundamental right.

    Look at the price of oil right now. It’s unhinged from supply and demand and is rising based on political factors. That’s Wall Street for market manipulation. And don’t think the most powerful on Wall Street won’t be trading in carbon credits over time.

    Folks, this is why Donald Trump won. The Deep State, its nonprofit friends, consultants and Wall Street invent scheme after scheme to enrich themselves and keep political power.

    Please explain the safeguards that will prevent these bad results from happening.

  6. A minor note: you say, “The only overlap between [PJM and RGGI] are Virginia, Maryland, and Delaware.” Change Virginia (which is not in RGGI yet) to New Jersey, which is a big participant.

    A major note: look at the map and you will see major omissions. If PA, OH as well as Virginia joined RGGI, that would be a critical mass. Meanwhile I’m with Steve H. on this: RGGI is fundamentally a carbon tax, and a symbolic one at that, given the absence of federal leadership on this. We do not want to disadvantage Dominion in PJM’s energy market, where externalities like RGGI payments would simply increase Virginia generators’ costs — the result would not only be payment of the tax but also lower earnings from lower dispatch rates for all generation located in Virginia, a double whammy.

    A major caveat: Tom H knows much more about the off-setting fringe benefits and other subtleties of RGGI than most of us. Tom, if you have a link to a succinct description of what this might mean for Dominion ratepayers, bring it on.

  7. I’m not sure the RGGI is really much of anything beyond symbolic but admit great ignorance on it in general.

    Anything that riles up the anti-Obama types these days is counterproductive!

    In terms of monopolies – “of the wires” – not the generation… something that DOES work if the State is really interested in it working and not designing it to fail with suggestions from the monopoly on how…

    While Dominion is the big dog in utilities in Virginia – it is by no means the only player as there are a dozen or so rural electric coops that “own” their wires but don’t generate their own power -but buy it from others – of which I’m not totally clear whether they buy from Dominion or PJM… I know that Old Dominion co-owns a plant and maybe sells to other co-ops or do they also run under PJM ?

    So where do the RECs get their power and can they just buy it straight from PJM .. in essence multiple generators selling at auction prices? Wouldn’t it be possible for REC customers to see – every month – how much power was being auctioned for sorta like gas prices at the pumps?

    • “So where do the RECs get their power and can they just buy it straight from PJM .. in essence multiple generators selling at auction prices?” The Rural Electric Co-ops do ‘just’ buy it from PJM. 100% from the PJM energy market! I believe this is reported as purchased by ODEC and passed through at a uniform price to all the ODEC co-owners including Rappahannock Electric Co-op. Only partially from the PJM capacity markets: they are co-owners of ODEC which has some generation of its own, also dispatched by PJM, so they (through ODEC as agent for the r.e.c.s) only buy capacity from PJM to the extent not already owned by ODEC. And as co-owners of ODEC, the r.e.c.s get an ownership share of ODEC’s net income from generation sales to offset a portion of the cost of the PJM energy they consume.

      “Wouldn’t it be possible for REC customers to see – every month – how much power was being auctioned for sorta like gas prices at the pumps?” Yes of course. PJM’s wholesale energy prices (which vary every 5 mins.) are published for all to see on their website. I believe the monthly average energy price paid by Rappahannock Electric Coop to ODEC is available on its website; certainly it’s reported regularly to the VSCC and is available to you as a customer if you ask.

  8. re: ” PJM, not the utilities, control which power plants feed into the system”

    I was under the impression that the buyer chose what to buy based on auction price… no?

    I “get” the idea that the lowest price offered might be a high CO2 emitter… but can the buyer at PJM auction choose a higher priced generator that is lower in CO2? Is that the choice of the buyer and not PJM?

    • Larry,

      The Load Serving Entity (LSE), such as a utility, buys electricity from PJM based on the current auction price. The auction price is set by the highest cost generator operating at that time. All generators get paid that price regardless of their cost of generation. The price varies throughout the day, depending on the price of the unit establishing the market price.

      There is no way to distinguish where the energy comes from, so you cannot pick a source of generation that has a lower CO2 output. A utility can reduce its peak demand and thereby purchase less energy during the periods when the least efficient, and highest CO2 emitting units are operating.

      • Thanks Tom – this sounds like Dominion is correct when saying that they have no control over how much CO2 is generated when they buy PJM power… or perhaps there is a more precise parsing of words/meaning in their claim?

    • “I was under the impression that the buyer chose what to buy based on auction price… no?”. No. The buyer has no choice. All power delivered by PJM to any delivery point on the grid within PJM comes from the PJM energy market, at the marginal price set by the highest cost generating unit currently being dispatched by PJM. The buyer cannot choose units; the buyer buys from the commingled energy in the market at that moment. Neither can PJM; PJM’s ‘choice’ of which are the lowest-cost units to run is automatic, dictated by the auction price fixed by each generator’s owner.

  9. Let me see if I can answer Acbar’s question:

    I agree with Steve. The RGGI process is complicated and doesn’t directly address the problem. Especially the way Virginia is attempting to deal with it. The RGGI organization itself admits that there were factors other than their carbon limits that contributed to the CO2 reductions in their states

    If we are serious about reducing emissions that can contribute to sea level rise in southeastern Virginia, we should tackle it directly. The DEQ can set limits from Virginia emissions that reduce over time. These limits should be for total greenhouse gases (GHGs). Dealing only with carbon (because it is easier to track) and ignoring methane gives the appearance of dealing with the issue without really doing so.

    The Virginia contribution is small compared to global levels, but failing to deal with it doesn’t solve the problem. Every little bit helps.

    We will be paying for gas-fired generation in Virginia for at least the next 40 years, so gas isn’t going to go away any time soon. But we should seriously consider whether we should build any more of that type of unit. Other less expensive methods of generating electricity exist that have zero emissions.

    A Virginia emission standard could be developed for GHGs. It could even be in the form of a tax that could be accumulated to pay some of the billions that Virginia taxpayers will be asked to contribute to keep Virginia Beach above water. It makes sense to ask those who are contributing to the problem to pay a portion of the cost. This should apply to generation above a certain size, to gas transmission pipelines, and especially pipeline compressor stations. A fee could be assessed to Local Gas Distribution Companies for leaks from their distribution systems. Low-cost remote sensing devices now exist that would make monitoring compliance relatively easy and inexpensive. Some of the methane leaks are fairly easy and inexpensive to fix. An emission limit and a fee would encourage those fixes to occur.

    What attracts me about RGGI is that utilities and policymakers in nine states (ten when New Jersey rejoins the group) are seriously discussing modern approaches to our changing energy system. They recognized the problems associated with burning fossil fuels and they are attempting to do something about it. Maybe they haven’t yet discovered the best way to deal with it, but they are out in front of everyone else.

    They have discovered that reducing electricity use makes dealing with these problems easier and gives more time for alternative solutions to contribute, while lowering customer’s energy costs.

    The RGGI states do have a higher than average contribution from nuclear units. Those units are affordable now but won’t be if they require refurbishment in order to obtain a license extension (just like in Virginia). This complicates long-term generation planning. And creates a greater opportunity for energy efficiency.

    RGGI states have separated generation from the retail side of utility operations and the wholesale markets run by the regional ISOs are setting the price, so market forces are guiding generation decisions.

    They also operate regulated utilities. This is a far cry from Virginia where utility holding companies, whose only priority is more profit, are setting the policies that govern the operation of their vertically integrated utility subsidiaries. We are still operating on the build more to earn more model. The RGGI states are not.

    New York is establishing utilities as Distribution Platform Providers. The utility acts as a platform (such as Google and Facebook) over which various parties, as well as the utility, provide services to electricity customers. Allowing customers to choose the type and source of their generation, as well as other services, reduces energy costs.

    Utilities are managed with new rules, but the old utility compact which provides a fair return to utility shareholders in exchange for fair prices to customers remains intact.

    If Virginia returned to this way of doing business, we might discover that it is less expensive to purchase excess generation from PJM for the few years it might be necessary, rather than get locked into paying the utility a guaranteed profit for 40 years for a unit that might have value for just a decade or so.

    These are complicated issues that require careful consideration. We don’t show any willingness to do that yet in Virginia.

    • Thanks, TomH. I was unaware that NJ had dropped out of RGGI, hopefully temporarily.

      Jim, note what Tom says: “RGGI states have separated generation from the retail side of utility operations and the wholesale markets run by the regional ISOs are setting the price, so market forces are guiding generation decisions.”

  10. The Rocky Mountain Institute (RMI) just released a study that shows if a utility used a portfolio of clean energy solutions (renewables, various distributed energy resources, batteries, etc.) within the next 10-20 years it would cost less for the clean energy facilities than just the operating cost for a comparable highly-efficient gas-fired plant. The clean energy solutions would provide the same system-level reliability and grid services as the gas-fired plants. The evaluation considered both gas-fired combined cycle plants and combustion turbine peaking units.

    Virginia ratepayers would also be asked to repay over $5 billion more to cover the capital costs for a plant like the 1,600 MW Greensville plant ($1.3 billion for the original investment + $2.6 in profit + $1.3 billion in interest charges).

    This is a significant finding for regulators to consider. Because it deals with only carbon, the RGGI structure favors new gas-fired plants. RMI shows that significant economic harm would result in addition to the environmental damage caused by choosing to build new gas-fired plants instead of fixed cost, zero emission clean energy options.

  11. re: ” Dealing only with carbon (because it is easier to track) and ignoring methane gives the appearance of dealing with the issue without really doing so.”

    ” These are complicated issues that require careful consideration. We don’t show any willingness to do that yet in Virginia.”

    It’s a tough row to how with this because most of the public and the don’t understand it … and at the same time are not supportive of higher taxes or more expensive electricity especially if it is tied to anti-Global Warming efforts.

    RGGI is viewed by most Conservatives/Libertarians as a faux “market” – a created “market” where none is needed and won’t work anyhow in a PJM type ISO market where there apparently is no distinction about carbon – only price.

    In order for RGG to actually work – it would seem that something would have to change about how PJM works.

    I was under the impression that PJM markets solar different
    than it does other sources… It would seem at the least – that
    PJM would have to identify the source of the marketed power even for the RGGI to assess a tax.. no? If RGGI doesn’t know what actually generated the power – how would they know how much carbon to tax?

    Probably dumb questions ..already addressed… and/or I still don’t understand how RGGI works.. in reality not theory.

    • “In order for RGGI to actually work – it would seem that something would have to change about how PJM works.”. No, RGGI is an attempt to influence decisions about what new generation should be built, by imposing a carbon emissions price tag now that influences generation OWNERS. PJM is agnostic about the price bid by sellers into its energy market. It’s up to the seller to set its price high enough to make a profit when it runs and low enough that PJM will dispatch the unit often enough to make that profit over time. That’s how markets work. If the seller has to pay for RGGI credits, PJM does not care. But, the builder of a new generating unit, or the owner of an existing unit trying to decide whether to retire it, WILL care.

    • “PJM would have to identify the source of the marketed power . . . for the RGGI to assess a tax…no?”. No. PJM does not buy or assess RGGI emissions offsets, the generator’s owner does. The cost of these offsets is treated by the owner just like the cost of fuel and other o&m costs. The generator is in competition with all other generators on the grid to run as much as possible and as profitably as possible. RGGI raises the cost of running fossil fueled generation relative to solar and nuclear. Of course, the state authority administering an RGGI program can check with PJM to verify or audit that the generator is reporting its hours of operation correctly.

  12. “RGGI requires fossil-fuel plants of a certain size to purchase an allowance for every metric ton of carbon dioxide they emit. Since the first quarterly auction in 2008 through the most recent in March, those allowances have resulted in $2.68 billion in proceeds for participating states …. States use the proceeds for various energy efficiency, renewable energy and environmental programs.”

    “But clearing prices have recently fallen to their lowest levels since 2012, which the Acadia Center argues is the result of underestimating how quickly power plants could reduce emissions.”

    Reading things like this .. Do the REGI states need additional carbon emitting purchasers for their program? And isn’t Dominion balking because they have kept Virginia at the bottom of the states who have promoted efficient building upgrades to maintain demand?

    Now that the Arlington PACE loans are available, and can be copied by other tax districts, maybe the best way forward would be through the tax districts and the banks. Efficient buildings and onsite generation with a fixed cost going forward sounds good.

    And if Dominion can no longer stand by their inflated future demand numbers … if it becomes clear that demand is and will be decreasing through efficiency and on-site solar which will soon include storage, … then, maybe the powers that be can take advice like Tom has put forth to open generating competition while protecting their wire monopoly.

    I have supported RGGI membership in the past but …maybe that opportunity is gone.

    • CA&W – who is paying the added costs for the carbon “tax”?

      • TMT,

        It looks like the program has provided a significant net benefit to the citizens of the RGGI states, not an added cost. Here are some stats:

        $2.8 billion paid in auction allowances through 2017. These costs would have been passed on to utility customers.

        In return:

        $2.3 billion in customer energy cost savings (through 2015). Jim says another $220 million was saved through 2017 so $2.5 billion in savings.

        28 MMBtu of fossil fuel avoided

        in 2005 33% of electricity generation in RGGI from coal and petroleum
        in 2016 7% ”

        30,000 person-years of new jobs created

        $5.7 billion cumulative economic value of health benefits from emission reductions through 2014.

        From: The Congressional Research Service. The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Congress

        We can’t always assume that a tax has a negative effect. For example: cigarette taxes; a portion of gas taxes keep our roads repaired; etc.

        • So I am to believe that, in Virginia, Dominion will pay carbon taxes and lower customers’ bills? This is a state where Dominion gets to use overearnings to upgrade the grid and avoid refunds and also put the costs for the upgrades in the rate base. This is a state where rates have been “frozen” except for the fact that many of the additional costs Dominion incurs get passed along to customers.

          This is just a scam by environmentalists and rent seekers to fleece the public for their own gain. If the cost of renewable energy is going down, the regulatory process, perhaps, coupled with mandated competition should be sufficient to cause a major transformation in how we generate electricity. If that’s true, RGGI is not necessary and it’s presence suggests there are a lot of rent seekers out to make life more expensive for ordinary people. I don’t see much difference between RGGI and the people who call up consumers and small businesses telling them that they must pay their utility bill immediately with gift cards or have their service shut off. Both are trying to scam the public.

          • “So I am to believe that, in Virginia, Dominion will pay carbon taxes and lower customers’ bills?”

            I was just pointing out that it was the outcome with the RGGI group as currently constituted. Virginia is not a full member of RGGI and doesn’t intend on obeying the rules that created that result. And Dominion is trying to subvert even that paltry effort.

            Of course Dominion will keep money that belongs to the ratepayers and charge more than customers would have to pay for solar and energy efficiency (compared to if it was done by someone else) – because they can.

            I am only trying to point out that joining RGGI will not yield the results in Virginia its proponents say it will. Because we don’t intend to participate in that organization in good faith.

            I am also trying to point out that the policies we have developed so far in Virginia to govern our major utilities will not create more jobs and lower energy costs the way the utilities and politicians have advertised.

            As long as the utility holding companies can gain more profits by managing the legislative process and the people and businesses that pay more as a result don’t do something about it, we will continue on our present path.

          • re: ” This is just a scam by environmentalists and rent seekers to fleece the public for their own gain.”

            so what do we call what Dominion is doing to customers?

            The enviros don’t have a profit motive. Nothing they advocate for – brings them more money. Their motives seem to be to generate less pollution and not waste resources burning more electricity than is really needed. Dominion seems to just want to sell more electricity to continue making profits.

            I can’t equate the Enviro’s motives to Dominion’s motives… and I can’t view what the Enviros are wanting to do as a “scam” because the money is not going to them to spend as they please for their own interests.

            Where am I going wrong on this, TMT?

  13. Larry,

    “RGGI is viewed by most Conservatives/Libertarians as a faux “market” – a created “market” where none is needed”

    This is a difficult issue. Economic theory says that in a free market, all of the information related to the transaction is contained in the price. This just isn’t the case in the markets that exist in the U.S. Every market is influenced by factors in addition to price. Many businesses are able to obtain favorable tax treatment, or regulations that give them an advantage over competitors or that create a barrier to entry by new competitors. When people ask for more “free markets” in America they are asking for the type of markets that are tilted in their favor. Every market we have is skewed by some sort of mechanism.

    Besides, utilities are accustomed to operating in a regulated market. We have had water and air quality regulations since the 1970s that have added costs to the production of electricity. Energy production has many externalities (costs that are not included in the price). These are health or social costs that are not reflected in the cost of energy. Sometimes regulations impose costs that partially compensate for these additional expenses. There is a cost to climate effects. Just ask the U.S. Navy and southeast Virginia.

    That is what RGGI is attempting to accomplish – recognize some of the cost associated with the release of CO2 from power plants. And they are using a market mechanism, the wholesale power market to do it.

    All participants in NY-ISO and ISO-NE are members of RGGI. It breaks down a bit because only a few utilities in PJM are in RGGI.

    PJM and FERC have considered adding a carbon price to wholesale markets. Currently, some utilities and the Department of Energy are pushing PJM and FERC to allow subsidies for coal plants (and nukes), so it is not likely in the near-term that any additional charges for CO2 output will be levied by these organizations.

    Renewables are handled by a different auction at PJM because these units have a zero marginal cost and cannot be turned on and off. Energy from these facilities is used whenever it is available.

  14. Larry,

    ” most of the public and the don’t understand it … and at the same time are not supportive of higher taxes or more expensive electricity especially if it is tied to anti-Global Warming efforts.”

    You are right about this. But I think the public avoids dealing with energy issues in general. They are uniformed about the issues and would rather not learn.

    When something like the new energy bill is wrapped up in a bow and given a cover story that it will increase jobs and reduce energy costs (exactly like the story about the pipeline), the public is satisfied and they move on to something else. Even though the story is fiction. The public accepted being taken advantage of without a whimper. The business and labor leaders, whose long-term interests will be harmed, served as cheerleaders.

    The Atlantic Coast Pipeline alone will cost Virginia employers and families billions of dollars in extra energy costs. The new energy legislation will add billions more unnecessarily. The public is like frogs in pot where the heat is gradually increasing. No one notices that they are about to be “cooked.”

    I have been unable to find a way of creating a good public conversation about these issues. No one wants to take on the most powerful companies in the state.

    I support the idea of our utilities doing well. I just want them to prosper by serving the interests of Virginians not just their shareholders.

    I have spoken out about these issues because our current policies are bad for the ratepayers now, and without alteration will ultimately be bad for the utilities too. These are avoidable outcomes. Other states are managing it. We can too.

  15. Thanks for the explanations and commentary.. Always informative.

  16. re: ” Economic theory says that in a free market, all of the information related to the transaction is contained in the price.”

    well.. it says that the buyer has to satisfy themselves that what they are buying is worth the price.

    The problem is if the product creates an externality – that the buyer does not have to pay for -then the buyer has no reason to not go through with the transition.. he’s not responsible for the other costs.

    Before the EPA was created… discarding waste into the environment was how products were created for a set price and the buyer accepted that price – even though the total cost of the product was not incorporated into the price.

    Once regulations were enacted – the cost of the externality was incorporated into the price but not all regulations applied to all externalities to start with and over time – not all were ever regulated.

    The last big thing for CFCs that caused Ozone Holes and it was different in an important aspect – the regulation had to be on a worldwide basis because cutting back on CFCs for only a few emitters would not be effective.

    Even then – not all countries comply with the CFC regulations.

    Then came Global Warming and CO2 and it became politicized and opposition ended up basically denying that CO2 needed to be regulated – at all… much less done on a Carbon Credit basis.

    So we cannot get that agreement – not even nationally – and RGGI is an attempt to elicit voluntary agreements to reduce carbon – and without a general regulation that really applies to all – it’s more symbolic than really effective.

    Anytime there is extra money laying around – either excess profits for Dominion or Carbon Credits… I worry about whether it will be spent cost-effectively – or just “spent”.

    • What about the externalities associated with illegal immigration and the hiring of individuals who are not authorized to work in the United States? Many employers, large and small, consume this product regularly, saving lots of money in wages and benefits, but imposing huge costs on society generally. If employers of illegal immigrants had to pay the costs associated with a large population of people here illegally including the costs for educating their children (something that needs to be done) and, as Larry likes to note, the costs for emergency room care alone, would employers still violate the law?

      “Anytime there is extra money laying around – either excess profits for Dominion or Carbon Credits… I worry about whether it will be spent cost-effectively – or just ‘spent’.” Very well stated.

      Most people cannot afford to pay for the retrofitting of their homes (be they owned or rented) to make major reductions in carbon emissions (either directly or indirectly). So anything that increases the costs of electricity will go directly to reduce their disposable incomes and quality of life. Be it trading in carbon emission credits or carbon taxes, the economic incidence is going to fall on ordinary people or as Presidential Candidate Hillary Clinton called them “the Deplorables.”

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