A new way to promote affordable, reliable electricity in NC

• Carbon Plan modeling has elevated the interim goal of reducing CO₂ emissions by 70 percent over legislative mandates for the plan to be reasonable and take the least-cost path that still upholds reliability
• To address this problem, a new report from the John Locke Foundation advocates for eliminating the interim goal and urges passage of an “Only Pay for What You Get Act”
• A version of such a bill has passed one chamber in the West Virginia Legislature

The previous brief discussed a revelation before the state Senate Committee on Agriculture, Energy, and the Environment that the Carbon Plan modeling has been unduly weighted to support the plan’s interim goal to the detriment of its least-cost and reliable mandates. As explained in the brief, the constraints placed on this model have caused the Carbon Plan orders from the North Carolina Utilities Commission (NCUC) to favor adding large amounts of intermittent renewable capacity rather than reliable, baseload-capable power from natural gas and nuclear. For that reason, the brief advocated repeal of the interim goal and suggested making carbon neutrality by 2050 aspirational rather than mandatory.

House Bill (HB) 951, the law requiring the Carbon Plan, specifically sought to safeguard electricity customers from transitioning to an expensive, unreliable system. The General Assembly deliberately included mandates that the plan be “reasonable” and take the “least cost path” to carbon neutrality by 2050 that will “maintain or improve upon the adequacy and reliability of the existing grid.”

HB 951 also set an interim goal of a 70 percent reduction in electricity-based carbon dioxide emissions by 2030 or shortly thereafter. The modeling used by the NCUC in determining what new power plants to build elevated that goal above being reasonable, keeping to least-cost generation, and upholding grid reliability.

Having customers pay only for the reliable portions of power plants

This unintended outcome is one of the examples provided in my new report for the John Locke Foundation’s Center for Food, Power, and Life. The report is called “Power Plays: How an Activist Bureaucracy Obstructs NC’s Energy Future, and What to Do About It.”

To solve this problem, the report calls for repealing the Carbon Plan — or at least eliminating the interim goal (the just-approved Senate budget plan includes this provision). It also offers another solution: passing an “Only Pay for What You Get Act.” We discussed this model legislation in a three-part series of research briefs last year. They progressed from discussing the problem of rising power bills from bad policy choices and utility incentives, introducing the concept of Only Pay for What You Get, and explaining how it would help electricity consumers in North Carolina.

Only Pay for What You Get is no longer just model legislation. A version called the “Reliable and Affordable Electricity Act” has already passed a chamber in the West Virginia Legislature. Another version is reportedly being developed for the Michigan legislature this session.

The key feature of the West Virginia bill would be to amend the legal rate of return formula utilities use to profit from building new electricity generation resources. Public utility companies are allowed to recoup their investments plus a certain percentage of profit when they build a new power plant. This guarantee helps them attract investors, but it also can incentivize building unreliable plants since there will be a need to build more of them (overbuild) to account for their unreliability. This problem is discussed in detail here, but what it means in brief is that the utility gets to build more, its investors get to profit more, while customers have to pay more.

Using capacity value as the reliability factor in adjusting rate of return

The West Virginia bill would add a multiplier to the rate of return: “the capacity value of the resource expressed as a percentage of its nameplate capacity as determined by the balancing authority in which it operates.” Capacity value is the “reliability value,” since it represents the proven reliable portion of a power plant, and it is measured by the power utilities themselves. A facility’s capacity value would correspond to the percentage of its costs that the utility could recover through the rate base.

As compiled by energy modelers Isaac Orr and Mitch Rolling, here is how the various types of power plants compare in terms of capacity values as measured by regional transmission organizations and Duke Energy:

Capacity values of power plants, as measured by Regional Transmission Organizations and Duke Energy

Source: Orr and Rolling

As you can see, under Only Pay for What You Get, Duke’s investors could expect to profit from 98 percent of a new nuclear power plant, 90 percent from a new natural gas–fired power plant, but only 30 percent of a new solar or offshore wind facility. The bill would not prevent a utility from building any specific kind of power plant, but it would affect the rate of return investors could expect from it.

Source: Orr and Rolling

In the graph above, Orr and Rolling used Duke’s 2022 Carbon Plan portfolios to show how this approach would lower cost increases significantly (by 28 percent in this scenario), saving consumers in North Carolina billions of dollars. In other words, this change would more closely combine the principles of least-cost and reliable generation — principles that the Carbon Plan modeling cast aside.