Why the onus is now on the state Utilities Commission to protect ratepayers and the environment
North Carolina’s electricity sector is undergoing a generational change. Duke Energy will retire most of its remaining coal-fired power plants over the next decade, and a key question for the state is what energy resources will replace those retiring plants.
The new energy law (House Bill 951) that Gov. Roy Cooper signed yesterday does not explicitly answer the question, but it does establish the framework that will determine the state’s energy future. It is now up to the state Utilities Commission to ensure that the framework delivers an affordable, reliable and clean system.
There is much to criticize about the new statute. Most stakeholders were excluded from the negotiations. Much of the 10-page bill focuses on multi-year ratemaking, a change that has clear benefits for Duke Energy’s shareholders but will likely mean higher costs for consumers. The bill calls for reductions in carbon dioxide (CO2) emissions that contribute to climate change, but the reductions are not mandatory and Duke Energy or the Utilities Commission can alter the carbon reduction plans every two years. Legislators also neglected to address the needs of low-income citizens, even as the COVID-19 pandemic reminds us that affordable electricity is a public health concern.
Despite these shortcomings, we should not lose sight of the fact that “decarbonizing” the electricity sector is now official state policy. The new law requires the Utilities Commission to “take all reasonable steps” to achieve a 70% reduction in CO2 emissions from the electric power sector by 2030 and carbon neutrality by 2050. This by itself is significant for a state legislature that made national news less than a decade ago for attempting to legislate away the threat of climate-related sea level rise.
More important, even though the carbon reductions are not mandatory, the targets create an opportunity to transform decision-making at the Utilities Commission.
North Carolina’s electricity system depends on a century-old compromise. Duke Energy Carolinas and Duke Energy Progress are rate-regulated monopolies that are insulated from competition. In exchange, the Utilities Commission ensures that electricity rates are reasonable and that utility investments produce tangible benefits for ratepayers.
Utilities typically earn returns for their shareholders based on capital investments. The more utilities invest in infrastructure, the more their shareholders are likely to earn. This creates an obvious incentive to overspend. Utilities commissions generally rely on a “least cost” standard to ensure that monopoly utilities are not over-investing. Commissioners often interpret “least cost” narrowly, excluding public health and environmental considerations unless there is a direct connection to electricity rates.
Under this limited approach, significant investments in new natural gas generation may appear to be the least-cost option today.
House Bill 951 should change the least cost calculus. The law requires Duke Energy and the Utilities Commission to determine the least-cost pathway to achieve both the 2030 and 2050 targets. Although heavy reliance on natural gas may be a low-cost approach to the 2030 target, the least cost approach to carbon neutrality by 2050 will likely require a very different energy mix.
Natural gas-fired power plants may last 30 years or more. Building a lot of new gas generation between now and 2035 and still achieving the 2050 emissions goal would require one of two options. The first would count on new technologies emerging that allow Duke Energy to operate their gas plants without releasing greenhouse gas emissions. This is within the realm of possibility, but adding new technologies to existing power plants will likely be quite expensive.
The other option is to retire the natural gas plants early. We are seeing how that would work now. The new law authorizes hundreds of millions of dollars to compensate Duke Energy and its shareholders for investments in coal-fired power plants that are no longer economic to operate. In a competitive marketplace, the company that owns the retiring power plants would bear those costs. Because Duke Energy is a rate-regulated monopoly, the costs are borne by Duke Energy’s customers. There is a very good chance that over-investing in natural gas today will result in the same steps in the 2040’s. In fact, a Duke Energy executive referred to this as an “accounting problem.” By that, she meant determining when, not if, Duke Energy is compensated for the investment.
The Utilities Commission should not accept either option. The least cost approach to net carbon neutrality by 2050 requires investing in low carbon electricity generation starting now.
Jonas Monast is the C. Boyden Gray Distinguished Fellow at the UNC School of Law, where he directs the UNC Center on Climate, Energy, Environment, and Economics.