In 2016, Virginia’s solar industry could grow more than 1,000 percent compared with 2015 -- a 750 percent increase over all the solar ever deployed in the state.
At a moment when the world is focused on the climate talks in Paris and the fundamental energy transformations that need to take place across the globe, we are poised to create a competitive energy market in Virginia that could lower prices, grow jobs and investment, reduce pollution and spur innovation.
Advanced Energy Economy’s market report found the global market for advanced energy technologies reached $1.3 trillion in 2014 and conservatively estimated a $200 billion market in the U.S. The U.S. advanced energy market is bigger than the airline industry and equal to pharmaceuticals.
Virginia’s regulators and policymakers will soon make decisions about the state’s energy market structure that will determine whether we participate in the new energy economy and see enormous growth in solar -- or not.
The stars may finally be aligning in favor of solar.
The upside: 300 megawatts or more in 2016
There are currently 25 to 30 megawatts of solar generation installed in Virginia. The amount of solar energy available in the state of Virginia could increase fifteenfold in the coming year. Here’s what we see.
Dominion’s regulated and unregulated businesses may deploy close to 200 megawatts in 2016:
- Dominion has sought approval to own three solar projects totaling 56 megawatts (called Dominion 56).
- Dominion has reported that it is negotiating an additional 47 megawatts of power-purchase agreements (called Market 47).
- In addition to these 103 megawatts, Dominion’s unregulated business bought the 80-megawatt Amazon project developed by Community Energy.
- Finally, Dominion may add a few additional megawatts through various other programs.
Outside of Dominion, an additional 50 to 80 megawatts of projects have been announced:
- Old Dominion Electric Cooperative (ODEC) recently announced 30 megawatts of PPAs through 2016.
- Appalachian Power Company (APCO), typically reluctant to engage in solar markets, has issued an RFP for 10 megawatts to be interconnected by the end of 2017.
- The Council for Independent Colleges (CICV) has issued a request for proposals for 38 MW, of which at least 10 MW can reasonably be constructed in 2016.
- There are several hundred additional megawatts listed in the PJM queue that may be built in 2016. These projects will require a buyer for their energy, and direct sales may be difficult.
- Projects seeking to interconnect into the distribution systems of Dominion, APCO, ODEC or the retail electric cooperatives may exist. These projects may not show up in the PJM queue, but again, they will need a buyer for their energy.
The downside: 120 megawatts?
Currently, many large-scale projects are not subject to the State Corporation Commission's decision-making authority (for example, the Amazon, ODEC and CICV projects).
These projects total 120 megawatts in 2016 -- a 600 percent increase over 2015. They are all likely to be built because there are willing buyers and sellers -- a competitive market free of the public utility regulatory process.
If the SCC were to deny the 56-megawatt Dominion-owned project, the utility would have little incentive to enter into the PPA contracts with the other 47 megawatts from third parties.
If Dominion walks away from the other 47 megawatts, these projects will need to find other buyers. However, Virginia lacks the policy support for these kinds of transactions. Hence, the SCC will most likely determine the fate of all 103 megawatts.
Is a market index for setting utility rates the key to the future?
In my opinion, the future of the Virginia solar market depends on the ability for non-utility-owned solar to set a market price for utility-owned solar. The Market 47 projects are the key to this price index.
To understand why Dominion is pursuing PPA contracts with the Market 47, one needs to understand why they are essential to the utility's ownership of the Dominion 56.
First, we need to look at how the price for solar power is currently set in Virginia and why prices are currently higher than they should be.
The utilities and regulators set prices through “rate normalization” rules. These rules result in prices that are 20% higher for the customer if the regulated utility owns the solar as compared to solar power purchased through a PPA. There are two reasons for this:
- Accounting rules for tax incentives. The federal government requires Dominion to spread out the federal tax incentives over the life of the project. In contrast, a third-party PPA will sell the power based on when the owner receives the federal tax incentives. Under rate normalization, the ratepayer loses the present value of the tax credits – a 20 percent increased cost to the ratepayer over 20 years.
- Different costs of capital. Many, including former FERC Commissioner Jon Wellinghoff, have argued that the utility’s cost of capital will be greater than the competitive market's cost of capital, again making the cost of utility-generated power higher than that of power generated by competitive generators.
Second, the commission denied Dominion’s application to construct, own and operate the Remington 20-megawatt solar plant. Commissioners said the project lacked adequate data on third-party, market-based alternatives.
The commission’s decision makes clear that future Dominion attempts to own large-scale solar will require significantly improved market data. Such information is only available when third-party sources of solar power are allowed to compete unimpeded in the marketplace.
Third, Dominion may have found a way to address the commission’s concerns about market-based pricing data – which would enable it to build and profit from its planned 56 megawatts of solar power. This solution depends on establishing a market price index for solar energy. (In the 2015 session, the general assembly determined that the Virginia regulated utilities “may propose a rate adjustment clause based on a market index in lieu of a cost of service model for such [solar] facility.”)
Dominion is utilizing the proposed pricing from the Market 47, to establish a market-based price for the Dominion 56. Since Dominion is setting the cost to the ratepayer based on the price for the Market 47, the SCC may find that third-party market alternatives were appropriately considered.
Further, the commission may find that the Dominion 56 provides the lowest cost to ratepayers because it is equal to the market price. Hence, the Market 47 may allow Dominion to build and profit from its own 56 megawatts of solar generation.
Without the Market 47 PPAs and this market-based pricing information, the SCC would likely deny Dominion's 56 megawatts of proposed projects. The Commission would use the same rationale it used in denying Dominion’s 20-megawatt Remington solar project.
In addition to requesting that the SCC approve this market index approach, Dominion has petitioned the IRS to allow this approach by exempting its 56 megawatts from rate normalization or cost-based regulation.
If the IRS fails to provide a Public Letter Ruling allowing Dominion to utilize the market index approach, the Dominion 56 would presumably need to go through a new commission case. Hence, the Dominion 56 will not be built in 2016, likely dooming the Market 47.
If successful, Dominion will create a new rate-setting and cost-recovery approach for utility-owned solar. Further, it will likely create a need for a competitive market.
Success for this market-based pricing approach will benefit the solar industry and ratepayers -- assuming you believe that competitive markets drive down prices and encourage innovation. A competitive market will enable Virginia to finally compete in the advanced energy market.
Francis Hodsoll is the founder and leader of the Virginia Advanced Energy Industries Association. He is also the president of E&E Frontiers.