In North Carolina, falling costs of clean energy make strange bedfellows

By Elizabeth Ouzts, Energy News Network

Manufacturers, mills, and environmental interests oppose Duke-backed legislation because it hampers the role of regulators and costs ratepayers.

It’s not often that paper mills and chemical manufacturers agree with the likes of the Sierra Club.

But the debate over controversial energy legislation in North Carolina shows how companies like DuPont, Chemours, and Georgia Pacific are increasingly aligned with environmental groups on utility policy.

The strange bedfellow scenario stems in part from economics. The rapidly declining costs of clean energy mean the gas plants mandated in the bill will almost certainly cost large ratepayers more than would cleaner alternatives, a reversal from a decade ago. 

“Couple that with the volatility of fossil fuel prices,” said Peter Ledford, general counsel for the North Carolina Sustainable Energy Association, “it creates risks for ratepayers whose bills are in the millions of dollars a month instead of hundreds of dollars a month.”

And though clean energy nonprofits welcome the new solar farms and early retirement of coal plants required in the bill, they, like the manufacturers and mills, think utility regulators should keep their authority to authorize any replacements — not have it usurped by legislative mandates. 

The two camps are lobbying and testifying against the current draft of the Duke Energy-backed bill and even partnered on a news conference. “It’s nice to be standing together,” said Kevin Martin, director of the Carolina Utility Customers Association, a trade group that originated with textile mills. “People don’t normally see us standing together.”

A decade of tumbling prices

North Carolina utility law requires energy planning and ratemaking that results in the “least-cost mix of generation and demand-reduction measures” achievable. For decades, the provision favored fossil fuel plants over more expensive wind and solar farms.

To help counteract that reality, the state adopted a mandate for both renewable energy and energy efficiency in 2007. Though a study commissioned by regulators showed the combination would save ratepayers over time, the law included tax breaks and cost caps to help win the support of large customer groups worried about rising utility bills.

In practice, the caps proved unnecessary. According to data from the North Carolina Sustainable Energy Association, utilities have spent well under them — with an outlay of $860 million to date compared to a cap of $2.4 billion. An analysis by Research Triangle Park-based think tank RTI shows the expenditures helped avoid over $4 billion in natural gas-fired electricity.

The reason, of course, is that renewable energy prices have plummeted. Over the last decade and a half, state renewable energy mandates and other incentives helped to jumpstart markets — increasing supply, spurring innovation and efficiency, and decreasing costs.

According to asset management firm Lazard, the levelized cost of energy — the price per megawatt-hour over a project’s lifetime — has fallen 71% for land-based wind power since 2009. Large solar fields have plunged 90%. 

That means developing a new, large-scale solar farm isn’t just cheaper than building a new coal plant; it’s cheaper than using one that already exists. It’s cheaper than a new, single-cycle gas plant. Increasingly, it’s even cost-competitive with a more efficient combined-cycle gas plant.

And while renewable costs are still decreasing, albeit, at a slower rate than in the last decade, those for gas are unpredictable at best because of the cost of fuel.

“If you have a fuel-free resource,” said Gudrun Thompson, senior attorney at the Southern Environmental Law Center, “you’re doing away with the fuel cost and you’re also doing away with some risk — because nobody really knows what prices are going to do in the future.”

New competition for natural gas

Passing the Republican-controlled House of Representatives narrowly in July, H951 includes 4.6 gigawatts of solar power developed through a competitive bidding program. The provision has the backing of solar companies, who’ve carefully avoided commentary on the rest of the bill.

But that injection of solar power — about a 70% increase by 2030 — isn’t raising the hackles of large industrial users of electricity, or the reason the bill could be so costly in the future. 

A multi-year ratemaking scheme in the bill includes several features that favor Duke over its customers, experts say, including a provision allowing Duke to over-earn by half a percentage point but not under-earn at all. 

“We’re not opposed to earnings,” said Martin of the Carolina Utility Customers Association. “But we are opposed to exorbitant earnings.”

Another provision requires Duke to retire five of its coal plants, assets worth over $1 billion but limits the company to recover less than half of that amount through low-interest securitization bonds. The rest would be charged to ratepayers on an accelerated schedule, benefiting shareholders.

“Approximately $20 million in ratepayer savings is achieved for every $100 million of the book value that is securitized,” wrote Weyerhauser, Dupont, Ashley Furniture and more than 50 other companies in an August letter to state senators, urging the $500 million cap to be lifted. 

At a Senate committee hearing on H951, the North Carolina Sierra Club echoed that request. “I think we can all agree we need to move beyond coal, but we need to do it in the right way,” said Cassie Gavin, the group’s head lobbyist. “The cap should be scrapped or raised to at least $1 billion.”

The measure also allows the company to charge ratepayers $50 million in research costs for small modular nuclear reactors — experimental technology that may prove vital in curbing emissions, but which critics worry is much less safe and more expensive than today’s large, baseload nuclear plants and may not ever come to fruition.

“Most of my companies are fans of nuclear energy,” Preston Howard, head of the North Carolina Manufacturers Association, told the Senate panel. “What we’re not fans of is paying for new nuclear facilities that never generate a kilowatt of power,” he said. “It’s time for the utility to share some of the risk of nuclear investments.”

The bill also puts the thumb on the scale for natural gas — once the paragon of least cost — mandating the resource rather than leaving it up to the seven-member utilities commission to determine whether it is a necessary, prudent, and reasonable addition to Duke’s generation mix. 

At the company’s Marshall plant, some 30 miles north of Charlotte, the bill gives Duke five years to swap out two coal units for a new, single-cycle gas unit of up to 900 megawatts. Such gas plants are the second priciest form of dispatchable power available today, according to the U.S. Energy Information Administration, a close second behind battery storage, whose costs are falling.

At present, the two coal units totaling 740 megawatts run up to a third of the year, per Public Staff, the state-sanctioned ratepayer advocate. Situated in the heart of Duke Energy Carolinas territory, such plants can be used for voltage support and frequency regulation as well as electricity generation, said James McLawhorn, the agency’s energy division director.

Still, battery storage can also provide those functions. To replace the coal units, Thompson asked, “Do you really need gas at all? And if so, do you need that much?”

H951 also requires Duke to submit a “retirement and replacement plan” for its Roxboro plant, north of Durham near the Virginia border, three years from now. While the replacement isn’t specified, it must meet criteria that only gas can satisfy.

Yet a study by the Brattle Group shows gas wouldn’t be the most cost-effective substitute.

Commissioned by solar developer Cypress Creek Renewables, the analysis models two scenarios under H951. Both meet the bill’s requirements for new solar and storage capacity. One limits new gas to just the 900-megawatt unit at Marshall, with none at Roxboro. The other assumes Duke will build 4.7 gigawatts of single and combined-cycle gas plants by 2030.

The limited gas scenario isn’t just cleaner, cutting 2005 carbon emissions by 74% in the next decade rather than about 60%. It’s also cheaper, saving ratepayers $530 million in 2030 and $1.2 billion five years later.

The Brattle study is the latest to show that Duke can retire coal plants earlier than now planned, ramp up renewables and storage instead of natural gas, and cost ratepayers less than the company’s favored long-range plan. An analysis by Synapse Energy Economics found the savings over 15 years could top $7.4 billion.

“The Synapse report shows that renewables, storage and efficiency — as a portfolio — are already cost-competitive with new gas,” Thompson said.

‘Numbers like that close plants’

The question of cost is tantamount for industries like textiles because electricity is a large and growing portion of their operating expenses. That’s in part because the global trend toward automation has increased kilowatt-hour needs. It’s also because electricity is the one expense manufacturers can’t control by seeking a better deal in a competitive marketplace. 

Then there’s the sheer scale, Martin said. “Something that might cost an annual residential bill to go up $200 might cost an industrial bill, on an annual basis, to go up $5 million or more,” he said. “Numbers like that close plants.”

The numbers are also crucial factors as industries weigh moving operations overseas — or coming back to the country. “We believe in manufacturing in the U.S. and we’ve grown in the U.S.,” Dan Nation, government affairs director of Gastonia-based Parkdale Mills, a textile company, told Senate lawmakers. “This bill puts that in danger.”

To be sure, industrial users don’t want any resource — including solar and battery storage — to bypass the existing process by which regulators permit power plants. “It’s not necessarily that we’re opposed to or supportive of one particular technology or another,” said Christina Cress, whose law firm is counsel to Carolina Industrial Group for Fair Utility Rates, a business association that began with the pulp and paper mills.

“What the replacement generation resources are going to be, how it gets paid for — all of that is currently in the commission’s purview,” said Cress, and it should stay that way. “We think the commission does a really good job at being a regulator.”

The motivations of many large electricity users who oppose H951 aren’t purely economic. In the absence of enforceable carbon reduction targets in either North Carolina or the country, 66 companies with a presence in the state— from engine manufacturer Cummins to soap producer Unilever — have adopted their own ambitions for 100% renewable energy. Many want H951 to do more to expand Duke’s green tariff program and revitalize its failed community solar program.

“We support the need to transition to clean energy,” said Cress, who helped draft the August letter on H951. “We have several member companies who have very ambitious carbon reduction goals.”

A market left? 

Furniture, textiles, and logging and milling have a long legacy in the state, and their opposition has helped stall the legislation in the Republican-controlled state Senate for now.

But Duke Energy also holds tremendous sway, having handsomely rewarded its legislative allies with campaign donations and a web of dark money assistance. The company has repeatedly promised stockholders that it can and will pass some version of H951 and continue to build its asset base.

“That’s just the way their business model works,” Thompson said. “They’re pretty candid with Wall Street that their value proposition to shareholders is that they’re planning to build a lot of new big capital projects.”

Solar companies, meanwhile, caution that the status quo is bad for their industry. Economics aren’t the only factor when it comes to plant approval, they say, and that without some change in policy at the state or federal level, natural gas could continue to win the day with regulators. 

A competitive procurement program for solar energy that began with a 2017 law has almost come to close, and “there is no mechanism by which this market is guaranteed to be extended,” said Tyler Norris, a senior director with Cypress Creek and the vice chair of the Carolinas Clean Energy Business Association, a trade group. In North Carolina, he said, “there is no market left for large-scale renewables.”

Like Norris’s group and other stakeholders, the Carolina Industrial Group for Fair Utility Rates continues to meet with lawmakers and other interests to try to reach an agreement. 

“But without seeing some significant changes,” Cress said, “I don’t see us getting to a point where we can do anything but oppose the bill.”

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