TODAY’S STUDY: NEW ENERGY AND ELECTRIC RATES

Understanding the Impact of Electric Choices on North

Ivan Urlaub and Kacey Hoover with Jim Kennerly

May 2015 North Carolina Sustainable Energy Association

Introduction

North Carolina’s Electric Industry In North Carolina, there are three types of electric power providers that sell electric power to retail customers: investor‐owned utilities (IOUs), electric membership corporations, and municipally‐owned utilities. North Carolina has a highly‐regulated electricity industry where at least 67% of electric customers are provided service by IOUs. 1 North Carolinas’ IOUs include Duke Energy Carolinas (DEC), Duke Energy Progress (DEP), and Dominion North Carolina Power (Dominion). The merger of Duke Energy Carolinas and Duke Energy Progress (formally known as Progress Energy), approved by the NC Utilities Commission in 2012, made Duke Energy the largest electric power holding company in the United States, supplying and delivering power to approximately 7.2 million U.S. customers in six states.

North Carolina’s IOUs generate, transmit, distribute, and sell electric power to consumers across the state. In exchange for an exclusive service territory, IOUs can design rates to recoup operating expenses and capital costs necessary to meet their obligations to provide reliable, available, and affordable energy to their customers.

The utilities’ generation portfolios include a mix of resources, with different operating and fuel characteristics, to meet customer demand. In 2014, coal, nuclear and natural gas made up 79% and 91% of DEC and DEP’s existing electric generation and non‐renewable purchased power, respectively. The remainder was supplied by other generation resources such as hydroelectric, long term purchased power agreements from the wholesale market, and renewable energy. Table 1 below illustrates the current capacity by resource type for DEC and DEP, as reported in their most recent Integrated Resource Plans (IRPs), a long‐range planning document that provides insight into the utilities’ current and conventional and clean energy infrastructure that could meet electricity demand.

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You, the Consumer

For more than a decade, retail electric rates in North Carolina have been on the rise. The cost to build, finance, maintain and operate electricity generation is reflected in electricity prices to consumers. There are several factors that influence the cost of electricity prices including, but not limited to: the cost of maintaining and using the transmission and distribution systems to deliver electricity, the cost of constructing, operating, and maintaining power plants, and fuel costs that go up and down over time.

In reality, the cost to generate and supply electricity changes by the hour, minute and second. However, most residential customers pay flat monthly rates, so they do not see this variability in costs when paying their bill. Customers on the common flat rate who want to see when they use the most electricity during the day cannot, because they do not have modern electricity meters installed and cannot easily access their electric usage information through their utility. Most North Carolinians take some sort of action each year to reduce their electricity use, but improving meters and customers’ ability to easily see when they are using the electricity they pay for could make saving energy and money much easier.

To better understand the cause of the rise in rates and residential customer bills, the NC Sustainable Energy Association examined recent orders issued by the NC Utilities Commission where increases and decreases in rates have been approved. NCSEA is providing this service to residential customers so they can see what has caused the average residential customer’s monthly bill to rise since 2001.

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Clean Energy and Your Electric Bill

It’s understood that everything has a cost, and for the average rate payer the cost of electricity generation, moving electricity, and consuming or saving electricity adds up to the amount of your monthly electric bill. Many customers are under the misconception that clean energy resources are simply an added cost. However, without these resources the utilities would need to invest in additional conventional technologies to meet that same demand, some of which costs more and some less. In order to understand the drivers of electric rates, this report breaks down the factors as the following:

1. Conventional Energy and Plant costs: The cost of purchasing fossil and nuclear fuel (coal, fuel oil for starting up coal plants, gas and uranium) and pollution control materials for coal‐fired power plants. Also, the cost of purchasing electricity from third parties, including non‐renewable energy from wholesale power plants;

2. Renewable Energy Purchased Power costs: The cost of purchasing electricity from third parties, including renewable energy from independently developed projects at “avoided cost” rates previously approved by the Commission. (The “avoided cost” is the cost the utility would have charged customers anyway if it had produced the electricity themselves with other resources.);

3. Renewable Energy and Energy Efficiency Portfolio Standard (REPS) costs: The incremental costs associated with compliance with the REPS; and

4. Demand‐Side Management and Energy Efficiency (DSM/EE) costs: The cost of the utility’s DSM/EE programs that reduce individual customer energy costs and produce energy savings for all utility customers. For the purposes of this report, the drivers are evaluated as separate line items to illustrate the nominal cost impact of clean energy resources as compared to conventional energy costs. A discussion of costs must begin and end with this accurate information.

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Driver #1 – Conventional Energy and Plant

As we see in Table 1, the utilities have made large, long‐term investments in conventional energy resources to provide reliable, available and affordable energy to their customers. Since the costs of these investments are passed on to their customers, it can be easily understood that conventional resources are the primary driver of utility rates. For instance, in DEC’s 2013 rate increase application, the Commission summarized the primary drivers for a need to increase rates as:

• “Capital investments for plant modernization, environmental compliance, and other capital additions;

• Fleet modernization efforts of retiring, replacing, and upgrading generation plants and transmission and distribution systems; and

• Other capital investments including: (1) the new Cliffside Unit 6, a state‐of‐the‐art advanced coal technology plant; (2) the Dan River Combined Cycle [natural gas] plant; (3) the uprate project at the McGuire Nuclear Station; and (4) the NRC‐mandated Tornado/High‐Energy Line Break (HELB) Project at the Oconee nuclear station.” 4

By analyzing key North Carolina Utilities Commission proceedings, it was uncovered that the cumulative changes to monthly residential bills were driven primarily by investments in conventional energy sources (coal, natural gas, and nuclear). Figure 2 and Figure 3 below show the overall residential bill increase on an inflation‐adjusted basis for each component of DEC and DEP residential rates from 2001 to 2014. 5 The data shows that investments in conventional energy sources (coal, natural gas, and

Driver #2 – Renewable Purchased Power

The second driver of utility rates is the cost of renewable energy investments made by the utilities under Public Utility Regulatory Policies Act (PURPA). PURPA requires North Carolina’s electric utilities to purchase energy from developers with renewable energy projects connected to the grid. For such purchases, utilities are required to pay rates which are just and reasonable to their customers and adequately reflect the value of these projects. To finance these agreements, utilities pay “avoided cost” rates that are reflective of the cost they’d otherwise pay to generate or purchase from other resources.

While these investments do have a short‐term rate impact (see Figure 2 and Figure 3), most of the investments themselves are explicitly designed to curb future utility costs for all customers, because they are for long‐lasting infrastructure built in North Carolina. These investments provide North Carolina’s utilities with a unique opportunity to meet customer demand with low‐cost clean energy resources.

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Driver #3 – The REPS

Similar to renewable energy purchased power, the third and fourth drivers of residential utility rates are designed to avoid future costs for all customers.

Passed in 2007 with bipartisan support, Senate Bill 3 created North Carolina’s REPS law, in addition to other clean energy provisions. Under the REPS, electric utilities are required to meet a portion of their electricity sales through renewable energy and energy efficiency resources. Utilities have several options for complying with the REPS, including:

• Using renewable resources to generate power at new or existing power plants6 ;

• Purchasing bundled or unbundled power and renewable energy certificates, known as “RECs”, from renewable energy facilities; and

• Implementing energy efficiency measures to reduce demand.

Under the oversight of the Commission, the utilities are allowed to recover costs associated with complying with the REPS from their customer classes: residential, commercial, and industrial.7 As noted in Section III and Section IV to follow, the average customer experiences a small REPS credit or charge on their bill – less than a dollar per month in 2014. Furthermore, utilities’ compliance with the REPS is providing customers with cost savings both now and in the future. (See Figure 5)

Driver #4 – DSM/EE

Senate Bill 3 also authorized utilities, like DEC and DEP, to create customer‐funded DSM/EE programs. DSM refers to activities, programs, or initiatives undertaken by an electric power supplier to shift the timing of its customers’ electricity use from periods of high‐energy demand to periods of low demand. The total cost of DSM/EE programs can be passed on to customers if and only if the programs actually save customers more money than they cost in the first place. The Commission must review and approve each program and its associated costs to ensure customers’ money is used prudently and is actually used to reduce energy consumption. The utilities recover costs associated with DSM/EE programs separately from the REPS. Since 2007, the cost of renewable energy technologies have significantly declined and DSM/EE programs have remained a low cost resource.

As we see in Figures 2 and 3, North Carolina utility customers are predominately paying for conventional resources to keep the lights on in their homes and businesses. Unlike with renewable energy, these resources require costly, regular maintenance to keep pace with consumer demand – and many of them rely on finite fuel sources at fluctuating costs to continue running properly. Renewable energy

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The Average North Carolina Monthly Residential Bill

Since 2001, residential customers of DEC and DEP have experienced increases in their electric bills. As we see from the preceding analysis, this is largely due to the fact that the utilities have made large, long‐ term investments in increasingly expensive conventional energy technology. (See Figures 2 and 3)

According to Commission‐reported rate information, the average monthly residential bill is estimated by the Commission to be $107.04 and $106.67 for DEC and DEP customers, respectively. Within this total, monthly REPS charges are nominal: $0.39 and $0.83 per month, respectively.

While a portion of our electric bills can be attributed to clean energy resources like renewables and energy efficiency programs, clean energy costs have largely been shown to either reduce residential customer bills, or to help customers avoid an equal amount of future utility cost increases in the future.

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Conclusion

Since 2001, North Carolina electric ratepayers have seen their monthly bills steadily rise. In response, public curiosity and dialogue on the topic has also become amplified, with fingers pointing in many directions towards the blame.

This report sheds light on what’s behind these increases, and uses nonpartisan, reputable sources to help readers navigate the assumptions heard in today’s swirling public discourse about electricity costs. The trends documented in this report – namely, that conventional costs are rising and clean energy costs are nominal – equip all North Carolina customers with accurate information about where their electric bill charges come from.

Even though customers see a line item on their monthly bill for investments in clean energy resources, they are saving a great deal more in current and future utility costs. (See Figure 5)

We can conclude that while rates have risen in the last decade, they would be higher without renewables and energy efficiency – Drivers 2, 3 and 4 – in North Carolina’s energy mix. The result of these clean energy line items is of benefit to rate payers statewide: $162 million in cost savings with clean energy in our state’s balanced energy mix since 2007, and an estimated additional $489 million to be saved by 2029.

What goes into our electric bill costs is a complex matter. At the same time, this report proves that understanding is possible – for the North Carolina home owner, for the small business owner and for the legislator in Raleigh influencing energy policy. We hope the findings outlined here will increase awareness and empower customers to continue advancing the most beneficial long‐term energy decisions for their own property and for North Carolina.

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