A renewable portfolio standards compliance program approved by the Virginia State Corporation Commission on Sept. 7 authorizes Appalachian Power Co. to add roughly 350 MW of renewable resources to its capacity portfolio. Appalachian Power is a subsidiary of American Electric Power Co. Inc.
➤ This is the third phase of a renewable portfolio standard development program that was initiated in 2020 in accordance with the Virginia Clean Economy Act (VCEA), which calls for 100% of Appalachian Power's (APCO) generation mix to come from renewables by 2050. The company is required to file updated compliance plans for the Virginia State Corporation Commission (SCC) approval on an annual basis.
➤ The cost associated with the VCEA-inspired investments are being recovered on an expedited basis through a rate adjustment clause, or limited-issue rider, as are several of the company's other renewable and traditional generation projects.
➤ Regulatory Research Associates views the regulatory climate for energy utilities in Virginia as relatively balanced from an investor viewpoint.
Under the approved phase three plan, the company is to enter into six new purchased power agreements (PPA) totaling 184 MW and one renegotiated PPA totaling 20 MW and is to acquire the Grover Hill Wind Farm, an almost 146.2-MW out-of-state wind facility being constructed by a third-party developer, upon completion in 2026.
The commission denied the company's request for cost recovery associated with a legacy wind contract, finding that the economic analysis did not show positive value for customers.
The company had proposed a $23.2 million revenue requirement for the rate year beginning Oct. 1, 2023, and ending Sept. 30, 2024, that included a true-up of revenue collected under the prior renewable portfolio standard (RPS) rider proceeding (covering the rate year beginning Aug. 1, 2022, and ending July 31, 2023), uncollected revenue requirement associated with the RPS compliance plan for August 2023 through September 2023 (known as the bridge period); and the prospective revenue requirement for the rate year. This revenue requirement is roughly $8.9 million below the annual revenue requirement that had been approved under the initial order implementing the rider.
The commission largely adopted the company proposal but excluded costs associated with a PPA the company had entered into in 2010 for the output from the 100.5-MW Beech Ridge Wind Farm in West Virginia. The commission had previously excluded the PPA from the RPS compliance portfolio.
APCO maintained that including the Beech Ridge PPA in its compliance portfolio would keep the levelized renewable energy credit cost lower than the noncompliance charge it could be required to pay absent the capacity and that since the facility is already built and operational, it would remove the uncertainty associated with negotiating for, and building, new facilities in the short term. The SCC concluded that APCO had failed to establish the prudence and reasonableness of the Beech Ridge PPA's inclusion in the company's VCEA compliance plan.
The SCC approved a $16.4 million annual revenue requirement for the rate year Oct. 1, 2023, through Sept. 30, 2024, that is about $15.7 million lower than that approved in the initial 2022 order implementing the RPS compliance rider.
Background on APCO RPS plans
The SCC approved APCO's first RPS plan in 2021, under which the company was to acquire the 15-MW Depot Solar Facility, full requirements PPAs with two 20-MW solar facilities that were to come online in 2021–22, 105 MW of utility-owned solar expected to come online in 2022–23, PPAs with 50 MW of solar that would begin in 2023, and 400 MW of storage that would be in place by the end of 2035 (Case No. PUR-2020-00135).
In February 2022, the SCC approved the company's proposal to purchase a 5-MW solar facility in Amherst County, Va., known as Amherst County Solar Project (Virginia), from a third-party developer after the project is completed.
In July 2022, the SCC approved APCO's second RPS compliance filing, which included the acquisition of 493 MW of new renewable capacity through a combination of company-owned assets and PPAs. Under the plan, APCO was to acquire 289 MW of solar and 204 MW of wind power over the next three years.
These facilities include the 204-MW Top Hat Wind Farm in Illinois, expected to come online in July 2025; the 150-MW Firefly Solar Project in Pittsylvania County, Va. and the 50-MW Bedington Solar Project in Berkeley County, W.Va., both of which have since been canceled due to cost overruns; and 55 MW of smaller solar projects that were coming online in 2022 and early 2023. The company was also to obtain 89 MW of solar generation through PPAs. These are in addition to the Amherst project that the SCC had previously approved.
The SCC authorized APCO to implement Rider RPS-RAC for recovery of the related costs; the initial revenue requirement approved for the rider was $32.1 million which reflected a 9.20% return on equity (48.59% of capital) and a 9.82% return on a $4 million rate base for the rate year beginning Aug. 1,, 2022, and ending July 31, 2023. This revenue requirement is an aggregation of several sub-riders that address different aspects of the RPS plan.
The commission ordered APCO to file its next RPS update after Jan. 1, 2023.
Provisions of Virginia Clean Economy Act
The VCEA, which became law July 1, 2020, requires 100% of the power sold to APCO's customers to be sourced from renewables by 2050. For Virginia Electric and Power Co. (VEPCO), 100% of the power sold to customers must be sourced from renewables by 2045. For APCO, the phase-in began with a 6% requirement in 2021. For VEPCO, the RPS phase-in also began in 2021 but with a 14% target for that year.
Facilities considered to be RPS eligible include solar or onshore wind located in Virginia; off-shore wind interconnected to PJM Interconnection LLC; hydro, or "falling water," resources located within PJM that were in operation as of Jan. 1, 2020, that are owned by VEPCO or APCO; non-utility-owned hydro resources that meet certain criteria; waste-to-energy in operation as of Jan. 1, 2020, provided that such resources do not use waste heat from fossil fuel combustion or forest or wood biomass as fuel; and biomass in operation as of Jan. 1, 2020, that supplies no more than 10% of their annual net electrical generation to the electric grid or no more than 15% of their annual total useful energy to any entity.
The law does not classify nuclear generation as a renewable resource per se but provides that energy sold to customers from nuclear facilities constructed and in service prior to July 1, 2020, is to be excluded from the amount of "total electric energy" consumed for the year when assessing the companies' compliance with the standard for any given year.
The bill calls for at least 5,200 MW of offshore wind generation facilities located off the state's Atlantic shoreline or in federal waters and interconnected directly into Virginia to be constructed by Dec. 31, 2034, with an interim target of at least 2,500 MW but no more than 3,000 MW by year-end 2028.
During compliance years 2021 through 2024, the utilities may apply renewable energy credits from any facility located in Virginia or within PJM to meet that year's standard. Beginning in 2025, at least 75% of all renewable energy credits used by VEPCO must come from facilities located in Virginia.
APCO is required to "construct, acquire or enter into agreements to purchase the energy, capacity and environmental attributes" of at least 600 MW from solar and onshore wind capacity located in Virginia. By Dec. 31, 2035, APCO must seek SCC approval to construct or acquire 400 MW of energy storage capacity.
The law requires VEPCO to develop 16,100 MW of solar or onshore wind generation located in the state by 2035. The 16,100 MW must include 1,100 MW of small-scale solar — projects less than 3 MW — and 200 MW of solar placed on previously developed project sites.
By 2024, VEPCO is required to have filed with the SCC for a certificate of public convenience and necessity for at least 3,000 MW of the 16,100 MW, and 35% of that capacity must be purchased from third-party-owned facilities through PPAs.
VEPCO must petition the SCC for the necessary approvals to construct or acquire 2,700 MW of energy storage capacity by the end of 2035.
The law requires VEPCO to submit annual filings to the SCC outlining plans to meet the renewable energy generation and energy storage development targets, and the company may seek to recover the related costs through a combination of its fuel factor and other rate adjustment clauses.
Riders for utility-owned assets may be adjusted annually using a forward-looking rate year; the rate of return used to determine the rider-specific revenue requirement is that approved by the SCC in the company's most recent periodic earnings review or rate case, with no incentive adders; the company is accorded a cash return on construction work in progress; and the rider is subject to true-up for under- or over-collections relative to the authorized revenue requirement.
The SCC approved the third phase of the RPS development plan in April. The VCEA requires 100% of VEPCO's generation mix to come from renewables by 2045. VEPCO's plan relies more heavily on utility-scale solar, while APCO's focuses on developing wind projects and on PPAs. Under phase three, VEPCO is to add 750 MW of new solar capacity and almost 65 MW of storage to its renewable portfolio. VEPCO has several riders in place to address the recovery of related facilities. VEPCO is a subsidiary of Dominion Energy Inc. and does business in Virginia as Dominion Energy Virginia.
Virginia regulatory climate
Over the past three years, RRA has observed a tightening of the regulatory climate in Virginia, which has led to successive shifts in RRA's ranking of the jurisdiction. Most recently, in conjunction with a May 2023 comprehensive review of its rankings, RRA lowered the ranking of Virginia regulation to Average/2 from Average/1, indicating that despite the constriction, the climate remains relatively balanced from an investor viewpoint. Even so, the ongoing strife between Gov. Glenn Youngkin and the General Assembly concerning the pace of the energy transition presents considerable uncertainty for investors.
The lack of consensus between the governor and the legislature spilled over into the commissioner selection process, leaving the three-member commission with only one full-time member. As a result, former commissioners have been called upon to maintain the flow of cases before the SCC. It is unclear whether the current paradigm is sustainable, given the commission's active rate case agenda and the volume of broad policy initiatives the commission must oversee.
For additional information regarding RRA's regulatory rankings process, refer to the latest "RRA Quarterly Regulatory Evaluations" report, where RRA maintained the Average/2 ranking.
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