North Carolina Advances Its Clean Energy Transition

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Courtesy of Rocky Mountain Institute
By Josh Brooks, Dan Cross-Call, & Heather House

2020 did not go according to plan, to say the least. But that did not stall North Carolina’s drive forward on clean energy. Over the past year, state officials, utilities, and a broad set of stakeholders worked together to advance key portions of the state’s Clean Energy Plan. Through an intensive, collaborative process that pivoted entirely to remote meetings starting in the spring, a diverse group of about 40 organizations produced detailed policy recommendations and implementation guidance on four key electricity reforms that will support the state goal of 70 percent greenhouse gas reductions in electricity by 2030.

North Carolina’s Clean Energy Transition

North Carolina is emblematic of forces playing out in the larger US electricity system: although the state enjoys relatively low-cost energy, it has also relied heavily on coal-fired generation. North Carolina is now at a crossroads for how to retire remaining coal generation, minimize future reliance on natural gas, and integrate vastly more renewable energy. Fortunately, the state has laid the groundwork for its clean energy transition. In addition to being home to a deeply engaged and knowledgeable community of experts in energy policy and utility business models, the state is third in the nation in installed solar capacity.

In recent years, the state’s government has stepped forward with critical leadership on climate. In October 2018, Governor Roy Cooper signed Executive Order 80 (EO80) — North Carolina’s commitment to address climate change and transition to a clean energy economy. Among other directives, EO80 instructed the North Carolina Department of Environmental Quality (DEQ) to develop a Clean Energy Plan (CEP).

The CEP established goals to reduce greenhouse gas emissions in the state’s electric power sector 70 percent below 2005 levels by 2030 and attain carbon neutrality by 2050. The CEP also encouraged updates to energy system planning processes and regulations that achieve these goals, while maintaining long-term affordability and price stability for North Carolina residents and businesses, as well as spurring innovation that grows the economy of the state.

Advancing Electricity Reforms through the North Carolina Energy Regulatory Process

From February to December 2020, RMI and the Regulatory Assistance Project (RAP) convened and facilitated the stakeholder process called for by the Clean Energy Plan. The plan’s “B1” recommendation outlined a stakeholder process to design new policies that align regulatory incentives with 21st-century public policy goals, customer expectations, utility needs, and technology innovation. RMI and RAP led this work on behalf of the DEQ, in what we called the North Carolina Energy Regulatory Process (NERP). NERP resulted in four recommended regulatory reforms:

• Development of comprehensive performance-based regulation of electric utility revenue and rates
• Expanded authorization of securitization to accelerate retirement of fossil generation assets
• Utilization of competitive procurement of new energy resources to meet energy and capacity needs
• Study of the benefits and costs of various wholesale electricity market reforms

In developing these reforms, the stakeholders considered the costs, benefits, and downstream impacts to other aspects of the electricity system, including changes in electricity rates and the impacts of these reforms on communities of color.

Performance-Based Regulation

Performance-based (or outcome-based) regulation (PBR) would motivate utilities to accomplish outcomes that customers or society deem desirable in addition to safe, reliable electricity. In doing so, PBR can help shift utility focus away from expanding capital projects and electricity use, which is inadvertently incentivized by traditional ratemaking. Performance-based regulation was a significant focus of NERP stakeholder work, following its identification in the CEP as a key tool to realign utility financial incentives with social and policy goals. NERP recommended that the state legislature and the North Carolina Utilities Commission (NCUC) pursue a comprehensive package of PBR reforms including use of multiyear rate plans (MYRP), revenue decoupling, and performance incentive mechanisms (PIMs).

Wholesale Electricity Markets

Wholesale electricity markets are markets where electricity is bought and sold for resale. Unlike retail transactions — electricity sales to the end-user — wholesale transactions consist of power sales from electricity generators to electricity providers. North Carolina’s wholesale market currently consists of electricity sales from the state’s three investor-owned utilities (IOUs) to its nearly 30 power cooperatives and 75 municipal power providers. NERP reviewed options for wholesale market changes and recommended the North Carolina General Assembly direct the NCUC to study the benefits, costs, and implications of reforms such as a southeast regional transmission organization (RTO), a Carolinas energy imbalance market (EIM), and several other options with less restructuring.

Securitization

Securitization is a financing mechanism involving the issuance of bonds to raise funds to refinance the remaining undepreciated value of existing power plants. If properly designed, securitization combined with a coal retirement plan can lower customer bills, reduce air and water pollution, support coal plant communities in the energy transition, and allow utilities to reinvest in clean energy to replace lost revenue from legacy coal plant investments. NERP’s primary recommendation for the North Carolina General Assembly is to expand the current use of securitization in the state beyond storm recovery costs to include early retirement of generation assets, including but not limited to coal generation.

Competitive Procurement

As defined by NERP stakeholders, competitive procurement is an “all-source” procurement process for utilities to procure new capacity or generation that is neutral with respect to the type of energy resource and is that open to a portfolio approach versus a single-source approach.  Competing resources must meet all identified needs defined by the utility in a manner that is consistent with policy directives and at the best available overall price. This allows independent power producers and other businesses to submit competitive bids for new resources.

In other states, competitive procurement has resulted in cost savings to customers. Further, utilities could benefit via more innovative business structures, expanded generation options, a cleaner grid, and optimization of existing grid investments. NERP identified competitive solicitations as an important tool to meet energy and capacity needs identified in integrated resource plans (IRPs) and as otherwise deemed appropriate by the NCUC.

What’s Next for North Carolina’s Electricity Reforms

2020 was not only the year that the COVID-19 pandemic dramatically changed our lives. It also highlighted the worsening effects of climate change, including devastating wildfires, increasing storm severity, and melting polar regions. Although renewed federal leadership on climate change is welcome, US states cannot relax their own actions to reduce greenhouse gases and must stay aligned with the Paris Climate Agreement to maintain healthy, sustainable, thriving communities.

Regardless of which changes are ultimately enacted by state leaders, North Carolina has exemplified leadership in the energy transition, demonstrating resolve to adapt to a work-from-home situation while maintaining progress and momentum on necessary clean energy reforms. Following this past year’s NERP process, stakeholders are now refining details and seeking alignment to collectively advance the proposals in the 2021 legislative session. NERP’s recommended reforms will be considered by the governor and state policymakers, including elected legislators at the General Assembly, as well as for implementation by the North Carolina Utilities Commission (NCUC).

Developments in the next four to six months will tell which parts of the NERP recommended reforms are adopted through legislation, NCUC orders, or executive branch actions. The package of reforms adopted by the state’s leaders will determine the extent of the change to key regulatory structures and North Carolina’s ability to transition to a cleaner electricity system.

Access the final summary report and products produced in NERP on the DEQ website.