What North Carolina's New 'Carbon Plan' Will Mean for the State's Energy Sector

Fox Rothschild LLP

Fox Rothschild LLP

When Gov. Roy Cooper signed House Bill 951 on Oct. 13, 2021, North Carolina became the first state in the Southeast — and one of the first in the country — to authorize significant reductions in carbon dioxide emissions from the electric sector. The law, entitled “Energy Solutions for North Carolina,” also authorizes new methods for setting electric utility rates.

The provisions on carbon dioxide emissions require the North Carolina Utilities Commission to “take all reasonable steps” to reduce CO2 emissionsfrom Duke Energy’s North Carolina electric generating facilities by 70% in 2030, compared to 2005 levels. The law also requires Duke to achieve “carbon neutrality” by 2050, although that may be accomplished in part by carbon offsets as well as by emission reductions.

The enacted law is less prescriptive than prior versions of the bill, which had specified certain coal-fired power plant retirements and provided more direction on technologies to replace the retired plants. Instead, the legislation now charges the Utilities Commission with developing a “Carbon Plan” by December 31, 2022, with Duke Energy and other stakeholders providing input. The plan will be reviewed and revised every two years.

The Utilities Commission must follow current least-cost planning as it develops the Carbon Plan. Current law on energy efficiency and demand-side management is unchanged.

The legislation states that where new solar generation is used to achieve emission reductions, 45% of that capacity must come from third parties under contract with Duke. Such third-party solar facilities can be no larger than 80 megawatts (the size limit for solar facilities that are Qualifying Facilities under the federal PURPA statute). The other 55% of solar generation shall come from facilities owned and operated by Duke. Although the law does not specifically mandate competitive procurement, it is expected that procurements of solar energy and capacity under the Carbon Plan will be made on a competitive basis, consistent with the least-cost planning principles stated in the bill.

The second major change allows regulated utilities to apply for rates based on “performance-based regulation” and multi-year rate plans. The changes will increase the complexity of rate cases and require annual reviews between rate cases.

In brief, performance-based regulation can reward the utility for achieving certain performance metrics or penalize the utility for missing them. For residential customers, the utility’s revenue requirement would be based on its performance instead of its costs. Rewards and incentives, however, cannot exceed 1% of the authorized revenue requirement.

The multi-year rate plans allows the Commission to set rates based on projected utility investments for up to three years. In the past, rates were based on actual investment through the close of the rate case. Rate increases cannot exceed 4% in each of years two and three. The intended result is for rate cases to become less frequent and for utilities to avoid “regulatory lag.” There is a mechanism to refund customers any overearnings that are more than 50 basis points above the authorized return on equity.

Other provisions in the legislation:

  1. Require the N.C. Department of Environmental Quality to develop a plan to pay for the decommissioning of large solar facilities, to be submitted to the General Assembly for legislative action;
  2. Require the Utilities Commission to initiate rulemaking on several issues, including partial securitization of early retirement costs for coal-fired power plants; standby service charges, and net metering rates;
  3. Require the Utilities Commission to establish an on-bill payment method for energy efficiency, and establish a rider for customers to purchase renewable energy, provided that there is no cross-subsidization from or to such customers for the cost of renewable energy; and
  4. Require the Utilities Commission to open a docket to establish a process giving certain small power producers (5 megawatts or less) with existing PURPA contracts a one-time option to extend those contracts for an additional ten years and setting energy and capacity rates to be paid during that extension.

House Bill 951 establishes ambitious, high-level policy goals relating to greenhouse gas reduction and regulatory reform. But it remains to be seen how successful it will be in accomplishing those goals, as implementation will involve considerable work by the Utilities Commission and stakeholder parties over the next several years.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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