The future of energy in Virginia
The new energy debate: balancing costs, growth and environment-friendly alternatives

by Garry Kranz
for Virginia Business
July 2007

Momentous change is coming to Virginia’s energy industry. Tweaks to state and federal laws are changing the rules, and there’s a growing public mandate to wean America from the volatility of Middle East oil prices. Self-reliance is the new buzzword, and some businesses are turning to alternative energy sources to cut costs and help the environment.

Consider Honeywell Specialty Materials in Hopewell. It consumes more natural gas — 57 million cubic feet a day — than any other commercial operation east of the Mississippi River. To cut consumption, Honeywell turned to methane. The gas is pumped in from a landfill in Waverly 23 miles away, possibly the longest such pipeline in the world, according to the Environmental Protection Agency.

Honeywell uses methane to help power the plant and as a key ingredient in making specialty nylons. Since the project started in 2004, the company has reduced its natural-gas consumption by about 4 percent, or 2.5 million cubic feet per day, says Keith Togna, coordinator for the project.

Honeywell’s experience is but one example of the shifting energy debate. Eight years ago, when Virginia and other states deregulated electric supply markets, competition was hailed as the force that would lower prices and spur innovation. On July 1, Virginia returned to a regulated electricity market. The competition never showed up.

This is also the month state legislators review a highly anticipated blueprint for crafting a long-term energy policy. With gasoline prices at record highs in recent months, it’s easy to see why energy is one of the defining issues of the 21st century. The challenge for lawmakers and companies is how to balance new power generation and energy technologies against the demands of growth, reasonable cost, conservation and climate changes such as global warming. “If we stifle new generation capabilities in the state, we’ll have no ability to regulate rates anyway,” says state Sen. Frank Wagner, a Virginia Beach Republican. “For Virginia to maintain an economically competitive posture, we’re going to have to be able to generate electricity within the confines of our own state.”

At no other time in the state’s history have so many alternative energy sources been proposed. Richmond-based energy giant Dominion Resources Inc. plans a new coal-fired power station in Wise County. Tentatively, the project involves a consortium of other utilities, but Dominion says it will proceed with an application for the facility even if other parties drop out.

Prompted by 2004 legislation that encouraged clean-coal facilities, it would burn only Virginia coal, with the resulting electric power sold to Virginia customers. The plant would use advanced fluidized bed technology, which burns coal with lower emissions and allows waste coal and wood to be reused as energy sources. With a proposed price tag of $1 billion, the 585-megawatt plant would produce 800 construction jobs, 250 mining jobs and about 75 new positions at Dominion. “It definitely will have an economic impact on that region of the state,” says Thomas F. Farrell II, Dominion’s chairman and CEO.

Meanwhile, Virginia’s scenic highlands could be the site of the Old Dominion’s first wind farm. (See story on Web site at www.virginiabusiness.com.) And out-of-state developers want to build two huge plants in Chesapeake: a $500 million ethanol refinery, with corn producing as much as 225 million gallons of ethanol a year, and what reportedly would be the world’s largest biodiesel facility. Smiling Earth Energy LLC of Bakersfield, Calif., has amassed a 44-acre site on the Elizabeth River for a $532 million complex that could generate 320 million gallons of biodiesel a year.

It would be powered by jatropha, a poisonous, drought-resistant plant that, unlike corn, is not in demand by the food industry. Smiling Energy selected Hampton Roads because of its central location along the Eastern seaboard, its large port and proximity to the military. “One of our big customers would be the Navy and military,” says company principal Cliff Cowles. “They’re already mandating a 20 percent mixture of biodiesel with their diesel, [in nontactical diesel vehicles] so that would be a huge customer base.”

Off-shore drilling is another remote possibility. In May, the federal Minerals Management Service (part of the Depart­ment of the Interior) said it plans to open Virginia’s shoreline for offshore drilling for oil and natural gas. The plan still must clear several hurdles, including the lifting of longstanding drilling bans at the presidential and congressional levels. That appears increasingly unlikely given a Democratic-controlled Congress that last month defeated a Senate proposal from John W. Warner, R-Va., giving Virginia the right to drill offshore for natural gas. If the idea ever flies, nearly 3 million acres of Virginia’s coastal waters would be thrown open to commercial drilling, with the decision triggering a bidding war for the federal lease that could be offered in 2011.

In fact, 2011 looms as a pivotal date on many fronts. By then, Dominion Virginia Power — the state’s largest electricity utility serving 80 percent of the population — hopes to be finishing two massive power transmission lines: one to serve Northern Virginia and another for the burgeoning Hampton Roads region.

It’s also the year when rate caps — imposed as part of deregulation — come off. In other states such as Maryland and Delaware where electric deregulation failed, the expiration of caps brought increases in electric prices of 50 percent to more than 100 percent. Under the new re-reg law that took effect this month, a 2007 increase in the fuel rate adjustment sought by Dominion Virginia Power will be limited to 4 percent for residential customers.

Remaining fuel expenses not covered by the adjustment will be deferred for recovery in later years, so it isn’t clear whether Virginia will escape steep sticker shock prices.

In the normally slow-moving, bureaucratic energy industry, Virginia’s recent chain of events is breathtaking. “People need to realize that the demand for energy is so high that we have to use everything we’ve got,” says Michael Karmis, who runs the Virginia Center for Coal and Energy Research at Virginia Tech in Blacksburg. “To me it was never a case of one source vs. another — we should be focusing on how we can maximize all sources, because we need everything.”

The new re-regulation law encourages change. It offers incentives for building renewable power sources and makes state conservation a priority, calling for a 10 percent reduction in energy consumption by 2022. Yet this hybrid form of state regulation doesn’t restore full regulatory control to the State Corporation Commission. Instead of setting a utility’s profit based on operational costs — the approach in place before electric deregulation — the SCC will base profit targets on the average earnings of a peer group of utilities in the Southeast, a provision backed by Dominion Virginia Power.

Part of the bill calls on Virginia to develop new energy sources. This push is manifested by the Virginia Coastal Energy Research Consortium.

pearheaded by Old Dominion University in Norfolk, the consortium includes research faculty from several Virginia colleges and universities. With $1.5 million in state funds, it will explore research in areas as diverse as hydropower, the use of algae as feedstock for alternative fuels, and other marine-related sources of potential renewable energy.

Old king coal reigns supreme
It’s difficult to discuss Virginia’s energy needs without mentioning coal. It’s the chief source of fuel for generating Virginia’s electricity and the top state export, accounting for about $1.7 billion in state revenue last year. That’s up from $836 million in 2005, according to the Virginia Department of Mines, Minerals and Energy (DMME).

In terms of annual production, Virginia ranks among the top 10 states in the country. About 32 million tons of the mineral were extracted in 2006. The state’s bituminous coal is prized for its high heat density and comparatively low sulfur content. Along with other coal mining states, Virginia expects to benefit substantially from skyrocketing demand for electric power in China, India and elsewhere on the Asian subcontinent.

Closer to home, coal remains crucial. One quarter of Norfolk Southern Corp.’s revenue comes from coal shipments, or about $2.3 billion annually. To move Appalachian coal to maritime ports in Hampton Roads more efficiently, the Norfolk-based rail carrier is investing about $2 billion during the next decade to replace its aging fleet of 33,000 coal cars.

Coal also is a longtime linchpin for Southwest Virginia’s economy. Despite declines in recent decades, coal mining still provides good-paying jobs to about 6,000 people in Virginia’s Southwest coalfields, where miners earn between $55,000 and $60,000 a year.

Besides coal, utilities will look to other sources as they power up more generation. During the next 10 years, Dominion will need to boost its 18,194-megawatt capacity in Virginia by about 4,000 megawatts. That projection comes from PJM Interconnection, a Valley Forge, Pa.-based company that operates the electricity-supply grid for Virginia and 12 other states. PJM says Dominion’s southern territory, which includes Virginia and parts of North Carolina, will experience spikes in electricity demand approaching 2 percent a year during the coming decade. “In just five years, peak demand in the Dominion territory is forecast to grow by 1,756 megawatts. That’s like adding more than a million houses to the system,” says Michael J. Kormos, PJM’s senior vice president.

The proposed, clean-coal fired generating power station in Wise County is one part of the solution. Dominion is exploring other options to handle peak loads, including expansion of nuclear power. No new nuclear facilities have been built in the U.S. in nearly three decades, part of the aftermath of the meltdown that occurred at the Three Mile Island nuclear reactor in Pennsylvania in 1979. The public’s icy attitude toward nukes may be thawing, however. New federal energy policy, championed by the Bush administration and passed by Congress in 2005, dangles $8 billion in incentives to entice utilities to build new nuclear generating plants.

Coincidentally, Dominion is proceeding — albeit slowly — with possible construction of a third nuclear reactor at its North Anna power station in Mineral. Two existing reactors at the Louisa County site produce about 1,800 megawatts of electricity a day, enough to light about 450,000 homes.

Although Dominion filed for a federal site permit two years ago, things have begun to move quickly in recent weeks. Last month, Dominion struck a deal with GE Energy to buy components for a new reactor. Also, in May, the Atomic Safety and Licensing Board — part of the federal Nuclear Regulatory Commission — visited North Anna as part of the application review. If approved, the site permit would allow up to two new nuclear units and would be good for 20 years. A decision is expected in early 2008.

If all goes well, Dominion could break ground for the additional reactor in 2011. Farrell optimistically points to 2015 as the year a third unit could begin producing electricity. “It may be the first one in the country,” he adds, since Congress placed a moratorium on building nuclear plants nearly 30 years ago. The company plans to apply for a construction and operating license, which Farrell says should be on file with federal regulatory authorities by the end of the year.

Some Lake Anna residents have raised questions about the environmental impact of a third reactor. They worry that the dumping of heated water from the plant into cooling lagoons in the lake would harm water levels and aquatic life. Friends of Lake Anna, a group representing 2,650 state residents, wants Virginia to conduct a study addressing these concerns before a site permit is issued. In response to the concerns, Dominion changed the design of its cooling system.

Besides generation, the delivery of service to a growing Virginia population presents a different set of challenges. To cope with rising electricity demand in Northern Virginia, Dominion wants to build a 500,000-volt transmission line spanning 65 miles. It would cut across some of the region’s fastest-growing counties, which have seen a boom in residential construction and computer data centers. Farrell says Dominion’s preference is to build towers that would support the line along an existing transmission-line corridor that connects substations in eastern Frederick and eastern Loudoun counties. Dominion filed an application for the line with state regulators in April, offering this route after angry residents turned out at public hearings to protest an earlier plan that ran through scenic farmlands and would have required right of way from many individual land owners.

The company insists the transmission line, projected to cost about $243 million, is necessary to prepare for an expected 8 percent jump in demand for Northern Virginia by 2011. That would be on top of a 40 percent surge during the past decade. Without it, Dominion warns, rolling blackouts will become an everyday occurrence. “We can’t put a power plant in the middle of the Washington, D.C., suburbs. We have to bring it in from a remote location, and the only way to do that is by a transmission line,” says Farrell.

Detractors aren’t buying that argument. They say Dominion should invest in expanding under-utilized plants and forgo the 140-foot-high transmission towers needed for a new line. They will ruin scenic views, intrude on conservation easements and threaten wildlife, says Bob Lazaro, director of communications for the Piedmont Environmental Council, a Warrenton group that opposes the project. “The only blackout is the blackout of information coming from Dominion” about the project, he says.

The SCC typically decides such matters. Dominion also wants to install two new transmission lines in Hampton Roads at a projected cost of $224 million. But if the federal government has its way, state approval may be moot. U.S. Energy Secretary Samuel W. Bodman has announced plans to allow the Federal Energy Regulatory Commission to be the final arbiter in such cases. Under Bodman’s proposal, utilities in the mid-Atlantic and other overtaxed systems could bypass state authority if federal regulators determine that building new high-voltage power lines serves the nation’s interest. “That would be bad policy,” says Lazaro.

While these issues play out, the federal government’s drilling plan off Virginia’s coast simmers on the back burner. Although the plan isn’t exclusive to Virginia — acreage in the Gulf of Mexico and near Alaska also is being eyed for potential drilling sites — the commonwealth is the only state along the Eastern seaboard that has volunteered to remain in consideration for the exploration project. Virginia’s legislature in 2006 passed a bill endorsing federal efforts to explore, and potentially extract, any fossil-fuel reserves found offshore here. Gov. Timothy M. Kaine, in revising the legislation, sent mixed signals. While coming out against extraction, Kaine signaled tentative support for any federally funded exploration here, as long as it occurs no closer than 50 miles offshore.

Allowing big oil to nose around Virginia’s waters doesn’t sit well with everybody. For one thing, Kaine’s position seems untenable: If he is okay with exploration, how would he react if vast reserves eventually are discovered? The governor could find himself in a ticklish situation: either turning his back on an untapped natural resource, or alienating political supporters by endorsing extraction efforts. Even some who support Kaine are less than thrilled about his stance. “Virginia likes to boast that it has a 21st century economy, but supporting this is dirty, dangerous and unsafe policy,” says Michael Town, president of the Richmond chapter of the Sierra Club.

Others, such as Wagner, the Virginia Beach state senator, ardently endorse drilling as a potential economic windfall. Citing estimates from the Interior Department, Wagner notes that leasing revenue for offshore exploration and production could bring “hundreds of millions of dollars into Virginia’s coffers.”
Perhaps Virginia’s still-developing energy policy will serve as a lodestar to guide state decision-makers. Proposing recommendations is one thing; implement­ing them is an entirely different matter. As Virginia stakeholders wrangle about the best way to proceed, one thing is clear: Finding solutions to the state’s growing energy needs is an economic imperative. But it’s not going to happen with the flip of a switch.