In accordance with the Town Hall Agency Background Document, LS Power presents its comments on the proposed Regulation for Emissions Trading, VAC Part VII, 9 VAC5-140.  LS Power supports the DEQ’s efforts and work to implement the Governor’s Executive Directive.

2020 Base Budget

The Board requested comments on whether the initial Virginia base budget for 2020 should be 33 or 34 million tons.  LS Power supports moving forward with a base budget of 34 million tons.  This base budget is supported by the historical emissions from covered sources in Virginia and a higher base budget will mitigate the rate impact to Virginia customers.  Additionally, using the base budget of 34 million tons versus 33 million tons, a difference in the RGGI program cap of 0.9%, would not be expected to have a material effect on the RGGI program. 

Applicability

LS Power recommends that “primary” as used in 9VAC5-140-6040 B, be further defined such that affected sources can clearly be determined.  LS Power recommends that the proposed Regulation reference the applicability criteria of the RGGI Model Rule, which in this case, references an exempt facility would be one in which greater than ninety percent (90%) of the annual generation is used for internal facility use. 

LS Power recommends that Virginia explicitly exclude from the Proposed Regulation generating units utilizing methane (whether landfill or coal bed) as combustion of those gases versus natural release to the environment is beneficial in reducing the total GHG potential as methane has a CO2 equivalent of 25x.  Exclusion of these generation sources will allow these facilities, which are otherwise disadvantaged due to restrictions on siting and potential cleaning of their fuels, from being priced out of existence and thus losing this valuable use of this energy source versus flaring or otherwise wasting it.  These assets, some of which were developed specifically to reduce the GHG impact on the environment, should not be penalized because they generate electricity.  If these assets are not excluded, they should be allocated allowances that reflect the GHG reduction benefits they provide. 

Facsimile Numbers

With the change in technology, LS Power suggests that the requirement to include a facsimile number as part of the notification requirements be removed or changed to optional due to the general disuse of facsimile numbers as a means of communication.

CO2 Allocation Methodology

Allocation Methodology – LS Power supports the use of output (MWh) as the basis of allocating allowances to CO2 Budget Sources that have a capacity obligation for the allocation period.  Allocation of allowances based on MWh of output is an effective way to incentivize resources that operate more efficiently.  In the event that the DEQ determines that an alternate means would be more appropriate, LS Power would support the use of an input based allocation based on fuel use (as measured in MMBtu’s) as an alternate means of allocating allowances.

Retired or Mothballed Units – Allocation of allowances to units that are shutdown, mothballed, in reserve and/or retired may impact rates to consumers and unjustly enrich a participant should a CO2 Budget Source receive allocations with no expectation to operate and emit CO2 in a year. To address this issue, annual allocations of allowances to CO2 Budget Sources should be conditioned upon continued operations and obligations to participate in PJM energy market.  LS Power requests that the DEQ include an officer certification requirement certifying that the CO2 Budget Source has an obligation pursuant to the PJM tariff to participate in the PJM day-ahead energy market and that the CO2 budget has not or is not expected to cease operation, be mothballed, retired, placed in reserve or otherwise shutdown for or during the allocation period in order to receive allowances.  Any allocation as determined by the DEQ for a CO2 Budget Source with multiple units shall be prorated based on the portion of the facility for which such certification is provided.   Additionally, should a CO2 Budget Source receive allocations and are subsequently shutdown, mothballed, placed in reserve and/or retired the allowances, or an equivalent number of allowances, prorated as necessary, should be transferred from the CO2 Budget Source to DEQ by April 30 of the year after the CO2 Budget Source is shutdown, mothballed, placed in reserve and/or retired.

Eliminating a windfall was an important consideration during the working group meetings.  By allocating allowances to a CO2 Budget Source that is not operating, that CO2 Budget Source is then able to pocket the consignment proceeds without a requirements to purchase allowances, leading to that source’s owner being able to unfairly profit rather than operating resources receiving allowances  for producing electricity for the benefit of consumers.  For example, if a generator produced 1,000,000 MWh in each of 2016, 2017 and 2018 and subsequently elected to shutdown, mothball, place in reserve or retire a unit or the facility beginning in 2020, the resource would receive an allocation of allowances based on its 1,000,000 MWh of average historical generation, but would not have a corresponding emissions compliance obligation in the 2020 compliance period.  DEQ should address this issue and prorate allocations as necessary by requiring resources to notify DEQ as described in the previous paragraph.

New CO2 budget units – LS Power additionally requests that DEQ specify the allocation methodology for new CO2 budget units, which would be placed at a disadvantage to existing units due to a lack of three years of operating history despite typically being more efficient units.  Allocation of allowances based on the average of the most recent three year historical period would result in a significant lag in allocations to new units of up to four years and thus penalize the newest, lowest emitting, and most efficient units under the regulation.  DEQ could address this issue by specifying that new units that are in operation prior to a control period will receive allocations based on the average net-electric output for the operating period over the three most recent years for which data is available (the “Historical Period”) prior to the start of the control period multiplied by thirty six (36) divided by the number of months the new unit has been in operation in the Historical Period.  The number of months of operation shall be determined as commencing on the commercial operation date of the CO2 Budget Source and shall be certified pursuant to the Officer Certification previously discussed herein. 

Thank you for your consideration of these comments.  If you have any questions, please contact me at 908-239-3974 or kfrench@LSPower.com.