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10 August 2022

Dominion wants all the profit, none of the risk in offshore project

It’s hard to form a view of the latest debacle in US wind permissions, when on the one hand utilities want a guarantee of profit, and on the other they greedily decide to accept risk on the consumer’s behalf within the rate base, so the customer is in effect guaranteeing that profit for shareholders.

This is the situation at the Virginia State Corporation Commission versus Dominion Energy, highlighted this week in the quarterly earnings call by Dominion Chairman Robert Blue. He simply demands to both have his cake and to be allowed to eat it –  we can understand why, but it simply promotes delay.

As usual the devil is in the detail – The $9.8 billion Dominion Energy 2.6 GW Coastal Virginia Offshore Wind (CVOW) project was up for approval by the Commission, and it has chosen to limit energy price increases to customers where the project does not achieve its anticipated 42% net capacity factor on a three year rolling average. This allows Dominion to charge an average monthly bill increase of $4.72 to each customer for the 30 year life of the project – but only where this condition on performance is met, any shortfall in output would pro-rata reduce the ability for Dominion to charge the customer, and potentially take losses on the chin.

Modern large wind turbines are likely to create an even higher capacity factor, as this was tested with 6 MW wind turbines – less than half the size of those being chosen for the project. Also investors always rely on two year’s of wind data to provide the basis for an investment calculation, so a three year rolling average can certainly be managed by stringent supply relationships.

The Commission argued that this is the most expensive project in energy in the State’s history, it has never been done before, it relies on the availability of a “Jones Act,” ship that has other projects scheduled ahead of it, and fears that cost over-runs could easily become an issue.

The Commission also noted that it is common practice in every other US state for regulated utilities to use a PPA, and to place some of the risk for performance on an EPC or sub-contractor or part-owner. Dominion however wants to own and run this project and build it itself, despite never having built anything like it, and take ALL of the profit too. Hence the strange performance requirement from the Commission. The commission also noted that only a 3% provision in the project was made for potential cost overruns, which is way too low.

The Commission also noted that there would be a $215 million spend on transmission that the company could not guarantee would be complete in time to switch the service on, increasing the risk. So it also made another provision which was that if there are any cost overruns, Dominion would have to come back for permission to sign them off as transferrable to customer bills – another change in practice. Both provision may end up being struck down by a State Supreme Court or the State’s General Assembly, but the Commission decided it was safer to put them in place for now.

Dominion is one of the largest utilities in the US, responsible for bringing electricity to 7 million customers in Virginia, North Carolina, Connecticut, and West Virginia.

Chairman Blue used the platform of the company’s results announcement, where he talked through a $37 billion five year capital plan for the group to decarbonize, where the wind part of the plan has been in the planning stages since 2013 and which should she first fruits live by 2026.

So on the one hand Blue boasted that “Offshore wind turbines have no fuel costs… so the project is expected to save Virginia customers more than $3 billion during its first 10 years in operation.” But on the other he wants his company to have the customer take all the risks and guarantee a price hike. This is a typical attitude among US regulated utilities and this type of haggling is commonplace.

Blue added that “If ongoing commodity market pressures continue, those savings could total up to nearly $6 billion,” but won’t  most of this be pocketed by the generous dividends that Dominion will pay to shareholders, since customer costs will clearly “rise.”

He said “The performance guarantee creates an unprecedented layer of financial one-way risk for the utility and is “inconsistent with the utility risk profile” expected by investors.” And it is these attitudes which dog the roll-out of offshore wind in the US.

He took the view that over a 30 year time frame “that roughly half the time, the project would be above (the 42% capacity level) and half below,” which would leave Dominion financially guaranteeing the weather (in his view) for the life of the project. And he reminded his audience that this issue of a performance guarantee had come up within previous solar projects and in the end it did not materialize, which he considers sufficient precedent to make it untenable now.

The Project requires 176 Siemens Gamesa wind turbines which are over twice the size of those used in a prior trial (14.7 MW each).

At Rethink Energy we realize that each of these steps is necessary and any ruling, positive to Dominion’s rate case or not, will add further delays to the go ahead decision on this project.