Policy Memo: Propose Legislation to Require Revenue Decoupling for Electricity

To: Virginia House of Delegates

From: Megan Ahern

 

Virginia's Energy Dilemma

 

Virginia's Grid

Virginia is the data center capital of the world, with over 70% of global internet traffic passing through the state (Yu, 2024). The state has benefitted from this position: in 2023, data centers directly employed over 25,000 workers, generated over $16 billion in economic output, and supported almost $1.1 billion in state tax revenue (Northern Virginia Technology Council, 2024).

However, data center growth has put the state grid under enormous stress. Dominion Energy, Virginia’s largest electric utility, projects that data centers already operating in its service territory will have an eventual capacity of 3 GW — about 10% of the company’s total capacity in 2023 (Dominion, 2023a; Dominion, 2023b). Another 11.2 GW of data center demand has been approved and nears construction, and an astonishing 58.4 GW of additional applications await approval (Styer, 2024). These demand centers are set to connect to an already congested and troubled grid. PJM, the regional transmission operator for Virginia, has issued a growing number of “maximum generation emergencies” for the state over the past 3 years, declaring 10 in 2020, 30 in 2021, and 82 in 2022 (Pipkin, 2025). Concerns over reliability culminated in March 2024 when the Board of Supervisors for Loudoun County, where most of Virginia’s data centers are located, rejected a proposal for a new data center (Styer, 2024). One supervisor put it simply: “At some point, we have to say stop.”

Virginia’s Climate Goals

The Renewable Portfolio Standards established in Virginia’s Clean Economy Act (VCEA) requires that the state increase its electricity generation from renewables every year, reaching 100% by 2050 (PJM, n.d.). This plan may be directly obstructed by data center growth. As grid demand grows, the task of replacing fossil generation with renewable sources becomes increasingly difficult and may incent the construction of new fossil generation. This reality is reflected in the 2024 Integrated Resource Plan filed by Dominion Energy: in response to projected demand growth, significant new gas build is proposed (Dominion, 2024a). Stakeholders have pointed out that this build is not compliant with the VCEA (Main, 2024). Additionally, unchecked demand growth that incents significant new generation may increase electricity rates for all customers. Higher costs can interfere with the electrification of the economy, which is generally regarded as a central pillar of decarbonization.

Ratemaking & Incentives

 

Current Cost-of-Service Model

Mitigation of Virginia’s demand growth can be helped via efficiency efforts. However, utilities in the state are currently not appropriately incentivized to promote efficiency. Virginia’s two main utilities, Appalachian Power and Dominion Energy, are investor-owned vertically integrated utilities, meaning they own and operate all electricity generation, transmission, distribution, and retail within their service territories. Under this “natural monopoly” model, the utilities are closely regulated by the State Corporation Commission (SCC) and are required to have proposed investments and consumer rates approved by the SCC. Currently, rates are determined under a “Cost-of-Service” model, wherein the utilities are compensated for the “reasonable and prudent” investments they make to maintain reliable service and are also awarded a “fair” rate of return on these investments (State Corporation Commission, n.d.). Compensation for these investments and the return, referred to as the “revenue requirement,” is generated via the rates charged on electricity bills. Rates are determined by the SCC and are calculated according to estimated electricity sales. Ideally, the volume of total electricity consumption multiplied by the selected rates equals the established revenue requirement; however, this is not necessarily the case.

Under this model, utilities are thus incentivized to increase electricity sales to maximize revenues (i.e., exceed the “revenue requirement”), which may imperil state decarbonization goals and contribute to grid stress. The Virginia Conservation Network, in fact, contends that utilities use demand center growth to justify “new polluting gas facilities that would increase all ratepayers’ electric bills significantly despite the need being driven almost entirely by data centers” (Virginia Conservation Network, n.d.). Though Dominion does not clarify the exact impact of data center growth on electric rates, it does disclose that data center growth alone will catalyze over 20% of projected investments – which will need to be recovered via rates (Dominion, 2024b).

Proposed Decoupled Model

Revenue “decoupling” is a solution to disrupt this incentive structure. Under a decoupled model, any mismatch between projected and realized revenues is reconciled, either by a surcharge or refund to consumers. This reconciliation means that utilities can’t earn above the predetermined revenue requirement, and they are no longer incentivized to maximize sales. Decoupling has been adopted in dozens of states and has been shown to promote efficiency investments and result in demand avoidance (Williams, 2016).

Impacts for Consideration

 

Interference with Beneficial Electrification, Distributed Generation, and Affordability

Electrification of the economy is considered central to achieving global climate goals. As such, revenue decoupling should be carefully applied to ensure utilities are encouraged to minimize avoidable demand (e.g., inefficient appliances) whilst promoting so-called “beneficial” electrification (e.g., electrification of transport). This can be established via the use of Performance Incentive Mechanisms (PIMs), which increase/decrease a utility’s allowed rate of return according to its performance on a relevant metric. For example, a mechanism might encourage the utility to expand electric vehicle charging or promote residential heat pumps. PIMs might also encourage distributed generation and efficiency for low-income customers — two issues that have not always benefitted from decoupling (Brucal and Tarui, 2018).

Impact to Shareholders

The shareholders of certain investor-owned utilities may have grown accustomed to a cost-of-service model that allows utilities to pursue strategic methods to increase returns. However, there are secondary effects of decoupling that may assuage potential shareholder disapproval. First, decoupling significantly reduces volatility. As most investors aim to balance both risk and return, the reduced possibility for outsized returns is mitigated by the reduced risk of lower-than-anticipated returns. Secondarily, many investors have adopted targets to decarbonize their portfolios, which requires decarbonization of portfolio companies. Increasingly, investors cite enabling policy as a necessary component for achieving their targets (JPMorgan Chase, 2024).

Conclusion

Tackling unprecedented demand growth whilst minimizing emissions will require enormous innovation, investment, and collaboration. As Virginia addresses this topic, revenue decoupling can ensure that utilities are responding to the appropriate incentives — in service of both Virginia’s data center economy and decarbonization objectives.

 

 

Footnotes

^{Brucal, Arlan, and Nori Tarui. “Revenue Decoupling for Electric Utilities: Impacts on Prices and Welfare.” Grantham Research Institute, 21 Nov 2018, https://www.lse.ac.uk/granthaminstitute/publication/revenue-decoupling-for-electric-utilities-impacts-on-prices-and-welfare/. Accessed 25 Aug. 2024.}

^{Dominion Energy, 2023 Annual Report, 2023, https://s2.q4cdn.com/510812146/files/doc_downloads/2024/2024/03/20/20/Dominion-Energy-2023-Annual-Report-and-Annual-Report-on-Form-10-K.pdf. Accessed 23 Aug. 2024.}

^{Dominion Energy, 2023 Virginia Integrated Resource Plan, 2023, https://cdn-dominionenergy-prd-001.azureedge.net/-/media/pdfs/global/company/2023-va-integrated-resource-plan.pdf?rev=ef1a3f88f0704539968b6d9d86444bde. Accessed 23 Aug. 2024.}

^{Dominion Energy, 2024 Virginia Integrated Resource Plan, 2024, www.dominionenergy.com/-/media/pdfs/global/company/IRP/2024-IRP-w_o-Appendices.pdf. Accessed 5 Dec. 2024.}

^{Dominion Energy, Supplement to 2024 Integrated Resource Plan, 2024, www.scc.virginia.gov/docketsearch/DOCS/82l101!.PDF. Accessed 5 Dec. 2024.}

^{JPMorgan Chase, 2023 Climate Report, 2024, https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/documents/Climate-Report-2023.pdf. Accessed 25 Aug. 2024.}

^{Main, Ivy. “Once Again, Dominion’s Energy Plan Falls Short. This Time, the SCC Isn’t Having It,” Virginia Mercury, 28 Oct. 2024, www.virginiamercury.com/2024/10/28/once-again-dominions-energy-plan-falls-short-this-time-the-scc-isnt-having-it/. Accessed 5 Dec. 2024.}

^{Northern Virginia Technology Council, 2024 Virginia Data Center Report, 2024, https://info.nvtc.org/acton/attachment/45522/f-1c3915e6-b8b1-4914-818e-9fae14877a3d/1/-/-/-/-/2024%20NVTC%20Data%20Center%20Report.pdf. Accessed 23 Aug. 2024.}

^{Pipkin, Whitney. “Concerns Mount over Air Quality Impact of Data Center Power Variance.” Bay Journal, 2 Mar. 2023, www.bayjournal.com/news/pollution/concerns-mount-over-air-quality-impact-of-data-center-power-variance/article_ed61218c-b96e-11ed-9f07-e7cdaba6d3e5.html. Accessed 23 Aug. 2024.}

^{PJM Interconnection, Virginia, www.pjm-eis.com/program-information/virginia. Accessed 25 Aug. 2024.}

^{State Corporation Commission, How Are Electric Rates Set in Virginia, www.scc.virginia.gov/getattachment/4be693ef-eb12-4ad6-8c3d-3cc12866d869/howerates.pdf. Accessed 5 Dec. 2024.}

^{Styer, Norman K. “‘Tipping Point’: Loudoun Supervisors Reject Plan for Larger Data Center Campus.” LoudounNow.Com, 14 Mar. 2024, www.loudounnow.com/news/tipping-point-loudoun-supervisors-reject-plan-for-larger-data-center-campus/article_28dbccea-e208-11ee-8dc2-b37387cdeb70.html. Accessed 23 Aug. 2024.}

^{Virginia Conservation Network. VCN’s Data Center Policy, www.vcnva.org/agenda-item/responsible-data-center-development/. Accessed 23 Aug. 2024.}

^{Williams, Samantha. “The Evidence Is in: Decoupling Spurs Energy Efficiency Investment.” Be a Force for the Future, National Resources Defense Council, 4 Apr. 2016, www.nrdc.org/bio/samantha-williams/evidence-decoupling-spurs-energy-efficiency-investment. Accessed 25 Aug. 2024.}

^{Yu, Alan. “Data Centers Transformed Northern Virginia’s Economy, but Residents Are Wary of More Expansion.” WHYY, 28 June 2024, www.whyy.org/segments/northern-virginia-residents-are-wary-of-more-data-centers/. Accessed 5 Dec. 2024.}