New Super Highway Transmission Projects Waiting on Reforms
Both Congress and President Obama’s Administration are pushing to build a new backbone to the transmission grid, and transmission companies are answering the call. The most recent, and perhaps best, example is the Federal Energy Regulatory Commission’s (“FERC” or “the Commission”) April 10, 2009 approval of Green Power Express LP’s (“Green Power”) application requesting various transmission investment incentives and certain accounting treatments for its proposed transmission line, the Green Power Express. Despite the Commission’s support and approval for projects such as Green Power Express, several reforms must be made before the transmission highway becomes a reality.
In February, ITC Holdings Corp. (“ITC”) announced its plans to build the massive Green Power Express, designed to bring renewable energy from wind-rich states, such as North and South Dakota, east to metropolitan areas such as Chicago. The Green Power Express has proposed to integrate 12,000 MW of wind resources reliably and efficiently on approximately 3,000 miles of extra high-voltage (765kV) transmission. Based on the initial design, final build-out would result in new transmission in seven different states served by two different regional transmission operators, the Midwest Independent Transmission System Operator, Inc. (“MISO”) and the PJM Interconnection, L.L.C. (“PJM”). Preliminary estimates place the project costs at $10-12 billion and completed construction around 2020. The Commission views the project as “one of the largest, if not the largest, single transmission project ever developed in the United States.”
The Commission granted transmission rate incentives to Green Power because it meets certain requirements and will: “(1) reduce congestion in the future by facilitating integration and delivery of low-cost wind energy in the upper Midwest; (2) ensure reliability by providing a robust transmission backbone that is capable of moving large amounts of power and handling unscheduled flows; and (3) improve the voltage profile of underlying lower voltage networks.” The Commission went on to state that the Green Power Express will “nearly double the miles of 765 kV transmission lines that are currently in operation in the United States…and help deliver the approximately 62 GW of proposed wind capacity that is currently in the Midwest ISO’s interconnection queue.”
The Green Power Express represents recent transmission projects that will utilize high-voltage transmission lines and stretch greater distances. Other similar proposed projects include: ITC’s Great Plains’s 210-mile high-voltage transmission lines in Kansas; Prairie Wind Transmission LLC’s 230 mile 765 kV project in the SPP region; Tallgrass Transmission LLC’s two-segment, $500 million 765 kilovolt (kV) transmission project in Oklahoma; Pepco Holdings Inc.’s 500 kV Mid-Atlantic Power Pathway project; a joint venture by Duke Energy and American Electric Power to build 765 kV transmission lines under the Pioneer Transmission LLC project; and TransCanada’s 500 kV Zephyr and Chinook Transmission Line Projects, each of which would be over 1,000 miles long. While each of these projects represents parts of a new transmission highway, they are also facing challenges.
FERC Incentives
The timing of the Green Power Express and similar transmission projects is not surprising, given the recent events in the transmission world, which have sought to encourage the development of new projects to enhance the nation’s grid. Congress first opened the door for these types of projects with the passage of the Energy Policy Act of 2005, adding section 219 to the Federal Power Act to allow for incentive-based (including performance-based) rate treatments for the transmission of electric energy in interstate commerce. To implement that directive, FERC adopted Order No. 679, which provided for various incentives to be included in a project’s rate formula in order to develop and encourage multi-regional transmission projects. Order No. 697 allowed companies to seek deferred cost recovery through the creation of a regulatory asset and recovery of 100 percent of the construction work in progress costs (“CWIP”). It also allowed for return on equity (“ROE”) incentives based on certain characteristics of the project. Finally, FERC’s Order No. 890 made significant strides in advocating for, and even requiring, regional planning activities.
Without these incentives in place utilities would not construct projects such as the Green Power Express because of their size, scope, and complexity. For instance, the Commission found the regulatory asset incentive to be “tailored to Green Power’s risks and challenges because this incentive will provide Green Power with added up-front regulatory certainty and can reduce interest expense, improve coverage ratios, and facilitate the financing of the Project on good terms. Granting this incentive encourages development of more transmission infrastructure, thereby fulfilling the goals of section 219.”
Need for Transmission to Support RPS
Renewable portfolio standards (“RPS”) are also driving the development of new transmission. Twenty-eight states have adopted some form of RPS and Congress is considering imposing a national standard. In March, House Energy and Commerce Committee Chairman Henry Waxman (D-CA) and House Energy and Environment Subcommittee Chairman Edward Markey (D-MA) released a draft energy and climate change bill that would require retail electric providers, including municipally owned utilities and cooperatives, to obtain 25 percent of their electricity from renewable resources by 2025.
In their recently released Joint Coordinated System Plan, several regional grid managers, including MISO, estimate that increasing wind electricity production to 20% of total electricity production in the eastern part of the U.S. would require an investment of $80 billion in new transmission. However, this new transmission could save $12 billion annually by 2024 due to wind electricity’s low production costs and free fuel. The development of an extra high-voltage national transmission superhighway would encourage the development of renewable resources throughout the country and enable those resources to be delivered to areas of high demand. For instance, the proposed use of 765 kV lines for Green Power Express would deliver the same amount of power as six 345 kV lines. This results in less line loss, less fuel needed to be burned, reduced emissions, and smaller land use impacts for both consumers and the environment.
A Renewed Interest from the New Administration
In addition to FERC and Congress’ recent involvement, President Obama’s new administration has also adopted the idea of delivering energy produced in wind-rich states to metropolitan areas with high load demands. President Obama stated during his campaign, and more recently before Congress, the importance of transmission highways for wind power. “One of, I think, the most important infrastructure projects that we need is a whole new electricity grid. Because if we’re going to be serious about renewable energy, I want to be able to get wind power from North Dakota to population centers, like Chicago.” Newly appointed Secretary Steven Chu from the Department of Energy has echoed President Obama’s thoughts, noting that transmission is crucial to take renewable energy to urban centers.
Siting Interstate Transmission Lines
Projects like the Green Power Express that will traverse several states represent a significant shift in transmission development that will require new reforms and cooperation from states, regional transmission operators (“RTOs”), and FERC. Not only will various approvals and siting authorizations be required from possibly each of the seven states containing transmission, but MISO, PJM, and regional planning authorities for areas not covered by an RTO, such as the Mid-Continent Area Power Pool, will also be involved.
Previously, transmission planning has consisted of mostly incremental additions to the grid to facilitate the interconnection of new baseload generating facilities designed to accommodate incremental load growth in the incumbent utility’s service territory. States controlled all siting and permitting authority with an emphasis on certificating those projects needed to meet demand within their boandaries. In contrast, lines such as the Green Power Express approach transmission from a different paradigm. It employs a build-it-and-they-will-come approach by focusing on the construction of a regional transmission network that can accommodate the subsequent development of large numbers of renewable projects designed to enhance the operations of regional electricity markets and fulfill national environmental objectives.
Reforms to Transmission Planning Processes and Cost Allocation
One crucial step for large transmission projects is participating in the FERC-required regional planning processes. Given the size and multi-region nature of many of the proposed projects, the proposed projects cannot necessarily be approved for a regional cost allocation through the current tariff structure. As MISO and PJM have stated, “If the large scale project is to meet multiple planning objectives beyond basic congestion relief,” the current PJM and MISO planning metrics “are very limited to fully capture all the benefits the long term project creates, a further thorough analysis would be needed to explore additional value metrics to support the long term projects such as import capability, deferred generation capacity, loss reduction, constraint relief, etc. …” To this end, the Commission held a technical conference on facilitating the integration of large volumes of renewable resources on March 2 (Docket No. AD09-4-000).
Conclusion
Regardless of how these reforms are approached and eventually completed, getting seven multiple states to agree on such rates and incentives represent, at the very least, a new and formidable challenge. Yet if delivering wind power across the United States is truly a priority and, perhaps, central to any new RPS legislation, interstate transmission projects must be streamlined through efficient and effective cooperation. New reforms must be put into place that can decrease the amount of time needed to get projects like these off the ground and simultaneously reassure the states and regional entities that their best interests are still being protected.
Such massive projects do not just highlight reforms that need to take place; they also provide excellent opportunities to modernize and encourage a better transmission backbone for the entire country.