Enabling New Transmission Entrants: Unleashing a Bottom-up Clean Energy Transition
The FERC should address a key barrier to local transmission development, namely disparities in service reliability, rate treatment and cost allocation facing many wholesale transmission dependent utilities (TDUs). Such inequities impede clean energy development in attractive, renewable-rich areas served by many TDUs.
Earlier waves of wind and solar development utilized segments of the transmission system that enjoyed favorable service reliability and had timely connectivity rules. Despite falling costs and improved performance, the next wave of renewable development is being hampered by pockets of constrained and unreliable transmission service. While inside the traditional regional transmission organization (RTO) boundary, these pockets are often outside the RTO’s functional control. Upgrades to close these “holes” are typically quick and cost-competitive ways to get clean energy developments to market, especially compared to the cost of developing such resources in less windy or solar-soaked areas.
To address the “holes” requires either, depending on the circumstances, extending the RTO’s functional control to these areas and/or focusing on local upgrades, where decentralized decisions can outpace the centralized regional planning process that is notoriously slow and can lack granularity. But bottom-up, local planning approaches are often stifled by incumbents who seek to keep out new entrants and maintain their historical monopolies on transmission investment within their service territories. All the while, these incumbents’ deficient investment practices are the very reason transmission “holes” exist inside RTOs and continue to be a chronic problem for many TDUs and the communities they serve.
This conundrum is on full display in the regional grids covering two of the windiest and sunniest parts of the country—areas within the Midcontinent Independent System Operator (MISO) and Southwest Power Pool (SPP). In these RTOs, incumbents have routinely moved to block new entrants seeking to remedy unreliable pockets (often areas served by TDUs) in order to provide service reliability comparable to that enjoyed by the incumbent’s retail customers.
Aside from compounding the reliability disparity between incumbent and TDU customers, these incumbent efforts also stand to undermine U.S. decarbonization goals as prime renewable-rich places served by TDUs, such as the Oklahoma Panhandle, which remain underutilized. To illustrate, if a renewable generator desires to locate in one of these underserved areas, it is required to either pay pancaked transmission rates or construct and self-fund a direct interconnection to facilities located outside of that area. This discourages renewable development in otherwise desirable locations. Not only does this harm efforts to meet renewable public policy goals and make renewable energy more expensive, but it also negatively impacts the local communities within these pockets by skewing clean energy and economic development toward incumbents.
Further, the incumbents are incentivized to keep the holes intact and to do so by requiring new entrants to play by different sets of rules. Incumbents in the MISO and SPP routinely attempt to restrict non-incumbents’ networked facilities from being included in their transmission zones unfairly. They also mount regulatory challenges to prevent the costs of non-incumbent investments from being recovered in the same manner as the incumbent’s own facilities. Such asymmetric regulatory treatment is commonplace in these regions, where incumbent transmission owners are the most powerful stakeholder group and face little oversight and accountability.
Incumbents openly acknowledge that there are different rules for their transmission development when compared to proposed development by new entrants or other potential competitors. In one case currently being adjudicated, if the incumbent is successful, it could result in new development proposed in a transmission “hole” being relocated to the incumbent’s system instead.
This comes as little surprise for those familiar with the history of the FERC’s “open access” transmission policy. In landmark orders dating back to the 2000s, the FERC was cognizant that incumbents would likely be a barrier to any transmission solution that: “stimulates new entry or greater competition in their area. For example, a transmission provider does not have an incentive to relieve local congestion that restricts the output of a competing merchant generator if doing so will make the transmission provider’s own generation less competitive. A transmission provider also does not have an incentive to increase the import or export capacity of its transmission system if doing so would allow cheaper power to displace its higher cost generation or otherwise make new entry more profitable by facilitating exports.”
Unfortunately, the FERC’s concerns played out in the 2010s. And now it’s clearly constraining the clean energy transition in the 2020s. Fortunately, the FERC has the ability to address this without a rulemaking or other protracted regulatory process. At the next available opportunity, the FERC could quickly put an end to these practices by declaring that RTO zonal cost allocation practices must treat all networked facilities—whether owned by incumbents or new entrants—equally.
This is the time for the FERC to implement sensible and straightforward policy reforms as part of its 2021 agenda. Clean energy and pro-market proponents would be prudent to co-brand a plan to enable new entrants to pursue local transmission projects facilitating greater renewable integration without facing openly discriminatory and anti-competitive rules.
Plugging transmission “holes” that prevent increased renewable energy development throughout the country by requiring equal regulatory treatment between new entrants and incumbents in the SPP and MISO would be a great place to start.
Image credit: Calin Tatu