The imperative of free, green and secure wires reform
Economic and environmental progress hinge on modernizing energy regulation. The intense debt ceiling negotiations and lengthy proceedings at the Federal Energy Regulatory Commission highlight that bipartisanship is imperative and achievable where reforms enhance reliability, reduce costs and lower emissions. This is particularly true with generator interconnection, or GI, and regional transmission reform. Proper regulatory reforms would unlock trillions of dollars in productive investment, enhance power system security, unleash innovation and drive deep cost and emissions reductions.
Success requires proponents of economic freedom, consumers and environmental interests to make a compelling case to FERC and Congress, among other key federal, state and local actors. Timely action is needed as FERC’s recent GI rule leaves the bulk of reform needs unaddressed, while regional transmission reform has hit an impasse.
Interconnection relief cannot come soon enough. It is the largest barrier to new power development in many regions, of which 95% is zero emissions. Over two terawatts of new capacity — 60% more than all existing operating capacity — are languishing in interconnection queues. Admittedly, most of this will not reach commercial operation. Nevertheless, with interconnection costs ballooning over 700% in some regions, GI problems impede both a clean and lower-cost energy transition. The fact that GI backlogs delay new generation by half a decade adds to reliability risks in an era of resurgent demand due to electrification, industry growth and extreme weather.
At the end of July, FERC released its much-anticipated GI rule. It makes incremental progress on issues like improved information and some queue management processes. But it merely raises the floor for best practices that many grid operators have or plan to adopt already, such as “first-ready, first-served” cluster studies. The final rule fell well short of solving GI problems in part because from the outset FERC lacked a GI reform vision to holistically tackle informational, procedural and financial barriers to entry. As a result, instead of hitting all bases needed for GI reform, FERC is stuck on first without a strategy on how to score.
Suffice to say there is extensive unfinished business in GI reform. Part of the problem with FERC’s ambition appears to be a misconception that GI is purely a generator problem. Not so, as most of the escalating interconnection costs initially allocated to generators are either passed through in full to consumers by monopoly utilities or in part by merchant generators. The largest price pressure in power purchase agreements is often caused by inefficient transmission upgrades triggered by outmoded interconnection processes. The major energy consumer groups rallied in a recent letter calling for FERC to initiate deeper GI reforms, namely improved interconnection studies, queue management automation and reexamining the role of regional transmission to drive cost-effective network upgrades.
Sensible transmission planning reform is another win-win for the economy and the environment. Current regulation results in misallocating billions in capital annually toward inefficient local transmission projects and away from efficient regional ones. Over 90% of transmission is developed by exemptions to regional planning, which are neither subject to competitive bidding nor cost-benefit analysis. Stunted large-scale transmission development is exacerbating reliability woes, according to the North American Electric Reliability Corp.
Captive customers are calling for change. They converged around four transmission reform pillars last year: improved planning, optimized existing infrastructure, effective competition and quality governance.
Through this lens, FERC’s proposed rulemaking on regional transmission planning is a mixed bag. It would tremendously improve many aspects of planning, such as pivoting from reactive to proactive planning over an appropriate time horizon. It would also improve the number of future market scenarios to ensure planning is robust across a range of uncertain conditions. However, it would also impose an anti-competitive right-of-first-refusal for incumbent utilities. This attracted the ire of the Department of Justice, prompted blowback from the Senate and undermined consumer support for the proposal.
The proposal would be much stronger if it included improved transparency and stakeholder inclusion, minimized exemptions to regional planning and if it broke down silos between “economic” and “reliability” project planning. As previously noted, one of the biggest things the proposal could improve upon is merging aspects of GI into transmission planning for transmission upgrades, as Texas does to great benefit, which would greatly lower costs and uncertainty. This would be part of a winning formula for FERC in refining the good and jettisoning the bad.
Unfortunately, FERC has reportedly stalled on this rulemaking. The hangup appears to be twofold: disagreement over defining transmission benefits and concern that one state will pay for another’s pro-renewables policies. On the former, integrating all cost savings categories and monetizing reliability should be an uncontroversial minimum bar for defining transmission benefits. As for cross-state effects of state policies, it is plausible though wrought with administrative controversy to parse the cost effects of individual state policies on interstate transmission builds. It is conceivable that doing so could alter cost allocation. Nevertheless, the planning process can only maximize consumer benefit if it plans for expected electricity supply and demand irrespective of whether transmission is built for reliability, market-efficiency or public policy reasons.
The status quo is simply unsustainable. In addition to permitting reform, interconnection and transmission reform are the centerpieces of the energy transition. The more we delay, the greater the cost to consumers, grid stability and the environment. If FERC does not answer the call, Congress should.
A recent letter from Senate Majority Leader Chuck Schumer, D-N.Y., increases congressional pressure on FERC. It indicates that congressional patience is wearing thin. It may even foreshadow Congress taking transmission planning and interconnection reform into its own hands if FERC does not deliver.
Devin Hartman is the director of energy and environmental policy at the R Street Institute. Jennifer Chen is the senior manager of clean energy at the World Resources Institute.