ScottMadden has updated their 2021 white paper titled “Transmission in the United States What Makes Developing Electric Transmission So Hard? An Update.” The 2021 paper described the challenges associated with building electric transmission. The 73-page update describes developments that have taken place since then. According to the updated paper, there has been some progress since 2021 but not enough to build transmission as quickly as needed. This blog highlights a few aspects of the update, but we encourage everyone to read the entire paper.
Overview
Electric transmission is critical to the grid transition and to maintaining grid reliability. Since the original paper, the need for transmission has continued to increase. For example, the pace of the grid transition is accelerating due to large loads (artificial intelligence, etc.) seeking to connect to the grid. Rapidly increasing demand is putting pressure on utilities to increase both generation and transmission. Since 2021, the Federal Energy Regulatory Commission (FERC) has initiated several dockets to address some, but not all, of the challenges associated with transmission, but transmission developers continue to face many difficult challenges. After three years, there has been limited progress in addressing the issues identified in the original paper.
Transmission Development
Only a modest amount of transmission has been built over the past several years, and most transmission projects completed since 2020 have been intra-regional/local rather than inter-regional. Inter-regional projects are important for importing and exporting power between regions to prevent capacity shortfalls and lower wholesale power prices. In 2021, 26 transmission projects were completed, while a total of only 24 projects were completed during the following two years. Nationwide, investor-owned utilities and transmission companies plan to invest almost $198 billion in transmission projects during 2020-2026 ($92 billion during 2024-2026). However, the industry is not investing in transmission at the pace necessary to meet clean energy targets. The cost to build transmission is increasing, partly due to inflation, making transmission investments more expensive. Uncertainty in ratemaking and incentive treatment also make investing in transmission less attractive.
Planning and Cost Allocation
Since the earlier paper, FERC has made another attempt to update its Order 1000 and broaden the scope of transmission planning and facilitate allocation of transmission costs. However, even if Order 1920 is successfully implemented, the timeline will not result in building transmission for several years. Without siting and permitting reforms, the order may result in better planning and cost allocation for transmission facilities that are never built. FERC has deferred action on incentives and incumbent utility right-of-first-refusal for transmission projects, which leaves important questions for transmission owners and developers unanswered.
Interconnection Queues
Growing interconnection queues and slow processing times are a major challenge for the grid transition. More than 2.2 million megawatts of generating capacity (twice the generating capacity of the entire U.S. electricity system) are lined up in interconnection queues. Renewables, battery storage and hybrid projects represent more than 90% of this capacity. A large number of relatively small renewable facilities are seeking to interconnect, which has contributed to delays and backlogs. Federal incentives under the Inflation Reduction Act are encouraging solar and wind development, further exacerbating interconnection queue backlogs. The time a proposed project remains in an interconnection queue ranges from an average of more than three years in PJM to almost six years in the Southwest Power Pool. FERC Order 2023 includes helpful reforms, but it is unlikely to eliminate the backlog of interconnection requests in the short term. If interconnection requests continue to be largely renewables and storage, the generation sources will not adequately replace the attributes of dispatchable resources that are retiring.
Ratemaking and Incentives
FERC sets the return on equity (ROE) for transmission investments, which helps determine their attractiveness. FERC Order 679 established incentives to encourage investment in transmission, including ROE adders. Those incentives helped increase investment in transmission starting in the mid-2000s. While FERC recently granted a series of ROE and non-ROE incentives for transmission projects, much of FERC policy for transmission incentives remains largely unchanged from the 2021 paper, and ROE policy as a whole remains unsettled. However, new Department of Energy (DOE) funding has been made available to provide financial support for projects meeting certain criteria. These DOE funding programs may facilitate certain types of projects; however, the grants and other incentives available do not provide the same types of financial incentives available under FERC Order 679. Incentives can make transmission investment more attractive, but they will not overcome the other hurdles that transmission projects face.
Siting and Permitting
Siting and permitting transmission projects involve numerous federal, state, and local agencies, as well as stakeholders, including landowners whose properties are affected. These interests can derail project development, particularly for larger, longer power lines. There is continued focus on siting and permitting transmission at FERC, DOE, and in Congress. However, state vs. federal jurisdiction, landowner rights, and local environmental and cultural concerns remain significant impediments to project siting. Current efforts, including FERC Order 1977, rely on process approaches to facilitate siting and permitting. Some approaches will be helpful for development on federal lands. However, it does not appear that progress will be sufficient to build long distance transmission lines in the near term.