FERC’s ‘historic’ order attempts to right the wrongs of history, by Infrastructure Investor

FERC’s ‘historic’ order attempts to right the wrongs of history, By Infrastructure Investor

By: Zak Bentley PUBLISHED: 1 July 2024
NEWS & ANALYSIS

The industry has a mixed reaction to the US energy regulator’s update to a 2011 measure that ultimately underwhelmed.

In May, the US Federal Energy Regulatory Commission delivered Order 1920. It was, in FERC’s own words, a “historic transmission rule” to reform the grid as it tries to meet increasing power demand. There was even a nod to its own inaction and bureaucracy, with chairman Willie Phillips saying in a statement that “we must get beyond these after-action reports” when analysing power outages in extreme weather events.

The ruling orders transmission operators to conduct planning over a 20-year time horizon, providing updates to this every five years. It also brings to fore rules on the cost allocation between different states on large transmission projects.

On the face of it, long-term transmission planning and cost allocation transparency is exactly what the overloaded US power sector needs, with interconnection queues growing longer and too many projects stuck in various stages of the development process.

However, Order 1920 sounds familiar to seasoned observers of the sector, with Order 1000 released in July 2011 trying to fix many of these problems. A sceptical Kat Gamache, a Houston-focused energy partner at law firm Norton Rose Fulbright, is unsure the new measures will have much more of an effect than its predecessor.

“I’m not certain that there’s really much here that differs from Order 1000. That indicates that this order will not have any more of an impact than Order 1000 did,” she told Infrastructure Investor. “It has requirements for transmission owners to ‘consider’, but that’s a pretty ambiguous standard to try to meet and there’s no real required outcome.”

Indeed, the FERC ruling states with regards to transmission that transmission operators must “consider a broad set of benefits when planning new facilities”, “consider transmission facilities that address interconnection-related needs identified multiple times in existing generator interconnection processes” and “consider the use of grid enhancing technologies” for grid management. Ultimately, though, concerns are there is little oversight in ensuring those have been considered by regional transmission operators to a reasonable extent.

The various regional transmission operators will have to show their workings are on the 20-year forward planning requirement. There are, though, mixed reactions to this measure.

“I don’t think that we can realistically predict what 20 years from now will look like in terms of generation resources or demand,” Gamache maintained.

The other side of this coin are those that had naturally thought such long- term planning was typically how grid management worked.

“I wondered, didn’t we always do that? And the answer, if you speak to most people, is that we didn’t,” said Jim Spencer, chief executive of developer Exus Renewables North America, a Partners Group portfolio company. “Transmission planning was basically reactive. If I wanted to build a project, I would make an interconnection request to whoever my appropriate party was, whether it was PJM or MISO or somebody else, that would be considered in the context of everything else that they had going on.”

There are system operators that would argue they have forward-looking plans or scenarios that they update, but unchecked formally by a regulatory body there is little compulsion for these to be as effective as possible.

Himanshu Saxena, chief executive of Lotus Infrastructure Partners and one of the few GPs building large transmission projects, says system operators are realistically usually looking at five-year time horizons.

“There is always this mismatch between the load forecasting horizon and the timeline of developing transmission projects. Five years to build a new transmission line is just an impossibility and 10 years starts to be somewhat of a good case and it can be materially longer than 10 years,” he reasoned. “If it takes this long to build new transmission, how do you then do system planning in five-year windows? You’re not going to be able to build anything five years out.”

Who pays?
Beyond ambiguous orders for grid operators to consider long-term planning, Order 1920 also revisited the cost allocation aspect of building new
transmission lines, something which 2011’s Order 1000 attempted to address but never succeeded in doing so.

Now, the grid’s needs have shifted to trying to accommodate the huge amount of renewable generation that has come online since, as well as the needs of future large, inter-state transmission projects. That, along with varying states renewable energy standards, means the cost allocation rulings of Order 1920 might be the most likely aspect to be fought in the courts, with critics believing it will require states to pay for clean energy programmes they haven’t signed up to themselves.

Order 1920 will attempt to force states to agree on a cost-sharing mechanism, although the risk remains that consumers pay for infrastructure they don’t benefit from.

This feeling was summed up in the dissenting opinion on Order 1920, written up by FERC commissioner Mark Christie, who wrote: “This practice will force consumers to subsidise the interconnection costs of generator developers and in so doing turn them into the banks for the ventures, viable or otherwise, of generation developers – a classic example of the socialisation of costs to enable private profit. Of course, this will result in rates that are blatantly unjust, unreasonable, unduly discriminatory and preferential.”

“By definition, the requirement that these transmission planners consider new state laws gives supersized effect to the renewable energy standards that exist in states and in different districts. Of course, we’re happy about that, but there are obviously going to be parts of the industry that aren’t,” stated Exus’ Spencer.

Still, Order 1920 represents an important step in trying to resolve the great transmission challenge that is, as Saxena described, “everybody wants it, everybody knows that it’s needed, but really not a lot of people want to pay for it”.

Saxena added: “Order 1920 is a good first step in clarifying how cost allocations would work and give project developers clarity on how to navigate this and also give clarity to states and to ISOs on how to navigate this as they decide which transmission projects should be built and which transmission projects should not be built.”

Lotus, of course, has reasonable experience of this. Last month, the company handed over control of the 125-mile Ten West Link high-voltage transmission project to the California Independent System Operator after developing the project over a nine-year period, travelling across California and Arizona. In May, CAISO also selected Lotus, alongside Southern California Edison, to develop a 30-mile transmission project.

“We have dealt with this issue that if one state is paying for all or a material portion of that cost, then some of the stakeholders in that state would complain that they are having to pay 100 percent of a transmission line cost, which they would argue is benefiting two states,” said Saxena. “The way we have dealt with it is we generally don’t develop projects unless we have clarity upfront on who is paying if we build it. From the very beginning, this is a very important part of Lotus’ transmission development strategy that we would develop a project only if there is a customer that is identified on day one and that customer is willing to pay for 100 percent of the cost that we expect to incur.”

As for how Order 1920 might enable future successes for private transmission developers like Lotus, it might be around reviving projects that have fallen into the planning scrapheap.

“I think it’s about enabling some projects that have not taken off, even the ones that are needed that have not been developed or constructed because parties at the very beginning itself couldn’t agree on a cost allocation methodology,” Saxena believes. “There are some projects that are getting done because some customers are willing to bear the cost and the risk because it benefits them disproportionately. But if you have multiple parties benefiting from transmission investment and historically, and if they’ve been unable to agree on how that cost would be allocated between the parties, then it just doesn’t get built and that is what’s holding many projects.”

Those are challenges to be solved in the future. For now, Order 1920’s immediate obstacle is a coalition of 19 states led by Texas attorney general Ken Paxton against “Biden’s attempt to seize unprecedented control over energy production and distribution”.

As you were.