Merchant transmission—has its time arrived?

Pam Boschee, Managing Editor

Merchant transmission remains a hypothetical concept to most people in the electric industry. However, the time may be approaching when fantasy becomes transformed into reality.

The first merchant transmission project in the United States was the recently completed Cross-Sound Cable Project (see August EL&P, p. 26), developed by TransEnergie U.S. Ltd., a subsidiary of Hydro-Quebec. This project consists of an underwater high-voltage direct current transmission line (24 miles long) that runs under Long Island Sound and interconnects the Long Island system at Shoreham, N.Y. and the New England system at New Haven, Conn.

Recent Federal Energy Regulatory Commission (FERC) incentives were intended to provide momentum toward transmission investment—be it from merchant developers/ investors or incumbent transmission owners.

FERC’s proposed Standard Market Design (SMD) was a starting point for discussion from the industry, hopefully leading to a model with agreed upon fair market rules that would ultimately encourage investment in an infrastructure sorely in need of upgrading.

In January, FERC proposed an incentive pricing policy that would allow additional percentage points on a utility’s return on equity when it participates in a regional transmission organization (RTO), divests its RTO-operated transmission assets, or pursues additional measures that promote efficient operation and expansion of the transmission grid. The commission proposed a Dec. 31, 2004 deadline for utilities to qualify for the incentives.

Last month, David Clement, Cambridge Energy Research Associates (CERA) director, pointed to this important January milestone for cost-of-service regulation in his presentation on transmission investment at CERAWEEK 2003 in Houston.

Clement highlighted several indicators of stress on the U.S. transmission system:

“- Requests for transmission loading relief (TLRs) procedures have increased four-to five-fold from 1998 to 2002. (TLRs are indicators of high congestion.)
“- PJM transmission congestion charges have more than tripled in two years (1999-2001).
“- A “generation tsunami,” especially since the late 90s, according to Clement, consisted mostly of combined-cycle gas turbine power plants. From 1947 to 2002, 60 GW of new capacity came on-line. However, transmission investment did not keep pace. If transmission investment had followed historic patterns of increasing in tandem with central power plant construction, the amount invested would have been about $12 billion higher than actually occurred.

In spite of these recognized stresses on the grid, incumbent transmission owners identified the following investment risks in comments submitted in response to FERC Order 2000, which directed the formation of RTOs:

“- Risk of providing transmission access for competitors (termed “free riders”);
“- Eventual requirement to transfer control of new or upgraded assets to RTO;
“- Stand-alone transmission businesses are viewed as more risky than vertically integrated utilities;
“- Benefits of improved transmission service are captured by generators and their customers; and
“- Continued regulatory uncertainty.

Since those comments were filed, financial events in the energy industry presented additional challenges. Pervasive credit downgrades set the stage for severe credit crunches, which have essentially placed many companies into headlocks in terms of securing financing for any new projects. This includes prospective merchant transmission investors.

Reuters reported in late February that the Neptune project, a proposed underwater transmission line to move Canadian electricity to New York City, saw a significant setback when a key player was hit with a credit downgrade.

Jaya Bajpai, a Northeast power markets analyst for Boston-based Energy Security Analysis Inc. (economic consultants for the Neptune project), said, “Banks will not finance any project, generation or transmission, until you have a long-term power agreement with a creditworthy entity.”

Until interested companies can restore lenders’ confidence in their ability to handle debt, or until investors with strong balance sheets come forward, merchant transmission may remain a fantasy.

Meanwhile, bottlenecks will continue to prevent the movement of less expensive power into constrained regions when demand is high. According to a FERC study, congestion added more than $145 million to the electricity bills of U.S. consumers in these heavily constrained areas. And, unfortunately, that may remain a fact for some time to come.

Author

  • The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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