National Energy Policy Should Have More Than Transmission Hammer in Toolbox

by Dan Watkiss, Bracewell & Giuliani

National policy should be judged on whether it has picked the right winners. Two Congressional energy bills risk naming high-voltage transmission projects winners instead of more deserving alternatives.

For much of the past century, primarily large, remote, central generating stations joined distant consumers (load) through high-voltage transmission lines. Locate generation closer to load, and reduce or postpone the need for high-voltage transmission. Smaller and more generation sources closer to load better serve national energy policy than the traditional, remote central stations.

The American Clean Energy and Security Act (ACES) and American Clean Energy Leadership Act (ACELA) propose to ease high-voltage transmission line siting and construction. The Energy Policy Act of 2005 created a federal eminent domain right that would backstop states’ siting of new high-voltage transmission. ACES and ACELA would go further to supplant state authority to deny siting on the merits in certain circumstances. ACES and ACELA also would confer on regional transmission planning organizations new powers to authorize and site high-voltage transmission lines.

Parts of the country could benefit from speedy approval and construction of high-voltage transmission. Moreover, such transmission capacity linking noncarbon-emitting wind resources in the plains with load centers may have independent justification in climate change policy. But the increasing pre-eminence ACES and ACELA place on high-voltage transmission lines, with recent efforts of the Federal Energy Regulatory Commission to lessen the financing cost of those lines through broad, guaranteed, rate-based charges, may put alternatives such as distributed generation at an insurmountable economic disadvantage, even when those alternatives might better serve more national energy objectives.

A scenario in which national energy policy becomes skewed to depend unreasonably on high-voltage transmission is not difficult to project from ACES, ACELA and current regulatory initiatives. First, the deliberative process for choosing among parts of the machine becomes concentrated in large regional transmission owners or organizations.

As Mark Twain observed, just as “to a man with a hammer, everything looks like a nail,” to a planner with authority or funding only for transmission, everything looks like a new high-voltage line.

As I reported in my November/December 2008 column, at least one state utility regulatory commission concluded (incorrectly) that federally directed regional transmission planning processes in effect preempted integrated resource planning in which the reciprocal capabilities of generation, demand management and transmission can be explored and prioritized.

Add to that deliberative process an asymmetrical investment risk profile, and the transmission-skewed scenario comes into full focus. In this economy, investment dollars flow only to committed generation under contract for some reasonably long payback period; few if any investment dollars are flowing to merchant generation. As for small distributed generation projects, they are cash transactions that occasionally may benefit from some tax credit. In contrast, a new high-voltage transmission line can carry remote central station power into the markets in which new generation and distributed generation are seeking a foothold and be guaranteed a rate of return that the potential customers of the new generation cannot avoid paying in their utility rates.

To restore equilibrium to national energy policy, the deliberative process and investment risk must be attuned to clear goals that choose winners wisely. A recent Minnesota governor’s office and legislature study commissioned to evaluate the transmission impact of adding up to 1,200 MW of distributed renewable generation to the state’s resource base concluded that it could be done and would advance significantly the state’s energy and environmental policies but would require some nontrivial transmission upgrades. But the Minnesota analysis is balanced and timely and should be read and replicated by federal and state legislators and energy regulators to inform energy policies for optimizing the components of the machine that delivers our electricity.

A tool that helps energy policymakers do so is the economic modeling developed recently by Thomas E. Hoff, Howard J. Wenger and Brian K. Farmer. They discuss it in a paper, “Distributed Generation: An Alternative to Electric Utility Investment in System Capacity.”

In addition to other national energy policy values, such as self-sufficiency, reliability, efficiency and convenience, this model developed for the California Public Utilities Commission provides a sensible, rigorous framework for quantifying the value of distributed generation in reducing the variable cost of the machine or in deferring new capital investments in the machine’s high-voltage transmission and associated capacity.

Author

Dan Watkiss is a partner with Bracewell & Giuliani in Washington, D.C., representing power companies, exploration and production and midmarket companies, natural gas pipelines, power and liquefied natural gas project developers and lenders, as well as government agencies and regulators. Reach him at dan.watkiss@bgllp.com.

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