As Congress contemplates how to transition to a clean energy future, modernizing the electricity grid is a prominent part of the conversation. Spanning 164,000 miles, the nation's highly integrated system of transmission lines and control facilities connects more than 750,000 megawatts (MW) of electrical energy to millions of customers across the country. Thanks to the physics of electricity and the engineering innovations of the 20th century, whether you live in a town of 18 or eight million, you benefit from the grid.
Today, it is widely reported that our grid is bearing an increasingly heavy load. New technologies mean Americans use electricity for more and more of their daily tasks. In fact, Americans consume much more energy than they did when the grid was built and are expected to increase their consumption another 25 percent by 2030. [1] Advocates for expanding the electricity grid say that we can only meet this rising demand for electricity if we build new transmission.
"As our country's demand for electricity continues to increase, the system must be expanded and upgraded to meet the needs of our growing population and digital economy. In order to build the system to better meet current and future demand, to alleviate congestion, and to reinforce system reliability, electric companies have earmarked billions of additional dollars for investment in the coming decade."
– Edison Electric Institute's Website
While many agree that the time has come to start building more efficient and reliable transmission, there is disagreement on how it should be paid for. Some argue that only customers who directly benefit from new transmission lines should be responsible for funding their construction. There is agreement that those who benefit should pay; however, ascertaining exactly who benefits from new transmission can be a difficult task because of the interconnectedness of the grid itself.
The national transmission network spans thousands of miles and is highly integrated, making it virtually impossible to determine exactly who benefits at different times of the year, let alone the day. It is for this reason that transmission costs have generally been allocated to large groups of users (utility service territories or market regions), rather than individual customers. Furthermore, today's transformation of the grid demonstrates it is nearly impossible to anticipate how new electric transmission facilities built today will be used several decades down the road.
Others have questioned the cost of building new transmission. Advocates for transmission development point to the fact that transmission is by far the least expensive component of the overall cost of delivered power. The majority of cost to consumers is from generation and distribution charges (see chart [2]) and to the extent that transmission increases access to lower cost generation, the dollars invested in the grid actually have offsetting savings for consumers.
The issue of who pays for new transmission (referred to as "cost allocation") was debated again recently when a measure was added to the Senate energy bill, [3] which was originally drafted, in part, to help modernize the outdated electric grid. As amended, the language now limits the ability of the Federal Energy Regulatory Commission (FERC) to determine who pays for new transmission. This requirement applies a new, vague standard to cost allocation that could require lengthy, complex, cost-benefit analyses, further contributing to uncertainty for customers and investors. The new process could also potentially invite litigation and stop current and planned transmission upgrades by overturning existing cost allocation agreements.
"The Senate cost allocation language would block grid investment right at the time when there is a desperate need to expand the transmission system to deliver clean energy, assure reliability, and remove constraints that result in higher wholesale power prices," said Joseph Kelliher, executive vice president of Federal Regulatory Affairs for FPL Group, and former FERC Chairman.
While cost allocation always entails a determination of who benefits from new facilities, the amendment requires that FERC consider only "measurable" benefits. Many regional transmission advocates say this test is ambiguous, unpredictable in its consequences, significantly limits the scope of benefits that can be counted, and most importantly, technically unfeasible.
FERC currently approves regional cost allocation plans that assign costs broadly in some circumstances and narrowly in others where beneficiaries are specifically identifiable and limited. It is not clear if the Senate language would also overturn existing regional agreements on how to allocate transmission costs for planned system upgrades.
Critics of the amendment say that quantifying the benefits of a specific project would be nearly impossible because the grid is an integrated network made up of assets that were built at different times and have life spans of nearly 50 years, over which time power flows and beneficiaries change. This is particularly true for regional transmission and larger extra-high-voltage (EHV) transmission projects.
"From a policy standpoint we need to recognize the unique set of benefits associated with EHV transmission facilities. Simply put, the benefits of EHV extend well beyond production cost savings. Reliability benefits, reduced congestion, resource sharing and land conservation benefits need to be considered and valued."
– Lisa Barton, Vice President, AEP Transmission
Concerns over the cost allocation amendment to the Senate bill brought together a diverse group of electric generation and transmission companies, municipal utilities, electric cooperatives, environmental groups and other stakeholders who warned that it would thwart needed transmission expansion and hinder Congressional energy and environmental goals. In a letter delivered to Senate leadership in November, 62 companies and organizations objected to the amendment and expressed concerns that the measure would make cost recovery so uncertain as to disrupt billions of dollars of planned transmission investment.
[The Senate bill as amended] will prevent development of much needed high-voltage transmission facilities to meet a multitude of customer needs, as it will prohibit the FERC from adopting a cost allocation methodology that is fair and workable. Further, the current language may well upset existing FERC-approved cost allocation policies and jeopardize billions of dollars of planned transmission investment in certain regions.
While the issue remains unresolved, the strains on the grid grow every day. Answering the question of who should pay for new transmission would go a long way toward attracting needed investment.
References:
- 1. U.S. Department of Energy, Energy Information Administration, Annual Energy Review 2006 and Annual Energy Outlook 2008 Early Release [return to article]
- 2. Source of data: http://www.eia.doe.gov [return to article]
- 3. http://thomas.loc.gov/cgi-bin/query/F?c111:1:./temp/~c111i4NWmu:e1276: [return to article]