Suffering from lack of transmission

Publication August 9, 2018

Lack of transmission is quickly becoming the number one issue for renewable energy. A growing chorus of developers is complaining that projects can be built, but there is no way to move the electricity. Massachusetts had to import LNG from Russia last winter because of inability to get electricity across New England. Years of effort to build a proposed 720-mile Plains and Eastern transmission line have led so far to naught. Is transmission a growing problem in fact, and is there a way out?

Four panelists talked about the growing problems in this area at the 29th annual global energy and finance conference in June. The panelists are Rob Gramlich, president of Grid Strategies, Blake Nixon, CEO of Geronimo Energy, Himanshu Saxena, CEO of Starwood Energy Group, and Todd Singer, CFO of Transmission Developers, Inc. The moderator is Ike Emehelu with Norton Rose Fulbright in New York.

MR. EMEHELU: Rob Gramlich, you have spent at least 15 years working on transmission issues. Put the discussion we are about to have into context.

MR. GRAMLICH: Interest in transmission is cyclical, but it is not as if transmission suddenly came out of nowhere to become a big issue.

When I was hired by the American Wind Energy Association in 2005, the executive director at the time, Randy Swisher, told me transmission was the wind industry’s biggest long-term issue. It was starting to emerge as an issue. There was already a lot of congestion.

We undertook at the time a study with the US Department of Energy about how transmission would be affected if wind reached 20% of the US electricity supply. Andy Karsner, who was the assistant energy secretary for renewables at the time, got President Bush to say we could make 20% wind a goal, but it was clear that transmission was the biggest barrier. All the utility participants in the process said, “I don’t know how we can do more than 5% or 10% wind. We are going to need a lot of transmission.”

We went to the biggest transmission owner in the country, American Electric Power, and put together with it a grand grid vision of how to do it. There are multiple ways to do it, but we put out one.

After that, FERC Order 1000 came out, Texas CREZ happened, the Southwest Power Pool’s highway-byway happened, priority projects were developed, and MISO in the upper Midwest put multi-value projects in place. A lot of transmission was built. I think putting out the grand vision helped to some extent. We had one model, which was regulated transmission lines with the costs allocated broadly among all users of the grid.

Today, we are still building a lot of wind and some remote solar, but we are not building the next round of transmission lines to move the additional electricity. That is leading to more congestion and curtailments.

A new direct-current technology has emerged in the meantime that is cost-effective and valuable, and the economics, engineering and physics are great. The challenge is getting permits to build new transmission lines.

MR. EMEHELU: That’s a good segue. It reminds me of a developer who spent $250 million over seven years to build a line from Canada south through New Hampshire, only to have it cancelled this year. Todd Singer, that’s your business. You have transmission in your name. Why is it so hard to build new transmission?

MR. SINGER: The challenges are first getting someone to pay for it and then permitting and siting. You just mentioned the Northern Pass project. It is very hard to build overhead transmission lines in the Northeast.

What we are doing is building 2,000-megawatt projects with high-voltage dc lines buried underwater or underground. We have had success permitting those, but even then it is not easy. New York requires multiple permits. There is an article 7 permit that is the all-encompassing state-siting and environmental permit. There is a US Department of Energy presidential permit. Then there is a US Army Corps of Engineers permit. That’s just at the federal level. In Vermont, for example, we needed another 13 state-level permits.

Each permit requires community outreach. Before we filed for any permits in Vermont, we spent a year having meetings with political folks, community boards, local stakeholders and environmental groups. We had something like 200 to 250 meetings before we even filed for a permit.

Time and cost ratios

MR. EMEHELU: Himanshu Saxena, why is this so difficult?

MR. SAXENA: We are a firm that does different kinds of investments. Transmission is one. We have built wind farms, solar farms, biomass projects and two large transmission projects — Neptune and Hudson — that are high-voltage direct-current lines.

We are in the middle of developing and, hopefully building soon, the Delaney transmission line in California that we were awarded three years ago in a competitive solicitation. It is a 114-mile 500-kilovolt line that will move electricity from a Colorado River substation in Arizona to the Delaney substation in California.

The project should take us four years to develop and one year to build. That ratio is really a problem.

When it takes you four times as much time to develop a project as to build it, then there is something structurally wrong with the system. The amount of money that it takes to develop a project is also a problem. I can’t share the exact numbers for Delaney, but if a project costs $100 to build and you have to spend as much as $50 to develop it, that is a problem.

The ratio of development cost to construction cost is higher in the transmission sector than in any other sector. If we develop a wind farm, it will cost $300 million to build, and our development costs are maybe $5 million or less. Solar is the same. For every other technology, it is generally around 5% or less of the development cost compared to the construction cost.

In transmission, those numbers reach as high as 50%. For private capital where you have significant risk — if a permit does not come in or you cannot find an offtaker — the development capital is lost. Who is willing to take that much risk for a possible pot of gold at the end of the rainbow? The amount of capital available for investment in such projects is very limited.

We have been focused on projects where we can get from point A to point B not in 20 years, but hopefully in 10 years or less. The Hudson transmission line that we built had been in the making for 15 years.

We have a running joke in our office. When somebody in his or her 30’s picks up a new transmission project, we say, “We will build this before you turn 50.”

I think that is a problem.

MR. SINGER: I can attest to that. We are a totally different company, but we say the same thing.

MR. SAXENA: I think that is a problem. We are seeing an effort in Washington to streamline the permitting process. Hopefully the effort will remain after the current administration is gone. The interim period while the government tries to fix its policies has actually made it more difficult because while we are in line looking for certain permits, the government workers have to divert attention to figure out what the new policies mean coming out of Washington.

Ironically, the effort to help has actually slowed down development, not helped it, which is a challenge. We see the same thing with agencies like WAPA, the federal transmission agency in the West. Everyone is trying to figure out what Washington really wants. So this period when the administration is trying to help is actually not having the intended affect.

We have about $1.4 billion in capital that we need to put to work over the next two years. That is fresh capital that we have just raised. If we can successfully do one transmission project, I think it will be a good day. We would love to do 10 of them, but there just are not enough opportunities that can be executed over the next 10 years.

Transmission is a very, very long game.

No leadership

MR. NIXON: I can recall two or three other major plans that came out during the period to which Rob Gramlich referred to build new transmission in various parts of the country, but they all relied on top-down approaches. They were the product largely of federal planning. You get into federalism issues between federal law and states’ rights.

I second what Himanshu Saxena said. Take MISO as an example, as that is the area in which we are most active. The multi-value project process has been fantastic. It worked very well.

The problem is it took 15 years from start to finish. The new lines that are not fully built yet are already fully subscribed and then some. And there is no MVP-2 behind it. There are something like 40,000 megawatts of new generating capacity in the interconnection queue, some crazy number. Developers like me are throwing money at the process, just trying to get projects ready to go, if and when there is a way to move the electricity to market.

Think about the pace at which our industry is changing at the wholesale power market level, and think about the process and all the fiefdoms and infighting that exists within the grid system. It just is not set up for success at this time.

I would like to think that there is some federal leadership that is willing to do somewhat crazy, somewhat outside-the-box things — consequences-be-damned kind of leadership — to . . .

MR. EMEHELU: I think that’s in place. [Laughter]

MR. NIXON: I was leading the response, yes. [Laughter]

MR. EMEHELU: It sounds like a lot of this is a regulatory problem. We have about two million miles of pipelines for natural gas in this country. With transmission lines, we have just over 200,000 miles. The difference is the federal government helps push through gas pipelines, but for transmission lines, you have to go to the states and even to counties.

Rob Gramlich, you just flew up from Washington this morning. Is there real movement to fix this?

MR. GRAMLICH: The report on transmission from Washington is, unfortunately, I do not see a lot of change coming soon.

Himanshu, you mentioned some of the federal coordination. I do not see action being taken by the current administration to resolve disputes and speed up permitting. The FAST Act that was enacted just before Trump took office set up a new process. On paper, it looks good, but my understanding is it is all gummed up. They cannot agree on governance. There is no break in the logjam from where it had been.

That is the administration side. On the federal permitting side, for private lands there is federal back-stop siting, but it is very limited. The courts have limited it. It is not a dead letter. Some of us in the clean energy sector have encouraged the administration to use its authority to push through transmission projects. However, the indications to date from the US Department of Energy is it has no interest in doing that. Maybe that will change. We are not giving up.

The third leg is what the Federal Energy Regulatory Commission can do to promote more transmission, and I think there is an opportunity there. Nothing has happened yet. The new FERC commissioners took office late last year and earlier this year to a big backlog that built up while the commission had too few commissioners to have a quorum. Now grid resilience is all the talk. There is a strong argument to be made that transmission helps resilience.

FERC could, under the mantra of resilience, step in and do more, but thus far, transmission is not on the agenda. I know a lot of folks here are interested in investing in private transmission in a merchant direct-current model as opposed to the more utility-based model where the utilities do it and throw it in rate base.

FERC has a big role in that. Order 1000 opened the door to competitively bid projects. That is a very controversial policy. There is no reason these new FERC commissioners have to say that they even want to continue that.

My sense is that they do support the general structure of third-party transmission, and I think they believe that it can work. It worked in Texas CREZ, for example. But it is not working well in most of the parts of the grid serviced by RTOs. There are very powerful interests lobbying Congress and FERC to say, “Let’s kill it. It is broken.”

I don’t think FERC will kill it. I think it will take a serious look and try to fix the process. My concern, from a clean energy perspective, is the utilities ultimately still have so much power over the RTOs. RTOs are voluntary institutions. We are not going to see much new transmission built if the utilities do not get to put it in rate base.

They were pretty excited about transmission 10 years ago when they got to put it into their formula rates with a nice return on equity. When it is not theirs, they do not care about promoting it, and these projects require significant political support to get through the stakeholder process to be approved.

MapQuest

MR. EMEHELU: Before FERC Order 1000, incumbent utilities had a right of first refusal to build and operate transmission lines within their service territories. Order 1000 removed that right of first refusal, so people like Todd Singer and Himanshu Saxena can go build lines. How has that actually worked in practice?

MR. SINGER: Let me talk about how we think about projects. Our Vermont line is a good case in point.

Vermont Yankee, which was a 620-megawatt nuclear plant in Vermont, announced in the fall 2013 that it would close. At the same time, government officials in eastern Canada and New England said they wanted to bring hydro power from Canada into New England. Put that together, fast forward three weeks, and my CEO and I are sitting in my office thinking about next projects. Blackstone wanted us to do another project.

We thought about duplicating the Lake Champlain leg of our line and then having it run somewhere into New England. The first question we asked was how it would work electrically. We looked at the ISO-New England system and where on the 345-kV system our line would work. It was clear it had to plug into the Coolidge substation in Ludlow, Vermont.

How then do you site such a project? We thought about where our Champlain Hudson Power Express high-voltage dc transmission line was exiting Lake Champlain in New York: in a town called Putnam Station. What is directly across from it, but located in Vermont? Benson.

Then how do we route it? We go to MapQuest. [Laughter] This is how a $1+ billion project actually gets sited. [Laughter] I am not kidding.

Go into MapQuest, and what is the route from Benson to Ludlow, Vermont? There were two choices. One went through these big green spots. We were like, “What are those green spots?” “Oh, they are national forests.” {Laughter] We do not want to deal with that.

The second route does not go through the national forests, and that is our route. Ninety percent of that route is exactly the same. From that point on, you start to look at the economics of the project and then you start the whole permitting and outreach cycle, and it goes on from there.

MR. GRAMLICH: So there was no bid? ISO-New England did not say, “We want a line from A to B and we are going to take . . . .”

MR. SINGER: It is a merchant line. It still is, and it was started because of the signals from Canada and New England. There was a prospect of RFPs. The economics worked purely from an arbitrage basis. Then, as with all development, you figure it out from there, and we are still working on it.

MR. SAXENA: All right, so he is making it sound easy. I would say don’t try it at home. This is for the experts. [Laughter]

MR. SINGER: It is easy to start.

MR. SAXENA: We have a lot of global investors, sovereign funds and others. They call us and say, “We have this great transmission development opportunity in the West. Should we do it?” And we say, “You are sitting in Asia. I can barely build a transmission line in California sitting in New York. You cannot do it from Asia.”

He is making it sound easy. He has a special version of MapQuest, right? [Laughter] Can I get a subscription to it? Just send me your password.

We are doing the routing for a transmission line right now, and a certain agency is making us study five different routes. All five look really good on MapQuest . . . [laughter] . . . but we are spending millions of dollars studying every single route.

MR. SINGER: I will say our Vermont project was a lot different than our New York project from a siting perspective. Vermont was much easier. New York, not so much.

Market shifts

MR. SAXENA: Stay out of New York, too. That is another rule of thumb. I think all of you know this already, but there are two business models, from my perspective, in this sector. One is where you build a regulated transmission line, which is what we are doing in California. Once we build it, it will be considered part of the California ISO system, and we will get a regulated rate of return.

We will be considered a utility in California, so we will have all the rights and powers that come with being a utility. I used to work for AEP back in the day, so I have a utility heart and a private equity head.

The other model is what we did with the Neptune and Hudson transmission lines, which are what we call merchant transmission lines, which is what Todd Singer is doing, where you build the line for a customer. In our case, we have New York Power Authority and Long Island Power Authority as 20-year customers on our transmission lines.

Both business models work. If you can find a good route and you can find a good customer for whom you are solving a problem, those agreements can move fast. Permitting obviously always takes time.

On the other hand, when we won the bidding in California, we had a customer from day one, which was the California ISO, and that also works really well. FERC Order 1000 was designed to address the issue that utilities were not letting other participants like us play in their service territories. FERC Order 1000 has been in place now for 10 years. The group of projects was done in California. More than a dozen projects were awarded over the last several years. We got one of them. Now you see some other FERC Order 1000 RFPs coming out in PJM and other markets.

It is so much easier to manage a FERC Order 1000 RFP if you are in a single state because the cost allocation is simpler. With a multistate project, there is a fight among the states about who should end up paying for it. The whole cost allocation methodology is a big mess in the Northeast.

You have to come up with who is going to pay for the line at the same time as who will build it. Part of the reason why FERC Order 1000 has not been more successful is because there has not been a centralized way of allocating cost to different parties. Transmission is one of those asset classes where everybody wants it, but nobody wants to pay for it. That problem is structural.

The other challenge is the long lead times. If it takes 10 to 15 years to permit a transmission project, during such a long period, everything can change.

We saw this when I worked for AEP. The 735-kV lines that AEP was building from east to west were desperately needed, but by the time it got around to building them, the markets had shifted completely and the lines were no longer needed.

You see this in other places with coal and nuclear retirements, with distributed generation, with storage. The shape of the generating assets is changing far faster than the shape of the transmission assets. One is always playing catchup.

MR. EMEHELU: Blake Nixon, when you are committing to build a new generating facility, how do the transmission issues factor into the location, or are you more focused on finding the best wind resource or most predictable sunlight?

MR. NIXON: The ability to move any electricity we produce is number one, particularly in the wind business where the technology has improved so much that you can get decent productivity out of a lot of different resource sites. Historically, you would go to where the wind was and where transmission was readily available or you could get to it and there was some capacity.

But that has not been true for a number of years. I think lack of transmission will remain the big issue in the future. Finding the incremental pieces of existing capacity or anticipating the next addition of new incremental capacity is siting-job number one.

Then you go from there. You draw your concentric circles based on how big a project you plan to build and what the market opportunity is, and then you look for a site with the best resource within the desired radius.

Solar is a little different. It is a bit more plug-and-play. The constraints are different. I am not active in California, so I am not speaking about markets like that, but in the Midwest, the irradiance differences are not that different from one site to the next, so proximity to the physical infrastructure is what distinguishes sites.

Access to transmission is the number one challenge for siting and delivering projects. It is top-of-mind for us every day.

Blackstone

MR. EMEHELU: Let’s spend a couple minutes on financing. Transmission projects are challenging to develop. They take forever. A lot of money has to be spent in early-stage development. How do you finance that? When do you go to lenders to put in money? Is all the development capital pure equity?

MR. SINGER: Blackstone is funding 100% of our development equity and, as Himanshu said, it is 100% at risk. Every three months, we have to ask them for money. Every expense is evaluated.

Once we have all of our commercial agreements in place, engineering, procurement, construction agreements, and we have all the permits, then we arrange outside financing to pay for construction.

MR. EMEHELU: Himanshu, Todd Singer has to squeeze money from a black stone. How do you fund it?

MR. SAXENA: I was listening.

Look, there is a lot of money in the system, right? We are selling Hudson right now, and we see tremendous interest in the market in buying and operating transmission assets. There is no shortage of capital looking for good-quality infrastructure assets.

Gas pipelines and electric transmission assets are core infrastructure assets. Once such an asset has been built, everybody wants it. The problem is getting to that point.

Development capital is not widely available. It takes a certain degree of foolish optimism to invest in transmission, and there are not many people who have that.

The cost of funding construction is coming down to a point where we are seeing wind farms being financed at LIBOR plus 99 basis points for one-year construction projects. Transmission can probably be financed at LIBOR plus 125. There is no lack of debt capital for good projects that are ready to start construction. Finding the development capital to get them to that point — squeezing a black stone — is the hard part.

MR. EMEHELU: Where do you see the transmission business going? Do you see new technologies, new financing structures, new regulatory solutions?

MR. GRAMLICH: The grid is aging. There are challenges connecting remote renewable energy projects to the grid. We have an extremely old set of transmission lines in this country that will probably be replaced mostly through the utility rate-base regime.

There could be opportunities for developers to do pieces of it. That is where new technologies come in. There are some technologies that could be used to get more capacity out of the existing lines. That is an opportunity for clean energy.

There are ways to benefit operating wind and solar projects using dynamic line ratings, power flow control, network topology optimization and other new technologies to reduce congestion and curtailment. You build a plant and then four other plants come into your area. You could not have forecast it. The new plants crush your prices or end up causing your project to be curtailed, and now you are looking for ways to maximize your revenue out of an existing asset, and you may not be able to build more transmission. These types of opportunities will be important.

MR. EMEHELU: We hear smart grid, smart grid, smart grid. Is this part of a smart grid?

MR. GRAMLICH: Most people mean retail and residential meters when they say smart grid. These fall more into the category of improvements to the bulk transmission system. We need a sexier term obviously.

MR. SINGER: The RTOs and utilities that operate and own the grid are not in the business of taking risk. They are in the business of making sure that it is reliable. They are like baseball umpires. If you don’t notice them, they are doing their jobs. If you notice them, they are not.

We heard some of this from the storage panel yesterday, but it’s challenging to get utilities to move to new technologies. They are not compensated to take risk. It takes more time for improvements to be adopted in this sector.

I agree with what was just said about the aging infrastructure. The US grid is a patchwork quilt. Finding ways to fix the problems this creates is where the opportunities lie.

Changing politics

MR. SAXENA: Things could improve as the Facebooks, General Motors and Googles of the world enter into more and more corporate PPAs. They are all looking for renewable energy. They want to put in data centers that are huge consumers of electricity. They are building a new data center every six months. They are starting to notice the lack of transmission capability on the grid.

These are companies with enough pull within the federal government and the states to get things done. We have seen this at the state level where one of these big companies says, “I will put my data center or factory here if you will allow me to buy directly from this wind farm that is being developed next door.” The states find a way to accommodate them because they want the jobs.

My hope is that 10 years from now when Amazon’s market cap is $2 trillion and the company is more powerful than the federal government, Amazon will force a wholesale rebuild of the transmission grid.

When you start seeing forces like this demanding change, something will happen.

MR. NIXON: To take the historic and apathetic view that not much will change, I think it is all about use. It is like Rob Gramlich was saying: how do you squeeze more out of each transmission line? It is not just wind, not just solar. It is hydro in the Pacific Northwest. It coal-fired generation of the coal states. It is gas in Ohio and Pennsylvania.

Promoting renewables through subsidies can only go so far. Without the physical means to move the electricity, we end up with fragmented and inefficient markets. Solve the physical problem and you really have an opportunity for a truly free market.

I never heard that statistic that you mentioned at the beginning about two million miles of pipelines and 200,000 miles of transmission lines. That is insane, really. The fundamental problem is a failure to have a national approach to fixing the grid and overcoming a lot of local fiefdoms that stand in the way of a grid that works. I will keep saying that every time somebody asks me. That is really the solution. Build something that looks like an overlay, even if it does not include Texas, and let’s create a real market.

MR. EMEHELU: Any questions from the audience?

MR. KIM: Jonathan Kim from Nataxis. Do you see any resistance coming from incumbent utilities to where you want to locate transmission? I am wondering if part of this is an issue of regulated versus not regulated and the opposing forces between them.

MR. SAXENA: The regulated utilities do not like people like Todd and me. We are a threat to their business model. I think there are certain markets, like California, where the utilities have learned how to live with independent developers. In other markets, there is considerable tension between the utilities and the non-utilities trying to build transmission.

That is not a significant reason for why new transmission lines are not being built, but that resistance is very much there.

MR. SINGER: I think the utilities tolerate us, as merchant developers, and our relationship is good.

MR. TONDU: Joe Tondu from Tondu Companies. So the solution seems to be federalism. What about the opposite? ERCOT works quite well. Why not make a bunch of state-regulated grids, say in Michigan, Ohio and Pennsylvania, that are completely outside the federal system? When the federal government put the grid in the hands of regional RTOs, it made things massively complicated. For example, now you have MISO, which operates part of the grid all the way from the east coast to the south coast. Why not go the other way?

MR. SINGER: Permitting of our New York project at the state level was lengthy, but it was thorough. The federal permitting duplicated some of what had been already done at the state level. I agree with you. Just eliminating overlap would be a big help.

MR. GRAMLICH: Nobody else is going to physically disconnect a state from the rest of the interconnected grid like Texas has done. It is just not going to happen. I think what you are getting at is whether there is a way to bypass some of the regional policy and FERC logjams and cost allocation debates. That is what the merchant DC model allows. Clean Line and other companies have tried to use that model with mixed success. Todd Singer is hopefully going to get his project done.


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