April 2007 could go down as a milestone in the development of alternative power in the United States thanks to a pair of new rule changes pertaining to the construction of electricity transmission lines.
The U.S. Department of Energy’s declaration last week of high-priority “energy corridors” in the Southwest and mid-Atlantic regions, coupled with the Federal Energy Regulatory Commission’s approval of a new California policy on transmission financing, removed two potential stumbling blocks to the construction of new high-capacity power lines.
“If we develop a truly functional interstate transmission grid … the wholesale market will be more robust, and consumers will benefit from lower electricity costs and expanded access to renewable electricity that can be transported from the areas where it is viable to areas where it is needed,” Michael G. Morris, chairman of American Electric Power, said in a statement reacting to last week’s energy corridor designations.
While expanding the nation’s power supply and transmission grid remains a complex endeavor, in a nutshell the two decisions make it easier to connect wind generators in remote areas to consumers in the big city.
Rob Gramlich, policy director for the American Wind Energy Association, called the California measure approved by FERC on April 19 a move that opens the door to “several hundred gigawatts of cost-effective clean wind power.”
The new plan from the California Independent System Operator changes a state rule that had previously required companies building new power plants to also pay for the costly construction of the trunk transmission lines that tie into the major lines. The arrangement was geared toward major generating companies and often left small wind-power developers unable to shoulder the cost of building the trunk lines.
Under the new Cal-ISO rules, costs are spread out in advance among all of the main-line users. Utilities will pay a share and will then be reimbursed over time after the new plant is up and running. The unique arrangement is seen by wind proponents as benefiting both the development of remote wind farms and satisfying growing requirements that utilities obtain a specific percentage of their power from renewable sources.
“The transmission system that worked to interconnect (natural) gas generation over the last decade simply doesn’t work for wind and solar,” Gramlich said. “The California ISO and now FERC have given the wind industry a fair hearing on this barrier and have now adopted this pro-active solution.”
The energy corridor serves as the second half of the equation by helping ensure that new transmission lines leading into the urban demand centers will not become hopelessly bogged down in disputes over the environment and private property rights.
Meanwhile, U.S. Energy Secretary Samuel Bodman announced last week that two multistate areas in the United States had been designated as high-priority energy corridors where the federal government would have the final say on whether or not a new transmission line would be built through a particular area. State governments would be given first opportunity to reach an agreement on the path of the line; however, if the deal should stall amid disagreements over the path, the feds would have the authority after one year to step in and decide unilaterally where the line would be built.
One corridor includes the Southern California-Las Vegas-Phoenix triangle. A second energy corridor covers the District of Columbia and parts of Delaware, Ohio, Maryland, New Jersey, New York, Pennsylvania, Virginia and West Virginia.
The move raises a scenario in which local property rights and environmental concerns could conceivably be swept aside by a fiat from Washington. But Bodman said the important thing was to get projects moving so that the energy industry would have the means of answering the growing demand for electricity in the United States.
“I fully understand that this is sometimes difficult to do in practice, particularly when individual landowners or perhaps a local community feels adversely impacted,” Bodman said. “I won’t minimize those concerns and they must be taken into account. But, when viewing this situation from a broad perspective, it is clear that grid modernization is an urgent national problem.”
The policy moves come at a propitious time as private equity companies, flush with new cash, begin making noise in the energy sector, the biggest splash being the $32 billion purchase of Texas utility TXU by a private consortium led by Kohlberg Kravis Roberts.
Matthew White of the Wharton School of Business at the University of Pennsylvania said in a recent article issued by the school that regulatory uncertainty would be a caveat for investors looking at the energy sector.
“There is a great deal of uncertainty about the rewards for investors, and that will give any investor pause during due diligence,” White said. “They might say there are greener pastures elsewhere – at least until the regulatory environment clears up.”
The regulatory process indeed appeared to be at the very least more streamlined by the timely decisions on the energy corridors and power line financing. Being able to count on getting electricity produced by new power plants to market certainly makes wind and other forms of energy more attractive to the capitalists who can make it happen.
By Hil Anderson
30 April 2007
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