Has New England Built Too Much Transmission for Reliability?

The current transmission planning process in New England has created a bias toward funding new infrastructure to support the electricity grid’s reliability at the expense of less costly non-transmission alternatives — including energy efficiency, demand management and distributed generation, said industry sources participating in a recent Clean-Energy Transmission Summit in Boston. Investment in these non-transmission options can make it possible to avoid or delay expensive grid expansions by decreasing congestion on power lines. But as a result of present policies favoring more capital-intensive alternatives, the region’s consumers may pay more than is necessary to ensure grid reliability, said presenters at the event, which was co-sponsored by Americans for a Clean Energy Grid and the New England-based Conservation Law Foundation.

In addition, the bias may eventually render it more expensive to integrate new renewable-energy resources required by state rules, or even create a backlash against policies that fund clean-energy mandates through ratepayer surcharges, panelists said.

In a follow-up interview with Green Matters, a spokesman for New England’s Independent System Operator (ISO-NE), the non-profit company in charge of the region’s power grid and wholesale energy markets, indicated that ISO-NE is grappling with critiques such as these in a strategic planning initiative that is nearing completion.

Although the January 23 summit focused broadly on ways that a modern electricity grid contributes to enhanced security, a stronger economy and success in meeting many states’ clean-energy goals, the comments addressing New England’s regional issues seemed to generate the greatest interest on the part of conference participants.

“No transmission projects should be built just for reliability,” said Johannes Pfeifenberger, an expert on regulatory economics and finance who spoke at the summit.

In order to allocate costs accurately, transmission projects should capture all possible benefits, something that may not occur efficiently, given the somewhat disjointed planning process used by ISO-NE, said Pfeifenberger, who heads utility regulation and electric power consulting for The Brattle Group, an economics consulting firm. The problem is that instead of assessing grid needs in an integrated manner — by considering reliability, market-efficiency and public-policy requirements jointly — ISO-NE examines these components separately, in a way that ends up privileging reliability concerns, he said.

Pfeifenberger’s call for reform was echoed by Derek Murrow, energy and climate policy director at Environment Northeast, a nonprofit, who attributed the skyrocketing cost of new infrastructure in New England to the bias toward transmission solutions for reliability over non-transmission alternatives (NTAs). The result for ratepayers has been a dramatic rise in transmission costs, which were 0.05 cents per kilowatt hour (kWh) in 2006 and are expected to rise to 2.5 cents/kWh by 2016, he said.

Murrow said the current structure of utility incentives contributes to this state of affairs. Regulators grant companies returns of more than 11 percent on their capital investments, including all cost overruns, for projects that entail very little risk, he said. As a result, building transmission has become a much more profitable activity than generating or distributing energy, with transmission projects producing over 50 percent of utilities’ regulated earnings in 2010, or more than twice as much as in 2005, said Murrow.

The bias toward building new transmission over NTAs is also reflected in who pays for such projects, he said. Costs of transmission projects for reliability are proportionately shared across ratepayers in all states that benefit, whereas the cost of NTAs must be borne by ratepayers of an individual utility or state, even if others also benefit economically from a resultant ability to put off more costly additions to the grid, he said.

Utility incentives need to be aligned so that NTAs are seen as opportunities and not as competition for large, capital-intensive transmission projects, Murrow said.

A related concern was raised by Diane Arcate, the CEO of Power Options, a large power-purchasing coalition for non-profits. Arcate warned of instances in which proposals that serve to enhance merchant generation are presented as if they were solely transmission schemes. As an example, she singled out plans for new infrastructure to bring power from Hydro-Quebec into the region.

Murrow and Pfeifenberger also expressed concerns that the substantial amounts New England has spent on transmission for reliability may have a dampening effect on the development of clean energy, which is central to the states’ environmental goals.

“High costs of New England reliability upgrades may cause a backlash, making it difficult to fund the additional transmission needed to integrate the most cost-effective renewables,” said Pfeifenberger, who estimated that an additional $4-7 billion of transmission investments might be required to fulfill all the Renewable Portfolio Standards or targets in the states.

Ironically, this crunch comes at a moment when federal rules are placing greater emphasis on state clean-energy goals. The Federal Regulatory Commission’s new Order 1000, issued last July, requires regions to consider policy-based transmission needs alongside the more traditional focus on reliability and market efficiency.

Although New England already has a planning process that in many ways carries out what the new rule mandates, the region still needs to address public policy-based transmission planning in its compliance filing, noted FERC Commissioner Cheryl LaFleur, one of the summit’s keynote speakers. She also said that New England’s power supply may be affected by new EPA rules, with additional implications for transmission infrastructure.

One needed reform in the area of transmission planning has already been implemented, said Heather Hunt, executive director of the New England States Committee on Electricity (NESCOE), a nonprofit that represents the views of all six states. Although the region makes a substantial investment in energy efficiency, ISO-NE hasn’t properly reflected the impact of these programs in its load forecasts, she said. But, in response to a request from NESCOE, the system operator has identified a data-based methodology to incorporate energy-efficiency programs and their scheduled ramp-ups into the regional load-forecasting process, starting in 2012, said Hunt. The change should increase the accuracy of estimates about grid reliability needs and also support regional efforts to develop a cleaner energy supply, she said.

ISO-NE expects in the next month or so to release white papers presenting the results of a strategic planning initiative that addresses the incorporation of market resource alternatives — sometimes referred to as NTAs — into its forecasts and tackles other issues such as the potential impact of new EPA regulations and policy-based transmission planning, said Eric Johnson, senior external affairs representative at ISO-NE, in an interview with Green Matters. And a draft of the new energy-efficiency forecast for the region for the years 2015-2021 came out this week, he said.

Johnson added that ISO-NE’s mission is to maintain grid reliability and oversee the region’s wholesale power markets, as stipulated by the Federal Energy Regulatory Commission (FERC) in the 1990s when U.S. electricity markets were restructured to replace a highly regulated model with a competitive one. ISO-NE would need authorization from FERC to move forward with any broader solutions that emerge from the strategic planning initiative, he said.

Other decisions, such as determining relevant public policy for transmission planning, must come from the six states, which are reaching a consensus on that question through NESCOE, Johnson said. Similarly, decisions about socialization of costs for non-transmission investments must involve the states, since they pay the bills, he said.

The next chapter in this debate will become clearer when ISO-NE issues its white papers.

–By Eleanor Saunders