US Energy Transmission Activity Offers Hope to the Ailing Grid

Source: By David Penna, Bloomberg • Posted: Monday, June 17, 2024

The US can only fully tap its renewable resources by expanding and modernizing its electrical transmission grid to move power generated in Midwestern plains and Southwestern deserts to the high-density urban areas that need them.

There are advantages of increasing transmission capacity, and challenges to achieving that buildout. Some recent government activity should offer encouragement to the transmission industry.

Pros and Cons

Investments in new power transmission lines would enable the transport of renewable energy from resource-rich areas to end users. A more robust transmission network would also improve the grid’s reliability, benefiting producers of both renewable and traditional energy alike.

By connecting diverse sources of renewable energy from across the country, we can mitigate the intermittency inherent in wind and solar power generation, while providing resiliency if a particular region of the country is affected by severe weather.

Improving transmission infrastructure could also enable economic development. Renewable energy projects in many underdeveloped areas of the country haven’t been possible because they’re underserved by existing transmission infrastructure. By expanding the transmission grid, we can enable developers to advance projects that would create jobs in rural communities.

One major obstacle is the lengthy and complex regulatory approval process for building new transmission lines. Current regulations require input from various stakeholders at the federal, state, and local levels, leading to delays and increased costs.

Another challenge is the financing of new transmission lines. It’s been difficult to coordinate payments across multiple utility companies, regional transmission organizations, independent system operators, and other planning authority areas.

In theory, the consumers who benefit more from new projects should bear the greater cost. In reality, allocating that cost appropriately is a complicated and nuanced process that can lead to lengthy delays or derail strategic planning entirely.

Similarly, if the construction of new transmission infrastructure is paired with the development of new generation projects, it can be difficult to navigate “project on project” risk. A generation project might happen only if transmission is available, but the financing for transmission capacity may be predicated on there being electricity to transmit, creating a chicken and egg problem for potential lenders.

There are practical ways to mitigate this risk, but these challenges applicable to the development of transmission lines are unique in the project financing market.

Transmission projects are complex. A developer must be able to obtain a long chain of rights of ways, navigate multiple permitting and regulatory regimes, and clear the technical, engineering, and financial hurdles posed by a major infrastructure project.

Few participants in the market possess the range of capabilities—let alone the patience or resources—to navigate these challenges over the course of a project that will last years.

Federal Action

The Department of Energy released a preliminary list of 10 potential National Interest Electric Transmission Corridors, or NIETC, to accelerate transmission development in regions that have an acute need for additional capacity.

A NIETC designation unlocks federal financing and permitting tools that enable development, including access to direct loans under transmission facility financing, public-private partnerships through the Transmission Facilitation Program, and federal siting and permitting authority through the National Energy Regulatory Commission.

The designation also allows state and local siting authorities to utilize the environmental analysis conducted by DOE to complete local siting and permitting requirements, which could ultimately accelerate the development of eligible transmission projects.

Five days after the DOE announcement, the Federal Energy Regulatory Commission promulgated Order 1920, which is widely considered to be the most significant transmission regulation in decades.

The order requires transmission providers to engage in long-term planning for regional transmission facilities, introduces criteria and a process for evaluating transmission benefits (on both technical and economic bases), and creates a cost allocation framework designed to appropriately apportion costs line beneficiaries.

The goal of the order is to overcome the short-term thinking and balkanization of interests that have restrained the planning across and development of long-haul transmission.

Cautious Optimism

Renewable energy project developers view the new NIETCs as critical to building out transmission infrastructure and say it could accelerate the construction of transmission projects across the country. The DOE is accepting comments on these designations this summer, and the agency is expected to issue a finalized rule in the fall.

Many are similarly optimistic about Order 1920. Its provisions, combined with the climate-forward policies of the Inflation Reduction Act, could be a boon for clean energy producers.

While a previous draft of Order 1920 included a right of first refusal that would give local utility companies exclusive ability to complete local projects, the final order removed it. This move was praised by independent transmission companies, who can now compete in this space, accelerating development and driving down costs.

This optimistic reaction is not universal. FERC Commissioner Mark Christie, who dissented from the order, said it exceeded the commission’s statutory mandate. He argued the agency should focus on consumer prices and views the climate concerns behind the order as outside FERC’s jurisdiction.

Some policymakers have also objected. Senator John Barrasso (R-Wy.), the ranking member of the Senate Committee on Energy and Natural Resources, criticized the order, claiming that the commission is improperly working to regulate emissions.

Regardless, these regulatory developments are a major step forward in modernizing the nation’s transmission lines. The electric grid is aging and fractured, and these moves could provide much-needed momentum to accelerate grid modernization and deploy renewable energy.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

David Penna is project finance partner at Davis Polk where he advises clients on complex project development, financing and M&A transactions, with a focus on energy, power and infrastructure.