The International Panel on Climate Change (IPCC) predicts that the Earth will almost certainly reach or exceed 1.5 degrees in the next decade or two. While there is already tremendous acceleration in renewable energy, most of the overall emissions cuts will need to come from the power sector and be completed by 2030 to stay at or below the 1.5-degree target. In the United States, solar, wind, and other renewables would have to produce roughly half of the country’s electricity by 2030 – much faster than federal estimates, which forecast renewables at half of the energy mix in 2050, 20 years later. The chart below from the World Resources Institute shows the “S curve” of clean energy deployment that must be achieved for the 1.5-degree goal.
Figure 1: World Resources Institute from Authors and Climate Action Track 2020
So there’s no doubt about it – the United States must move quickly to add renewable energy to the grid. However, interconnection backlogs and upgrade costs shouldered by clean energy developers are slowing the process considerably.
These issues matter a great deal to project finance. The transition to a clean energy economy is dependent on how quickly projects are deployed and connected to the grid. All of that hinges on overcoming bottlenecks with costly upgrades or long wait times. Lenders are seeing more and more small projects, because interconnection delays mean repayment is not assured for up to five years. Organizations are beginning to document these problems and what it means for ratepayers, economic development, and the environment. Earlier last year, Americans for a Clean Energy Grid, an advocacy group focusing on modernizing the North American electrical grid, released a report titled, “Disconnected: The Need for a New Generator Interconnection Policy.” The report stated that the current transmission grid is inefficient. Lengthy interconnection queues and costly upgrades add a huge hurdle for connection of clean energy projects. The numbers are staggering. At the end of 2019, 734 GW of proposed generation, 90 percent of which were new wind, solar, and storage projects, were waiting in U.S. interconnection queues. By delaying their interconnection, it increases electricity costs by preventing the quick adoption of new cleaner, cheaper power sources than existing generation. And, because these projects are often located in rural areas, this backlog prevents rural economic development.
Interconnection Clogs & Increased Transmission Costs
While tax credit extensions and the Biden Administration’s potential passage of the Build Back Better Plan are important, Steven Shparber, an attorney with Clark Hill, a major international law firm, notes, “Nothing can happen significantly until problems related to the transmission, queue reform, and cost allocation are addressed.” Government support and tax credits matter a lot less if a clean energy project must shoulder upgrade costs exponentially higher than what is anticipated, or sit in a long interconnection queue for months and months.
So, how bad is it really? Data from the Lawrence Berkeley National Laboratory show that average costs for transmission upgrade charges ballooned from 10 percent of total project costs five years ago to as much as 50-100 percent of the total costs. Clean energy project developers may exit the system when they find that the costs are so high. The current approaches to grid planning do not identify opportunities to take advantage of transmission’s large economies of scale to capture benefits, such as congestion relief, reduced transmission losses, and interconnection of renewable resources. But reform measures appear to be on the way.
Priority for ISOs and the Federal Energy Regulatory Commission (FERC)
FERC is now studying this issue. In July 2021, FERC issued an Advance Notice of Proposed Rulemaking on Potential Reforms for the Transmission Planning, Cost Allocation, and Generator Interconnection Processes (the ANOPR). The published action note is meant “to consider the need for more holistic transmission planning, cost allocation, and generator interconnection processes to plan the grid for the future, and to do so in a way that results in rates that are just and reasonable.”
Shparber notes, “The reforms that eventually come out of the ANOPR have the potential to fundamentally and positively impact the ability for renewables to be more successfully deployed throughout the United States. It is extremely important for the future of renewables in the United States that FERC and all stakeholders establish a final rule that allows for the grid of the future to work.”
But challenges remain. The fundamental issue of fairness is at stake: Why should developers of a single new generation system be solely responsible for the cost of transmission upgrades that benefit all customers? Often, the lowest-cost energy resources, such as wind and solar energy, are far away from energy load centers. Transmission capacity expansion must then move the power from the generation sources (in rural areas) to the location the power is needed. And, that power benefits a large population center. Almost all of the projects in the interconnection queue fit this profile, and yet the transmission upgrade costs are significant and benefit utilities and ratepayers alike within a populated area.
The barriers to deployment of renewable energy related to challenges associated with cost allocation and the interconnection process are perhaps nowhere more apparent than in PJM, the nation’s largest regional transmission organization, which covers a territory spanning from Virginia through Illinois. The 225 GW of projects in its interconnection queue – mostly solar and storage – is so high that it is considering taking an effective two-year pause to prioritize interconnection decisions on more than 400 projects that are closer to completion. A task force is expected to report on suggested reforms by May 2022, which would then be submitted to FERC for approval. Ideas include requiring more up-front money to take out speculative projects and connecting construction ready projects ahead of others.
While solutions to these intractable problems are being studied, the climate cannot wait.
We must figure out the remedy to these issues, and soon too.
Article Originally Posted At: Leyline Capital