TODAY’S STUDY: NEW MEXICO PLANS NEW ENERGY EXPANSION, BEGINNING WITH WIRES

New Mexico Renewable Energy Development Study
Toole, Bent, Salazar, Hinrichs, Verma and Ulibarri, October 18, 2010 (Los Alamos National Laboratory)

Wind developers can bring many blessings to wind asset-rich rural regions, starting with construction jobs and local spending and ending with a stable energy-producing operation in place providing permanent jobs, regular payments to landowners, ongoing income opportunities for local businesses and an expanded tax base for municipal, county and state coffers. But most of that won't happen until there are wires to deliver the wind-generated electricity to power markets.

For their earliest utility-scale wind projects in the 1980s, California developers and transmission builders went to local business groups and governmental and non-governmental associations and worked out individual plans that satisfied the multiple stakeholders (including environmentalists, landowners, grid operators and local military installations).

In 2005, Texas went California one better. Legislators saw wind asset-rich areas going undeveloped for lack of transmission where transmission builders saw no need to string wires because there were no wind turbines. It became known as "the Chicken and Egg thing" and Texas energy barons had no intention of letting it stop them. They pushed a Competitive Renewable Energy Zone (CREZ) plan through the legislature.

The CREZ plan required the Public Utility Commission of Texas (CPUCT) to identify places where developers wanted to build and gather stakeholders to see that transmission developers got wires built there. It is working. By 2013, the state will have enough new wires to carry 18,456 megawatts of new wind, effectively tripling the Texas capacity.

As the report below demonstrates, the CREZ concept is an idea whose time has come. New Mexico has identified CREZs and is planning new wires. States around the country are getting busy with similar plans. There is only one problem: Who invented the idea will be yet another area of contention between Texas and California.

Executive Summary

As a center for renewable energy development, New Mexico offers outstanding wind, geothermal and solar resources1. Today, fossil-fueled power (coal and gas) and nuclear power serves the State through transmission lines which interconnect to the Four Corners region. This situation presents challenges for renewable energy project developers that desire to export large amounts of renewable power given limited transmission capacity, flow bottlenecks and long interconnection paths. Upgrading New Mexico’s existing grid offers substantial opportunities and serves as the key motivation for this report.

In collaboration with the New Mexico Renewable Energy Transmission Authority (RETA), Los Alamos National Laboratory (LANL) analyzed a variety of possible transmission upgrades over the next 20 years in order to export power generated by 5,200 Megawatts (MW) of renewable capacity. Two renewable energy development plans (or Collectors) were analyzed by applying LANL’s independent technical judgement, tools and expertise.

Both plans identify opportunities to invest in grid upgrades and to create substantial economic development. They are intended to serve as examples of different design approaches: a looped transmission design identified by RETA (Collector Plan 1) which consists of upgrades to 345-kilovolt (kV) lines, shunts and transformers; design goals are discussed on page 18. A radial transmission design identified by LANL (Collector Plan 2) consists of upgrades to 115-, 230-, and 345-kV lines, shunts and transformers; design goals are discussed on page 14. Each plan is builtout over 5, 10 and 20 year time horizons through a phased series of transmission upgrades. Both plans are judged to be technically feasible designs which can potentially create immediate economic opportunities for New Mexico. Findings presented in this report do not indicate LANL’s advocacy for any Collector technical features.

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Economic findings focus on the direct, indirect and induced jobs created by the construction and operation of the 5, 10, and 20 year Collectors and the operation of 5,200 MW of new renewable energy projects. Renewable jobs are derived from production of renewable energy which also creates in-state and out-of-state energy sales. “Jobs” are defined in terms of “FTE- years” i.e. one “job” is one FTE for one year. In order to estimate the average number of annual jobs for the 20 year (2030) collector system, take the total FTE-years in 2030 and divide by 20. For Collector Plan 1, the average number of annual jobs created is 1,240; for Collector Plan 2, the average number of annual jobs created is 1,050.

Collector Plan 1 will require an investment of $312 million more than Plan 2, and it will create approximately 3,800 additional jobs over 20 years (on average, 190 additional jobs per year). Additional benefits can realized by wheeling of bulk energy sales in-state or as export. Also related to energy sales, a fraction of costs related to the production of renewable energy are likely to be retained in New Mexico and therefore create benefits to the economy. Collector Plan 1 exports 67,200 Gigawatt-hours (GWh) of energy by 2030 at Four Corners hub, generating $804 million of wheeling and operations & maintenance (O&M) costs over 20 years. Collector Plan 2 exports 45,900 GWh, generating $786 million of costs by 2030. Tax revenue generated from each plan is approximately $4 million per year, or a total of $67 to $79 million by 2030. The value of energy sales to New Mexico's economy is not included in this analysis.

Gross State Product (GSP) gain divided by Collector construction cost represents an approximate gauge of state-level rate of return on investments. The rationale for this measure is that it measures relative impacts within all of New Mexico’s economic sectors. Using this formulation, the annual compound rate of return for Collector Plan 1 is estimated to equal approximately 12.3% through 2030; the annual compound rate of return for Collector Plan 2 is estimated to equal approximately 13.6% through 2030.

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A decision must be made to implement an appropriate method for Collector cost recovery consistent with public policy requirements of various government entities. This study analyzed one cost recovery method, however these findings do not indicate LANL’s advocacy for a specific cost recovery method.

Each Collector plan meets the minimum threshold for feasibility, however more analysis must be accomplished to insure New Mexico’s grid can simultaneously serve future load growth, accelerate the development of renewables and maintain reliable electric service. This report and its findings represent “Phase 1” of three phases envisioned to develop refined Collector proposals. As “next steps”, Phases 2 and 3 are described in Section 6. Phase 2 of this study process would additionally evaluate the best combined features from both plans if several large regional transmission initiatives (i.e. SunZia, Tres Amigas, Santa Fe Clean Line, High Plains Express and Southline) are added to interconnect other states, control areas or load centers.

Note: Box sidebars appear in various sections of this report to provide background for a nontechnical reader. This information is intended to supplement content in the main body of the report by explaning planning concepts, offering cautions or different perspectives on study approaches that may need further consideration.

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Introduction

Since the early 1990s, Los Alamos National Laboratory (LANL) has applied electric grid models and simulation software to problems of national significance. This effort continues with a variety of projects funded by the Department of Energy (DOE), other federal and state agencies and private companies. Critical to the success of these programs is the ability to integrate regional and state-scale models of the electric grid, to assess the propagation of impacts to the grid, and to present, interactively, the effect of potential mitigations required to stabilize an impacted grid. On the basis of these capabilities, this report is intended to meet the following study objectives:

• Develop an AC-power-flow model, using commercial tools accepted by the utility industry, to represent future conditions within New Mexico’s electric grid.
• Conduct a screening analysis of options for accelerating potential renewable energy development through the addition of a statewide transmission Collector system on a 5, 10 and 20 year time horizon
• Evaluate total revenue needed, jobs created (temporary, permanent), plus indirect and direct impacts to the state’s economy.
• Evaluate a potential cost allocation methodology.
• Issue a project report that will provide information for policy direction by state regulators, project developers, and legislators…

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Results of Collector Analysis

Tables 9 and 10 detail project costs, revenue and benefits accrued by Collector Plan 1 and Plan 2 for the years 2015, 2020, and 2030. Costs are cumulative at each project phase. “Benefits to New Mexico” in the table summarizes jobs created and tax revenues that accrue to the state as a whole.

By 2015, as shown in Table 9, $540 million will be spent on Collector Plan 1, which is estimated to create 6,200 jobs throughout the state’s economy. Jobs are assumed to accrue from direct, indirect and induced causes. Roughly 40% of all jobs created will be “short-term” employment positions that end when transmission and renewable projects are commissioned. The remaining 60% of jobs are considered “long-term” and remain active, creating an ongoing economic stimulus across many sectors. Bonds are assumed to be 20 year fixed rate bonds with an 8% interest rate. Future market conditions cannot be predicted with high confidence so a conservative estimate of today’s market was used as the basis for these calculations.

“Export GWh” and “In-State GWh” equal the estimated sum of all exported energy delivered to the Four Corners hub, or distributed within New Mexico by that year.

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The sale of exported power directly benefits generation owners and utilities for both Collector plans, however these revenues may or may not provide statewide benefits. Utilities within the State of New Mexico (and nationwide) must meet the Renewable Portfolio Standards (RPS) that require a fraction of all generation be produced by renewable energy. As such, RPS has created a distorted market for electricity in which the assumed buyback rate is typically much higher than the true market rate. As soon as utilities meet RPS requirements, they will no longer contract for renewable energy at higher rates and instead only offer lower market-based buyback rates. Significant uncertainty is associated with estimating likely revenue from energy sales over the 20-year study period, and the degree to which revenue is retained to create statewide benefits is also highly uncertain.

Total estimated jobs created plus a breakdown of job function in New Mexico’s economy are listed in Table 11. Tabulated values are summed from results reported in Tables 10 and 11 which are cumulative at each project phase.

In order to estimate the average number of annual jobs for the 20 year (2030) collector system, take the total FTE-years in 2030 and divide by 20. For Collector Plan 1, the average number of annual jobs created is 1,240; for Collector Plan 2, the average number of annual jobs created is 1,050.

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Recovery of Collector Costs via Energy Assessment

There are at least three methods either proposed or currently in use for purposes of recovering transmission investment costs related to renewable development; they are

• MISO (Midwest Independent System Operator) proposes to establish a new category of transmission projects (Multi Value Projects, MVP); the cost of MVPs is spread evenly to load throughout the MISO footprint on an energy basis.
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• SPP (Southwest Power Pool) has implemented a “highway/byway” cost allocation method. Transmission projects above 300 kV are considered highways, and the regional system is allocated all costs; for transmission between 100 kV and 300 kV, allocation is 1/3 regional system, 2/3 to the facility zone; for transmission less than 100 kV, the facility zone is allocated all costs.
• ERCOT (Electricity Reliability Council of Texas) enacted a “Wind plus Load Share” method based on required “Ancilliary Services”. This include the cost to ERCOT of transmission reserves, regulation and reliability, the cost is hedgeable and can be exchanged for a variety of similar services.

Total electric energy (MWh) sales are projected to each out-year, i.e., 2015, 2020, and 2030, using a straight-line projection. Costs are then proportioned by energy sales to each customer class, as shown in Table 12.

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The bonded cost of each Collector plan is assumed to be recovered as a flat charge per MWh. Costs are distributed to each class, then re-estimated as a monthly per customer charge, based on projected number of customers in each class…

“Annual Cost Recovered” lists the proportion of each Collector’s bond costs, allocated to a specific year and customer class; the costs are discrete, not cumulative which decrease as Collector investments decrease. ”Monthly Per Customer Cost” lists the estimated per customer charge; charges are cumulative and therefore increase over time.

Two cost recovery levels are shown: 100% (Table 13), 50% (Table 14); all costs scale in proportion to the level of recovery assumed. If recovery is less than 100%, costs would be shared in some proportion between customers, renewable developers and other Collector beneficiaries.

Table 13-14 indicates that costs recovered per customer between 2015 and 2030 are relatively similar for both Collector plans. However, some differences are projected to occur later in the study period. By 2030, assuming 100% recovery the Collector Plan 1 per-customer charge for industrial accounts is $595.51 versus the Plan 2 per-customer charge of $458.17, a difference of approximately 25%. Residential and commercial customer charges are also generally higher for Collector Plan 1. These differences are strictly attributable to the cumulative bonded costs of each Collector.

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Comparison of Collector Economic Performance

Collector Plan 1 and 2 perform in a very similar economic fashion in terms of costs, jobs created, tax revenue generated, and income accrued from energy sales. This study analyzed one cost recovery method, however these findings do not indicate LANL’s advocacy of a specific cost recovery method. Economic findings focus on the direct, indirect and induced jobs created by the construction and operation of the 5, 10, and 20 year Collectors and the operation of 5,200 MW of new renewable energy projects. Renewable jobs are derived from production of renewable energy which also creates in-state and out-of-state energy sales. “Jobs” are defined in terms of “FTE- years” i.e. one “job” is one FTE for one year. For Collector Plan 1, the average number of annual jobs created is 1,240; for Collector Plan 2, the average number of annual jobs created is 1,050.

Collector Plan 1 will require an investment of $312 million more than Plan 2, and it will create approximately 3,800 additional jobs over 20 years (on average, 190 additional jobs per year). Additional benefits can realized by wheeling of bulk energy sales in-state or as export. Also related to energy sales, a fraction of costs related to the production of renewable energy are likely to be retained in New Mexico and therefore create benefits to the economy. Collector Plan 1 exports 67,200 Gigawatt-hours (GWh) of energy by 2030 at Four Corners hub, generating $804 million of wheeling and operations & maintenance (O&M) costs over 20 years. Collector Plan 2 exports 45,900 GWh, generating $786 million of costs by 2030. Tax revenue generated from each plan is approximately $4 million per year, or a total of $67 to $79 million by 2030. The value of energy sales to New Mexico's economy is not included in this analysis.

Gross State Product (GSP) gain divided by Collector construction cost represents an approximate gauge of state-level rate of return on investments, The rationale for this measure is that it measures relative impacts within all of New Mexico’s economic sectors. Table 15 summarizes the respective factors used for this calculation. GSP gains are cumulative for each project phase. Using this formulation, the annual compound rate of return for Collector Plan 1 is estimated to equal approximately 12.3% through 2030; the annual compound rate of return for Collector Plan 2 is estimated to equal approximately 13.6% through 2030.

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Recommendations: Further Refinement and Analysis of Collector Options

This study satisfies an initial milestone in New Mexico’s multi-year, statewide transmission upgrade program. Although each Collector plan meets the minimum threshold for feasibility, more analysis must be accomplished to ensure New Mexico’s grid can simultaneously serve future load growth, accelerate the development of renewables and maintain reliable electric service.

Completion of three analysis tasks will be key to the success of the upgrade program:

• Phase 1: A top-level screening of transmission alternatives (substantially accomplished by this report)
• Phase 2: A second more detailed grid analysis based on localized demand and generation forecasts
• Phase 3: A final evaluation of grid operational issues prior to actual construction

Each task outlined above will provide greater levels of detail and certainty regarding Collector plan features and the probability of outcomes which are discussed in this report.

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Phase 2 will incorporate more detailed forecasts from each transmission providers based on development of renewables within each utility’s service territory and planned changes related to demand and conventional generation. This phase should include a statewide, 1/2 to 1 day planning workshop with participants from LANL, RETA, utilities and other organizations to discuss conclusions from this study and to identify collaborative next steps. The best combined features from both Collector plans can be evaluated during Phase 2 if several large regional transmission initiatives are added to interconnect other states, control areas or load centers. Additional analysis of generator dispatching should be conducted at this step to ensure transmission capacity upgrades are properly balanced in terms of flows and production costs.

Phase 3 will ensure that the Collector plan will support robust transmission operation for delivery of power to New Mexico’s consumers. It should include a contingency screening analysis of possible grid failure states (N-1) and operational analysis of generator firming requirements for large amounts of variable renewable generation. This task will require analysis of multiple power flow cases which span an entire year’s range of demand and generation levels. This requirement exceeds normal utility planning practices which typically focus only on demand conditions for three periods (peak summer, peak winter, and off-peak/shoulder). Given that the renewable development plan assumed in this report will create large swings in power injection across multiple time periods, it will be necessary to analyze these issues in detail.