Transmission Competition Under FERC Order No. 1000: What we Know About Cost Savings to Date
Johannes Pfeifenberger, Judy Chang, Akarsh Sheilendranath, October 25, 2018 (Brattle Group for LSP Transmission Holdings and GridLiance)
Executive Summary
Competitive transmission planning processes in ISOs/RTOs, the most controversial aspect of FERC Order 1000, have shown potential for significant customer savings:
– While the scope of competition has been limited to only 2% of total U.S. transmission investments over the last 5 years, competitive processes led to innovations in proposed solutions, low bids, cost caps, cost control measures, and innovative financial structuring
– Winning bids average 40% below initial cost estimates while non-competitive projects are completed at 34% above initial estimates, offering 55% of potential cost savings
– Long-term savings likely less than the currently-observed 55% cost differences, but real prospect of significant customer benefits and innovation nevertheless
– Even if long-term savings were only half the 55% difference, if the scope of competition could be expanded from 2% to 33% of total transmission investments, estimated customer benefits would be approximately $8 billion over just five years
– Lower costs will also make transmission more cost-effective to address market efficiency and public policy needs (e.g., relative to more local and distributed generation)
Recommendations:
– Reduce qualification thresholds for competitive process and develop consistent criteria, drawing from best practices from least-restrictive RTOs to expand scope of competition
– Establish and implement consistent minimum reporting requirements to facilitate better tracking of project costs across all regions
Background
Focus of this presentation: An examination of transmission investment trends and current experience with competitive transmission planning in ISO/RTO regions as mandated under FERC Order 1000
U.S. transmission investments by FERC-jurisdictional transmission providers increased from $2 billion/year in the 1990s to $20 billion/year in last 5 years
We project $120-160 billion of investments over the next decade (for reliability, to integrate new resources, upgrade/replace aging existing facilities built in 1950-70s) Why competition? In 2011, FERC Order 1000 mandated competition in transmission planning to promote “more efficient or cost-effective transmission development”
We explore competition in ISO/RTO transmission planning to date and the criteria that currently limit the scope of competitive processes
We assess the extent to which the experience to date points to potential customer savings and how these savings would increase if the scope of competitive processes can be expanded
Competition Mostly for “Regulated” Transmission
Transmission investment remain largely regulated, based on state or regional planning with cost recovery at regulated rates Transmission is a public good:
Benefits broad in scope, wide-spread geographically, diverse in impacts on market participants, and occurring over many decades
Owners generally unable to capture sufficient portion of benefits
Will tend to lead to under-investment and over-use without regulated cost recovery
Competition is mostly for transmission projects with regulated cost recovery
Out-of-footprint investments by established transmission owners and independent developers
Elimination of “Right of First Refusal” (ROFR) of incumbent transmission owners for new builds approved in regional transmission plans as required by Order 1000 Some competitive “merchant” transmission projects (but not the scope of this presentation)
Mostly HVDC lines between regions with sustained price differentials, resource needs, and ineffective interregional planning of regulated transmission
HVDC is more likely to allow owner capture the benefits of the merchant lines
U.S. competitively-planned, regulated transmission opportunities for nonincumbents are limited to:
– Some regionally-planned projects in FERC-jurisdictional RTO/ISO regions U.S. ISO/RTOs are at different stages of using various frameworks for competitive planning processes, largely as a result of FERC Order 1000
– ERCOT’s transmission for competitive renewable energy zones (CREZ) Important international experience with competition for regulated projects
– Alberta: Developed a competitive process for major new projects; assigned first $1.4 billion project (significantly below AESO estimates)
– Ontario: Two competitive solicitations for transmission to date
– Brazil: Since 1999 all transmission projects have been auctioned off (similar processes in other Latin American countries, such as Chile)
– UK: Tenders for offshore grid projects…
Historical Transmission Investment in the U.S.
… Majority of U.S. Transmission Investments are made within ISO/RTO-Operated Regions Transmission investments in markets operated by FERC-jurisdictional ISO/RTOs and ERCOT account for 85% of current transmission investments
Transmission investments in ISO/RTO regions also have grown by more (10-16% annually) than investments in the non-ISO/RTO regions (6-10% annually
Scope of ISO/RTO Oversight in U.S. Transmission Investments
Of $70 billion in transmission investments by FERC-jurisdictional TOs in ISO/RTO regions over the last 4-5 years, almost half was made without full ISO/RTO and stakeholder engagement in the planning process
– Investments based on local planning processes of incumbent TOs are only subject to limited ISO/RTO review
– FERC’s August 31 Order (Docket No. EL17-45, still subject to rehearing): only transmission “expansion” activities are subject to full regional planning requirements…
State of Competition
… Experience with Competition in U.S. ISO/RTO Transmission Planning Processes
Since implementation of FERC Order 1000 (around 2013), FERC-jurisdictional ISO/RTOs have completed 29 competitive transmission project solicitations
– Of the 29 ISO/RTO competitive processes, 10 were by CAISO, 16 by PJM, and one each in NYISO, MISO, and SPP. These processes have resulted in 15 competitive projects to date.
Since 2013, only 2% of all FERC-jurisdictional transmission investments have been subject to competitive processes…
Benefits of Competition
Experience with 15 projects selected through the ISO/RTO competitive planning processes show potentially large cost advantages of competition
– On average, the winning bids of these 15 competitive transmission projects have been priced 40% below the ISO/RTOs’ or incumbent TO’s initial project cost estimates
– Similar bid cost advantages observed in Alberta
– However, all 15 projects are still under development (in-service dates post-2019), so final costs are not yet known
– In addition to low bid prices, winning bids generally offer cost caps or cost-control measures, reducing the risk and magnitude of significant cost increases as they are developed and constructed…
Implications for Customers and Transmission Owners
As documented in many studies, transmission investments have been providing significant overall cost savings through a wide range of benefits. Increasing the scope of competition will further improve the value proposition of transmission investments to the benefit of both customers and transmission owners.
– Customer Benefits: Even if long-term savings were only half the 55% difference documented to date, if the scope of competition could be expanded from 2% to 33% of total transmission investments, estimated customer benefits would be approximately $8 billion over just five years
– Transmission-Owner Benefits: More cost-effective transmission would…
Reduce “rate pressure” which is already causing significant opposition by customers and policy makers to all types of transmission investments
Increase the attractiveness of transmission as the preferred solution to enhance wholesale power market efficiencies and to integrate and balance increasing amounts of renewable generation
o Cost reductions needed to maintain attractiveness of transmission in an environment of low natural gas prices and declining costs for wind, solar, storage, and distributed resources
o Lower costs mean more transmission projects can exceed benefit-to-cost thresholds…