Why power plants should pay for grid upgrades.
Do we make all generators equal-using affirmative action to give rights to merchants that...
Gen Interconnection: Comparability or Common Sense?
where the combined-cycle plants in California and Arizona had identical operational characteristics. If FERC instead would assign network upgrades to generators, it would become more efficient to locate the plants in California. In that case, the additional transmission expansion is no longer needed to alleviate congestion. Ratepayers would face lower costs in the long run.
Moreover, with an RTO, the issue of comparable interconnection charges between merchant generation and generation owned by transmission owners is no longer an issue. The RTO, as the independent system operator with responsibility for grid planning, has no incentive to discriminate between generators based on ownership. Comparable price signals are the main issue in the RTO/LMP market design. Interconnection costs provide market participants with the long-run marginal costs associated with different locations.
A Partial Fix
One solution would allow an RTO to bill generators for the cost of upgrades to network transmission facilities that the RTO would not require in its transmission expansion plan "but for" the generator's new project. That would eliminate the problem of socialized costs for at least one category of grid upgrades. And, to its credit, FERC has recognized in a recent case that for an RTO with LMP it may be appropriate to assign costs directly to generators for such "but for" network facilities.
In June, pending the outcome of the NOPR on generation interconnection, FERC gave a temporary OK to a "but for" rule proposed by the California Independent System Operator (CAISO), as part of its interconnection policy embodied in Tariff Amendment 39. 5 The new rule would cover the allocation of two types of costs.
First, the rule would cover reliability upgrades beyond the first point of interconnection that were not already in the CAISO transmission expansion plan. Second, the rule would cover so-called "deliverability" upgrades that relieve congestion, including economic transmission projects and network facilities costs.
In each case, it appears that the tariff would allocate at least some costs to generators, as project beneficiaries. That's because CAISO tariff sec. 3.2.72 states that, for transmission additions or upgrades, "costs shall be borne by the beneficiaries, in approximate relative proportions by which they benefit." 6 Certainly, it is inconceivable that the new generator would not be considered as one of the beneficiaries of the expansion. 7
For any additional capacity created by the upgrade, the market participants in the project would receive financial transmission rights (FTRs). Some industry experts see FTRs as a logical, alternative way to finance grid expansion, because they reward grid investors for increasing the transfer capability of the network. 8
And in the CAISO example, awarding FTRs to plant developers would work better than requiring generators to pay up front for all network upgrades and then reimbursing them through rate credits against future payments for transmission service transmission. That's because generators do not pay directly for transmission services under the CAISO model.
Also, rate credits were designed for the pre-RTO paradigm. Rate credits reflect the old assumption that generators interconnect with individual TOs under a company-specific OATT approved under Order 888. That policy was designed to