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Gen Interconnection: Comparability or Common Sense?

Why power plants should pay for grid upgrades.
Fortnightly Magazine - September 15 2002

assignment of upgrade costs to generators could prompt some developers to delay projects until the MCP rises to offset the upgrade costs and ensure profitability. In order for the new entrant to meet its hurdle rate, expected net revenues must increase. As the supply and demand balance moves up the existing supply curve, the MCP rises. The longer entry is delayed, the higher the MCP.

In summary, if FERC should agree to modify its interconnection policy to assign upgrade costs directly to generators, then we might see higher energy prices. These potentially higher market-clearing prices must be balanced, however, against the higher access charges for transmission service that ratepayers otherwise will assuredly pay if the cost of additional grid facilities is assigned to load.

The content of this article reflects solely the views of the authors, and are not necessarily those of Southern California Gas Company, which has no responsibility for its content.

  1. Interconnection NOPR, FERC Docket No. RM02-1-000.
  2. The comparison is conducted using Henwood's Prosym. This analysis represents a detailed production cost simulation model with multi-area modeling capability. The power system modeled represented the Western Electricity Coordinating Council (WECC), formerly known as Western System Coordinating Council (WSCC). Approximately 39,000 MW of new thermal generating units were assumed to be added to the existing system between 2001 through 2004. In Prosym, power plants are grouped into their geographical regions with each region having its unique, electrical load, and individual power plant characteristics (fuel, generating capacity, heat rate, outages, and operation limits). The regions are interconnected with transmission lines, and transmission line constraints are enforced. Transmission line limits include line capacity ratings, average transmission losses, and wheeling costs. Buying and selling among regions is permissible either through contracts or economic transactions. The model dispatches power plants economically to meet load demands in all regions while meeting all operation limits.
  3. As a point of reference, a unit with these physical characteristics, a 20-year payback, and a 15% rate of return must operate at about a 60% capacity factor.
  4. Electric Market Design and Structures, FERC Docket No. RM01-12-000.
  5. FERC Interconnection NOPR, Docket No. RM02-1-000, at 29-30. For the CAISO, generators are not charged an OATT. Instead, the load pays the transmission access charge.
  6. CAISO Tariff § 3.2.7.2. If a specific beneficiary cannot be identified, then the upgrade cost is reflected in the access charge. See Tariff § 3.2.7.3.
  7. In a fully regulated, cost-of-service world, one could argue that the grid was built for the load. However, in an electric industry with a competitive wholesale generation market, this argument no longer holds. Generation is built at a specific location because of expected profits predicated on access to the market. To the extent an upgrade increases the generator's access to the market, the generator should be viewed as a beneficiary of the upgrade.
  8. Michael D. Cadwalader, Scott M. Harvey, and William W. Hogan, Review of the California ISO's MD02 Proposal, June 4, 2002 at p. 25.

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