A spate of newly announced deals, including Allegheny Energy’s proposed $9.27 billion acquisition of FirstEnergy, plus PPL’s takeover of E.ON US for $6.73 billion, has left the utility industry...
The Myth of the Transmission Deficit
The grid does not need a Marshall Plan for new investment.
We don't know what caused the Aug. 14 blackout, but somehow we know that our transmission system needs $50 billion to $100 billion in investment and upgrades. And utilities need higher returns to raise that kind of money. Talk about making lemonade out of lemons.
The reality is that we aren't short $50 billion or $100 billion in our transmission system. The study said to support that proposition just doesn't do the job.
The commonly cited signs of trouble-frequency of calls for transmission loading relief (TLRs) and magnitude of congestion cost-do not support any particular level of new transmission. The TLRs that curtail firm transmission are few and far between. Congestion cost is a measure of energy price differences-not an automatic mandate for more transmission.
Instead of macro estimates for new transmission, we need regulatory structures that will give the right micro answers to two questions: What new transmission is needed to sustain reliability? What new transmission is needed for economic purposes?
The need for -based transmission has been, and should continue to be, the focus of micro, bottoms-up analysis by the regional reliability councils. A stable environment for the systematic determination of need to sustain reliability will have no problem attracting capital on a traditional, regulated basis.
The need for -based transmission should be determined by the market. So long as transmission is enabled to compete with other solutions, capital will flow to the most efficient approach.
Where Did the Huge Numbers Come From?
The lights scarcely were back on after the August blackout before conventional wisdom said that our transmission system needs $50 billion or more. This was the unchallenged sentiment in the early rounds of talk shows and news stories. 1 Industry raised the ante to $100 billion. 2
Amazingly enough, we knew the solution to the blackout before we knew what caused it. 3
Where did these huge numbers come from? The $50 billion number seems to come from a June 2001 study by Eric Hirst and Brendan Kirby, sponsored by the Edison Electric Institute (EEI). 4 Hirst himself has cited this study in subsequent reports, 5 as have other EEI studies prepared by other EEI consultants, 6 and reports issued by the Department of Energy.7 Thus, the conventional wisdom-that this county's transmission system needs a $50 billion boost-was born.
Let's take a look at how that figure originally was determined. The June 2001 Hirst study consists of some back-of-the-envelope work that went something like this. Assume that the 1999 ratio between megawatt-miles of high-voltage transmission lines and megawatts of peak demand is the ideal value. Given that ratio, the projected growth in peak demand, from 681 GW in 1999 to 813 GW in 2009 (2 percent per year), implies a need for 54,000 GW-miles of new transmission by 2009 (with 27,500 GW-miles replacing retired transmission lines and 26,600 GW-miles being incremental new transmission capacity).
The study concludes that at an average cost of $1 million/GW-mile, the required capital for new lines is $56 billion. Hirst then