The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
East Vs. West: Growing the Grid
The models and motives behind tomorrow’s transmission expansion.
The grid is busting out all over, but not everywhere in the same way. In the past 12 months, developers have announced plans for a number of new transmission projects of regional, if not national significance, but with markedly different goals and aims. In short, two distinct models have emerged for new grid development, one in the East, the other in the West.
The Eastern model, designed to mesh with grid system operators and RTOs (regional transmission organizations), views transmission as a profit-making business. The process is well defined. You map out markets, study the locational marginal prices (LMPs) at various nodes, calculate heat rates and fuel prices, and then design your project to compete against those numbers. Along the way, you work with the local RTO through a series of studies for feasibility and system impacts, to ensure proper management of loop flows, reactive power support, voltage stability, and so forth. The major remaining hurdles concern site permitting and NIMBYism (“not in my back yard”).
But in the West, by contrast, the game proves much more complicated. Without RTO markets to fix prices and set protocols for planning, impact studies, and cost allocation, it has fallen to state governments to fill the vacuum. In fact, lawmakers in several states already have created new state agencies assigned the task of building out the grid. Governors, too, have formed regional state coalitions to push projects. Under this model, transmission becomes a virtual arm of the state—a tool to boost jobs, taxes, and the state’s economy. But by investing transmission with public-interest goals, the ante is raised.
Thus, in the West, the developer must begin as often as not by identifying the location of under-exploited natural resources. Where are the coal and lignite deposits, the gas reservoirs, the geothermal springs, the windiest plateaus? You plan the line to capture those resources. The resource plan comes first; the electrons seem almost secondary by comparison.And then things get dicey. Concerns over climate change and greenhouse-gas emissions—once the sole worry of California regulators—now extend across the West. Even the fly-over states have begun to question the concept of transmission expansion as a tool for resource development, if it means burning more coal. In California, the regulators have become even more aggressive. Just in the past six weeks, the state public utilities commission (PUC) has issued new mandates for controlling greenhouse-gas emissions as part of resource procurement plants for its investor-owned electric utilities, making it clear that in-state environmental rules will apply with equal force to power electrons imported via the interstate grid. These events reportedly have spurred some developers to rethink plans for building coal-fired power plants in the Intermountain West, since they must remain dependent upon California as the prime destination market. This new reticence likely will force developers to rely much more on renewables in putting together a business plan for any of the three very large regional grid projects proposed recently for