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Green Contracting

Structuring renewable agreements to survive change.

Fortnightly Magazine - November 2009

this policy was established before renewable energy resources began to develop on a larger scale. As FERC Chairman Wellinghoff recently testified before Congress, “[r]enewable energy resources such as wind, solar and geothermal are usually found in large quantities at dispersed locations remote from load centers…. [T]here are often high costs associated with developing transmission facilities needed to deliver power from such resources. If the resource developer or host utility is compelled to bear all of the cost of these transmission facilities, they may not be developed….” 2

Regional transmission providers and independent system operators have struggled with how to allocate these costs equitably among stakeholders. In 2007, FERC approved an innovative approach by the California Independent System Operator (CAISO) to allocate interconnection costs for location-constrained renewable resources. The approved CAISO financing mechanism applies to qualifying generation tie lines. The CAISO tariff initially treats such facilities as “network upgrades” such that the costs are reflected in CAISO-wide transmission rates paid by all users of the CAISO system. Each generator that thereafter interconnects to the tie-line becomes responsible for paying its pro rata share of the going-forward costs of the line, thereby reducing the costs allocated to the system generally.

In June 2009, FERC approved changes to the Southwest Power Pool’s (SPP) rules for allocating the costs of transmission for wind generation. SPP’s proposals would make more of the costs associated with wind resources able to be funded as part of SPP’s regional “base plan” for transmission upgrades and reduce the costs that would be allocated directly to the wind projects or their transmission customers. Under SPP’s cost allocation rules, the costs of transmission upgrades would be eligible for base-plan funding if, among other things, the costs were less than or equal to a “safe harbor limit.” Costs that exceed the safe harbor limit would be directly assigned to the transmission customer. The safe harbor limit was based on the lesser of the planned maximum net dependable capacity of the resource or the requested capacity. Because of the intermittent nature of wind energy, SPP generally was assigning a very low “net dependable capacity” to wind resources— i.e., 10 percent of their nameplate capacity—to calculate the safe harbor limit. As a result, the costs of transmission upgrades that were allocated to the base plan for wind resources were significantly limited, and a disproportionate amount of costs were directly assigned to the wind project or its customer. For wind resources, SPP now uses the requested nameplate capacity of the project instead of its net dependable capacity. FERC concluded that this would “eliminat[e] existing provisions that currently disadvantage wind resources.” 3

FERC also approved a change in SPP’s cost-allocation mechanism that addresses the situation when a transmission customer designates a wind generating facility as a network resource to serve the customer’s load, but the wind facility isn’t located in the same zone as the load it’s contracted to serve. In this circumstance, 67 percent of the costs are borne by all load in the SPP region on a postage-stamp basis. FERC determined that SPP’s proposals struck a