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Tres Amigas Tie Up

Synchronizing networks to bring green power to market.

Fortnightly Magazine - July 2010

border. Without the benefit of an exemption under the FPA, … the interconnection proposed would result in ERCOT and ERCOT utilities becoming subject to the Commission’s jurisdiction as public utilities.” FERC also declined to issue a blanket section 211 order without knowing the specific parties and circumstances, but said, upon receiving an application consistent with the requirements of section 211, it might issue an exemptive order to allow “interconnection and transmission of energy between ERCOT and the Project while retaining the jurisdictional status quo.”

Project Economics

Following issuance of the FERC orders, Tres Amigas has focused on the practical economics of project development and revenue generation. The task at hand is broadly summarized by Paul Joskow of MIT in his 2003 white paper on merchant transmission investment, co-authored with Jean Tirole. “In return for investment in additional transmission capacity,” he writes, “merchant investors receive property rights that allow them to collect congestion revenues equal to the difference in nodal energy prices associated with the incremental point-to-point transmission capacity their investments create. The value of those rights to relieve congestion revenues represents the revenues merchant investors receive to cover the capital and operating costs of their investments.”

The project’s revenue potential is a function in part of congestion rents, i.e., the prices, less transmission charges, a buyer would need to pay to interconnecting utilities to complete a trade using Tres Amigas’ project facilities. Congestion rents are expressed as the difference between energy prices at the source and sink. Based on historical data, total annual congestion rents can be calculated as the aggregate of constituent congestion rents across each of six paths ( e.g., WECC to SPP, SPP to WECC, etc.). This difference in locational prices is seen as the predicate for customers’ willingness to buy transmission rights and committing to use the project’s transmission capacity in the longer term ( see Figure 4 ). Beyond average regional price differences, market-price volatility is expected to permit arbitrage to capture additional revenue based on operational flexibility and dispatch. These factors will shape Tres Amigas’ bilateral negotiations with anchor customers and open-season auction strategy.

At this writing, Tres Amigas is still in the early stages of mounting a complex, long-term, capital-intensive project that isn’t expected to come on-stream until 2014. Definitive financing arrangements aren’t yet in place; agreements with anchor customers and interconnecting utilities remain to be negotiated; and procurement of high-tech customized equipment has just begun.

Nonetheless, the project has a reasonable chance of proceeding because it would reinforce transmission initiatives underway in WECC (High Plains Express, New Mexico Wind Collector, and SunZia), ERCOT (CREZ), and EI (SPP EHV Overlay). If it succeeds, Tres Amigas is expected to enhance reliability of the national grid and promote the national corridor transmission system.