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Chicken-Egg Solution

Solar and wind developers learn to shift project risk to the grid.

Fortnightly Magazine - February 2011
“We must not let projects fail.” —Former California Governor Arnold Schwarzenegger

Much has been written about the so-called chicken-egg problem. That’s where wind and solar developers can’t go forward without transmission expansions built and financed by others, but utilities won’t commit to new grid construction out of fear that the new gen projects won’t show up as promised.

In fact, this quandary supplies a major impetus behind FERC’s proposed new rules for regional transmission planning, still pending at this writing. FERC would attack the problem head-on, requiring planners to honor and accommodate “policy-driven” renewable energy mandates as an engineering imperative, just as they must plan the grid to maintain reliability or reduce congestion. (See Notice of Proposed Rulemaking, Docket No. RM10-23, June 17, 2010, 131 FERC ¶61,253.)

Under FERC’s proposal, planners presumably would map out future grid configurations from the top down, achieving the most efficient layout without regard to individual project locations. Everyone would know where they stand, even before wind or solar projects are sited. Developers then would have less reason to announce a new renewable project on spec, simply as a means to fish for a possible grid connection. And utilities, presumably, would be spared the indignity of chasing after each new wind farm or solar array with ad hoc grid expansion plans in order to get their proposals vetted and approved ahead of others. This new regime, it is hoped, would become much less piecemeal and random.

But now, just as FERC’s rulemaking effort nears fruition, a new model has emerged—one that seemingly allows both gen and grid developers to have their cake and eat it too, with the potential, perhaps, to outflank some aspects of FERC’s vision for an open and inclusive regional planning process. This model is made possible by transmission rate incentives granted by Congress in the 2005 Energy Policy Act for a completely different purpose: to overcome what was then seen as years of inadequate transmission construction budgets. And regulators dare not dally today on any such rate request, else they be found guilty of overstepping deadlines for stimulus funding and DOE loan guarantees under the American Recovery and Reinvestment Act . Together, these factors align to save power producers having to finance grid upgrades for their own wind and solar projects, and at the same time help utilities build rate base with new grid construction, insulated from the risk of gen project cancellations.

And FERC’s Order 679 policy makes incentives available to any grid expansion that can qualify as “non-routine”—a test easily satisfied by any project that is costly or subject to the risk of cancellation of the underlying generation project. The nuclear plant projects of the 1970s and 1980s also were costly and high-risk. But utilities that chose to bet the company in that way were rewarded not by rate incentives, but with prudence reviews.

A key champion of this new model, the former California Governor Arnold Schwarzenegger, sent two letters to FERC late last year in the dying

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