Perspective

It's the Grid, Stupid!

Advanced grid technologies are needed to realize FERC's standard market vision.

Could there be light ahead at the end of the tunnel for the U.S. power industry? With its bold proposed rulemaking on Standard Market Design (SMD), FERC has brought the arduous restructuring process to a climactic phase. Moving well beyond the general principles of Orders 888 and 2000, the proposed rule could well represent-as Chairman Wood likes to characterize it-the "final book of the trilogy." Importantly, FERC's proposal brings welcome and overdue attention to the power industry's biggest unmet challenge: How to bring innovation and investment into our nation's overtaxed and antiquated transmission system. Indeed, if today's ongoing power crisis could be reduced to a bumper sticker, it might read: "It's the Grid, Stupid!"

Unfortunately, for most of the past decade, market participants and policymakers alike have pursued a range of half-measures and work-around approaches to deal with congestion. Local bulk generation, distributed generation, and energy efficiency initiatives have been put forth not only as supply resources, but as alternatives to avoid the need for politically unpopular, and financially unrewarding, transmission expansion projects. But in practice these local approaches have offered highly imperfect substitutes for a robust and flexible network. Instead, this "anything but transmission" approach has left a bitter legacy: A sharp decline in reliability, episodic shocks in wholesale power prices, vast shareholder losses due to a poor allocation of capital to unneeded generation projects, and squandered political support for competitive reforms. Through flawed resource expansion policies, we have effectively put too many cars on the road instead of adding lanes to the highway!

To its credit, FERC has not retreated from the laudable objective of fostering competitive markets in electricity. Instead, it has upped the ante with a highly detailed and prescriptive proposal that aims to tackle the core problem: It is simply unprofitable for incumbent grid owners to invest in relieving congestion. The proposed SMD framework mandates adoption of locational marginal pricing nationwide. Market actors' expectations of locational pricing differentials will form the basis for valuable Congestion Revenue Rights. Thus, anticipated price streams in the marketplace-rather than the closely held plans of utility transmission departments-will signal when and where solving congestion is worthwhile.

Will Consumers Lose the War?

Will FERC win the battle to enact the proposed rule? It may well have a winning hand. Procedurally, the agency has conducted a strong stakeholder outreach effort over the past year. Industry reaction is mostly positive, and FERC has won noteworthy, if qualified, support from key state regulators in areas with actual experience under SMD-type market structures. Technically, its proposal is comprehensive and coherent. It is based not simply on theory, but on proven practice, and reflects many lessons learned from experiences around the world. Jurisdictionally, the commission appears to be on solid ground. The Supreme Court's Enron decision clearly authorized and even implored FERC to assert universal jurisdiction over transmission, to bring order to the nation's balkanized power markets.

But will FERC and consumers win the war to bring about truly robust competitive markets for electricity? Unfortunately, it is far from clear whether this pricing approach will be sufficient to ensure that timely grid upgrades are made. After all, FERC is missing a key card in its hand, transmission siting authority. The states' rights tradition in utility regulation dies hard. Western and Southern governors and regulators see the proposal as an infringement upon local control. The harsh Congressional reaction to the suggestion of federalizing eminent domain for power lines, put forth in May 2001 by the Cheney Energy Policy Task Force, suggests that any renewed push in this direction will be a non-starter unless and until the nation is in deep crisis.

The awkward split in transmission jurisdiction arising from our federal system is truly the Achilles' heel of the SMD proposal. FERC policies can send the right market signal to market participants as to where new resources are needed. But they offer no assurance that least-cost solutions will be implemented. Thus the rule carries the possible threat that it could backfire, exposing customers to sharply higher prices in congested areas without assuring them the means of relief. FERC cannot rely on locational marginal pricing alone as a fix. It is unlikely to be given siting authority, and with reliability margins worn through in many regions, the nation simply does not have the luxury of waiting out regulatory logjams on energy infrastructure.

The Role of New Technology

New grid technology can play a key role in resolving this quandary-serving the federal goal of robust regional markets, while protecting state interests in land use and environmental protection. New materials breakthroughs have yielded a number of strategies that offer the potential to improve, even multiply, power flows through existing pathways and facilities-without the large-scale environmental impacts associated with traditional grid expansion projects. For example:

POWER FLOW CONTROLS. FACTS (Flexible AC Transmission System) technologies to gain control over power system flows have been available for several years. A wide range of tools is available within the FACTS family to enhance grid flexibility. Uptake of these technologies, however, has languished in an environment of investment and regulatory uncertainty.

MODULAR FACTS. Modular-scale FACTS devices, employing advanced electronics and superconducting storage, are now being deployed on wide-area grids as a cost-effective source of targeted voltage support. The mobility of these systems protects against the risk of stranded investment. The reconfigurable, "just-in-time" approach to grid design enabled by this technology is well-suited to today's environment of uncertainty, in which plant additions and retirements are driven by unpredictable competitive dynamics.

COMPOSITE-CORE CONDUCTORS. Advanced, low-sag composite-core conductors now being tested on power grids could be restrung from existing towers. The ability of these conductors to run at far hotter temperatures could significantly boost peak power flow capacity, offering a cost-efficient solution on corridors where maximum loadings are experienced for a relatively few hours per year.

HIGH TEMPERATURE SUPERCONDUCTOR CABLES. Perhaps the most dramatic advance in grid operation could be enabled by the adoption of high-capacity, low-impedance cable based on high temperature superconductors. Recent studies suggest that the incorporation of even short lengths of HTS cable in strategic locations on power grids could result in dramatic improvements in the distribution of currents across power networks. The high capacity and low reactance of advanced HTS cable designs indicates that they will draw flows away from overstressed aluminum and copper lines and cables-taking the heat off the underlying system, improving its reliability and extending its useful life.

Standard Market Design: Spurring Adoption of New Approaches

FERC's SMD promises to clarify the financial benefit of investing in the grid. By creating valuable Congestion Revenue Rights, the new framework will directly reward cost-effective strategies to enhance network flows, instead of diluting these benefits among all network users as at present. New grid technologies, meanwhile, will make grid upgrades possible without compromising the land-use and environmental values that states and local communities hold dear. To enhance the prospects that SMD will lead to consumer benefits, FERC and the states should work together to pursue the following objectives:

TARGET VOLTAGE CONSTRAINTS. The requirement of power system reliability must not be compromised in pursuit of the objective of competition-related benefits. FERC's formulation-"security-constrained, bid-based dispatch"-emphatically, and quite properly, subordinates the latter to the former. Yet in many areas of the country, voltage and stability constraints can be significantly raised, at very low cost, through the application of advanced power electronics-based technology. FERC's rule should create incentives to go after this low-hanging fruit by assuring users the benefit of the resulting Congestion Revenue Rights.

FOSTER COMPETITIVE ENTRY. Through its orders on the TransEnergie and Neptune projects, FERC has set the template for competitive entry by merchant transmission providers. So far, however, entrepreneurs have not been willing to file proposals to construct transmission on overland routes, and specifically in the dense urbanized areas where the bulk of congestion occurs. Uncertainty regarding how state siting laws will be applied to third-party merchant transmission projects must be resolved. State and federal policies should expressly encourage, rather than block, third-party proposals that attack the problem of grid underinvestment-particularly, those that employ low environmental-impact technologies. In every network industry that has undergone competitive transformation, after all, network investment was the key to the success of reforms. Moreover, it was not incumbents, but rather new entrants, that led the way in adopting new technologies and strategies.

ENCOURAGE NEW APPROACHES. FERC will oversee, and states will participate directly in, the RTOs now being brought into existence. Regulators should insist that RTOs, as an integral part of their ongoing planning activities, actively seek out and pursue low environmental-impact proposals to strengthen the power grid.

Accelerating Technology Adoption: A Key Priority

When the dust finally settles, FERC's SMD should certainly help to restart needed grid investment. While necessary, however, it is not sufficient in and of itself to break the impasse. New grid technologies can play a key enabling role in helping this new framework to succeed. But some level of increased public commitment, at least initially, is required to speed this process. Unfortunately, investment in research, development, and deployment of new technologies by regulated utilities is low by the standards of other technology-intensive industries. Moreover, utility R&D has been even further depressed by the uncertainty of restructuring. The pharmaceuticals industry, for example, reinvests approximately 15 percent of gross revenues back into research. For electric utilities, the corresponding figure is 0.3 percent-proportionately, one fiftieth as much. At a time when grid constraints are wreaking havoc with regional economies, it is clear that this neglect of the potential role of next-generation grid technology has been penny-wise and pound-foolish.

In the debate over SMD, the stakes are high. There can no longer be any question that a much stronger and more flexible power grid is essential to the economic health of the country. Electricity has been called the lifeblood of modernity; for a century, overall economic growth has been closely linked with electrification. Indeed, a strong case can be made that healthy national economic growth will not resume unless and until transmission policy issues are correctly resolved. The SMD proposal provides a workable policy framework to attract needed innovation and investment in the network. Policy reforms alone, however, will not surmount the challenge. New, low-impact grid technologies offer the means to modernize and refortify the grid in ways that are compatible with 21st century land-use and environmental values.

Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.