Recent advances in materials science promise a new, truly competitive paradigm for grid investment without land-use headaches or "big-iron" solutions.
It looks like high noon for electric industry restructuring. Price spikes and the threat of brownouts and blackouts have led to intense pressure to reverse course in California. Reform efforts in other states are stalling. Another Congress has adjourned with little headway on the issue. Prospects for the incoming session are highly uncertain, given an election that yielded virtual dead heats in races for the presidency, Senate and House alike. Some political commentators are suggesting that the "benign gridlock" of the past could give way to "detrimental gridlock" in the coming two years.
Few areas more urgently call for action than the safeguarding of customers' access to reliable, competitively priced electricity. More than ever, electric power is the lifeblood of our technology-dependent economy. Done right, competitive reform can strengthen both reliability and market price discipline. Indeed, after years of low commitments to new power generation, reforms in that sector have led to a huge infusion of capital and tremendous innovation in efficient, "green" distributed generation technologies.
But it's become clear that the bottleneck is the power grid itself. The past decade has seen a sharp falloff in new transmission additions. Since the late 1980s, growth in power demand has outstripped grid expansion by a factor of 2:1-and the ratio is widening as obstacles to grid construction become nearly insurmountable. The North American Electric Reliability Council projects a mere 6,000 miles of new transmission by 2009. This expansion of 1 percent in grid mileage lags far behind forecasts of 25 to 30 percent growth in power consumption.
Many factors have contributed to this slowdown in grid construction. The prolonged transition to competition has driven utilities to defer investment decisions. Rapid growth in urban and suburban areas limits land availability in the very areas where new power infrastructure is most needed. The specter of distributed generation has undermined confidence in the traditional regulatory framework. Perhaps most of all, we are facing the consequences of a dysfunctional split between federal (ratemaking) and state (siting) authority over the transmission grid. Reforms that have succeeded reasonably well in other nations with unified regulatory regimes are perceived as failing in the United States.
The future promises more grid stress: continued electrification, huge new point loads such as "Internet hotels," and rapid changes in flow patterns spurred by competitive power market dynamics. A change in course-in both policy and technology-will be required.
What's needed is a competitive framework that reflects the true value of new transmission capacity. Such a framework is certain to spur technology innovation, adoption, and investment to meet market needs for improved capacity and reliability in an environmentally acceptable fashion. For too long, the restructuring debate has assumed that environmental, competitive, and reliability-related goals are in conflict. New transmission technologies offer a path to break the gridlock and reconcile these important objectives.
The revolution in electric industry structure and governance is at a hiatus. A second electric industry revolution-in the very materials that comprise the grid-ultimately may hold the key to its successful completion.
The Competitive Supply-Monopoly Grid Paradox
The power grid is the platform that supports competition among power supply options in any given region. If industry reforms are to yield robust and effective competition, this network must handle a variety of power flows reliably. Indeed, in other network industries, the key to successful deregulation lay in technological innovation and massive new investment, not just in commodities and services, but in the physical network itself.
Consider telecommunications, an industry in which monopoly regulation of the old Bell System clearly impeded innovation. Following the breakup of AT&T, broad deployment of new technologies (e.g., optical fiber, CATV, wireless, and satellite technology) drove geometric increases in communications "bandwidth," enabling an unprecedented range of new services. In two decades, over half a million miles of optical fiber cable were laid, mostly in unobtrusive underground corridors that engender no public opposition.
Likewise, reforms in interstate natural gas to foster wellhead competition and reduce commodity prices spurred billions of dollars in construction of underground pipelines, compressor stations, and information systems. These investments drove sharp increases in both total volumes and overall pipeline capacity utilization rates, and opened many new markets to gas.
Both cases highlight a critical point. Competition went beyond the delivered commodity (i.e., bytes of information and molecules of methane) to the means of delivery itself-the physical network. Spurred by the prospect of gaining or losing market share, new entrants and incumbents alike-both the MCIs and the AT&Ts-invested heavily in new delivery paths and new ways of reaching customers. Across both industries, new technologies and customer services flourished. As this network competition intensified, reliability in both industries improved.
By contrast, the debate over power industry restructuring remains largely bound by the paradigm of a regulated, monopolistic power grid operating under mandatory open access. Beginning with the Energy Policy Act of 1992 and moving through a series of orders from the Federal Energy Regulatory Commission and efforts at the state level, yesterday's vertically integrated, state commission-regulated monopolies are being supplanted by large, regional FERC-regulated monopoly transmission service providers under the rubric of regional transmission organizations (RTOs). Efforts to impose an open-access model on the industry have been difficult and politically contentious, and remain incomplete. Lines of responsibility remain unclear, investment languishes, and reliability clearly has started to suffer.
Why is power transmission commonly viewed as a monopoly enterprise? First and foremost, because of physics; flows across interconnected, alternating current power systems are highly interactive, requiring centralized monitoring and control. Investments in AC grid capacity yield generalized benefits that are hard to capture and capitalize. Other theoretical bases for monopoly regulation include perceived economies of scale, and environmental and land-use impacts. In the public imagination, transmission facilities are large, intrusive installations consuming broad swaths of forests, farmlands, and suburbs. Despite several reassuring studies, opponents of new lines continue to cite health concerns related to the electromagnetic fields produced by alternating current. In general, public policy has favored strategies that minimize the need to construct new AC transmission facilities.
What happens when this perceived public interest in limiting grid expansion clashes with other public policy objectives such as ensuring reliability and fostering robust competition? The evidence of the past three summers is clear: Reliability will degrade, prices will become highly volatile, and the promised price benefits of competitive reform will remain unfulfilled.
The Siting Logjam Must Be Broken
Recent advances in materials science offer the prospect of another industry paradigm: one based on robust facilities-based competition in network services, without the environmental and land-use impact of traditional "big iron" solutions. Consider how new materials developed in the 1960s-e.g., optical fiber and silicon chips-drove the conversion of our copper-based, electrically controlled analog telephone system into a photonics-driven, digitized "information superhighway." Likewise, new materials developed in the 1980s now provide an opportunity to bring quantum improvements to the performance of our aging power network.
Twentieth-century power system components are largely based on traditional conductors-copper and aluminum. The 21st century power system will harness the benefits of two significant developments of the last century in materials science. Decades of advances in semiconductor technology are yielding high-power electronic devices with dramatically higher performance and lower cost. By adding intelligence and control to the traditionally passive AC network, these devices will enable active grid management-extracting higher performance from existing infrastructure and reducing the need for new lines. Meanwhile, rapid advances in high-temperature superconductivity, or HTS-a field that did not exist before 1986-are yielding new ways to deliver unprecedented quantities of power to meet the energy needs of our continually electrifying economy. At the heart of HTS cable is a new kind of wire that, today, carries over 100 times more power than copper. Field trials of HTS cable are underway. Commercial versions of this technology, which could multiply the capacity of existing rights-of-way, are expected in mid-decade.
Of Semiconductors and Superconductors
New grid technologies will allow competitive suppliers to keep their promises.
Advances in materials science have the potential to multiply the capacity of the old copper and aluminum grid system. In particular, several new technologies using improved semiconductor and superconductor materials could improve power reliability, shrink the power infrastructure footprint, and support robust competition. Some examples follow.
High-Voltage Direct Current. Widely used to inject large blocks of power directly into weak areas of the grid, HVDC avoids introducing the troublesome electromagnetic fields, "loop flows," and "parallel path" flows associated with AC grids. But broader use of DC was blocked by the high cost of the terminal stations that interface with the AC system. Recent advances in power electronics make it economic to move smaller blocks of power at lower voltage ratings. With market dynamics exposing sharp regional price disparities, deregulation has sharpened the investment incentive to link low-cost supply regions to high-price end-use market areas. Deployments of so-called "HVDC Light" technology are occurring in Australia, Scandinavia, and here in the United States, where ABB and TransEnergie U.S. are using this approach to span Long Island Sound.
Flexible AC Transmission Systems. FACTS is a term that encompasses a wide range of new technologies based on advances in power electronics. These devices improve the controllability, stability, and power transfer capability of AC transmission systems. These technologies have been under development for more than a decade, and within the past few years, several different types of FACTS devices have been successfully demonstrated in Texas, Kentucky, New York, and elsewhere; several FACTS technologies are fully commercial.
Superconducting Magnetic Energy Storage. Using a combination of stored real power and high-speed electronics in a mobile, trailerized system, SMES allows users to "cache" large amounts of power close to customer loads. Used for several years for industrial power quality protection, the technology now is being deployed as a low-cost solution for wide-area grid stability problems. A new configuration known as "Distributed SMES" or "D-SMES" offers grid operators the ability to dampen out voltage disturbances, and thereby increase line ratings, by injecting large amounts of both real and reactive power, instantaneously, at multiple locations on a grid. It can be deployed rapidly to facilitate generator interconnections, increase available transfer capacity, and reduce reliance on so-called "reliability must-run" generation. Its mobility allows it to be relocated as system needs change.
High-Temperature Superconducting Cable. This new cable will use the extraordinary power density of HTS wire to provide a new solution for high-current urban distribution needs within the next few years. Initial deployments are expected to be in so-called "urban retrofit" projects in conventional AC distribution, such as the Pirelli Cables & Systems demonstration at a Detroit Edison substation that will be inaugurated this spring. This retrofit strategy will enable urban utilities to multiply the capacity of existing underground conduits without costly and disruptive excavation. Later, HTS cable could offer a new approach to address long-distance transmission.
HTS DC Transmission. Deployment of HTS cable in a direct current mode at medium voltage could yield tremendous synergies, especially in a deregulated environment with wide and volatile regional price disparities. Capable of carrying very large currents, such systems would be compact and highly efficient, and avoid the cost burdens associated with high-voltage terminal stations.
These semiconductor and superconductor materials form the basis for several new technologies that could improve power reliability, shrink the power infrastructure footprint, and support robust competition. (See sidebar, "Of Semiconductors and Superconductors.")
Given today's extraordinary power market dynamics, and the record of other industries that underwent deregulation, it is likely that these and other new power transmission technologies could attract significant investment capital on an at-risk, for-profit basis-if the conditions were right. Opening transmission to truly competitive entry could fortify competitive price discipline, reduce the need for generation investment, improve reliability, and depoliticize the grid-planning process. Investment decisions could be driven by anticipated trends in locational power prices, the surest indicator of the economic value of relieving bottlenecks in the transmission system.
But many issues must be addressed before widespread deployment of these technologies will occur. It is a given that the reliability and cost-effectiveness of new technologies must be proven. The more difficult issues and barriers, however, are likely to be institutional and regulatory in nature.
For example, traditional cost-based regulation could thwart the development of new projects perceived to have technology risk. Rules governing rights to the capacity created by these projects, and the valuation thereof, must be established. For interstate competitive markets to thrive, the siting logjam must be broken; reforms should create a unified federal siting process, albeit with stringent protections for state and local interests. And while mandatory open access may be suitable for conventional AC facilities under the "essential facilities" doctrine, we should seriously consider whether the burdens, limitations, and inefficiencies that it imposes are warranted for transmission projects that are undertaken on a competitive, at-risk basis.
Now Is the Time for Policy Reform
We find ourselves at a pivotal point in restructuring. Momentum for further reform is faltering in both Congress and the states. Meanwhile, a new class of transmission organizations is being formed. In many ways, now-before these new entities become vested in the notion of a monopoly over transmission services in their geographic areas-is the ideal time to forge a competitive framework for new, advanced forms of transmission service. The exact stage of development or commercialization of specific transmission technologies, by comparison, is unimportant. Shifting the focus away from contentious regulatory ratemaking formulas toward the economic and technical merits of new transmission solutions, and creating the framework for competitive entry, will accelerate their development. That will happen in much the same way that deregulation of power generation has spurred interest in the development of many forms of distributed power that, while high in cost today, show great promise.
How would this be done? Congress can find a ready model in the provisions of the Energy Policy Act of 1992 that created a light-handed regulatory framework for so-called "exempt wholesale generators." Upon a showing that their ownership structure did not afford a market power advantage, EWGs were placed outside the orbit of conventional rate regulation and Public Utility Holding Company Act restrictions. An earlier law-the Public Utilities Regulatory Policies Act of 1978-afforded so-called "qualifying facilities" certain controversial entitlements. By contrast, EWGs merely were allowed the opportunity to compete for wholesale market opportunities.
To foster new transmission investment, why not a similar framework for "exempt transmission facilities?" Conventional facilities could continue to be constructed under the umbrella of monopoly regulation where necessary. These ETFs would be free to compete on their economic and environmental merits for a wide range of power market opportunities. In particular, these might include debottlenecking congestion points and strengthening power flows across the "seams" of the grid where connections among RTO areas are weak.
Policy reforms in the area of transmission must appropriately reflect the concerns of the public policymakers, environmentalists, landowners, and market participants that have a stake in the competitive process. Here are some suggested elements for their organization.
Definitional Standard. ETFs should be consistent with the following standards:
- The ETF framework should aim to induce new investment in the power grid; ETF status, accordingly, should be extended only to newly constructed facilities. (In the future it may be appropriate to explore ways to convert existing facilities to ETF status.)
- The specific goal should be to induce investment in innovative, low-impact technologies. Benefits of ETF status, therefore, should be accorded to projects whose impacts fall below a specified environmental impact threshold. This determination might turn, for example, on whether the facilities
- are placed largely or entirely underground;
- are placed within existing utility corridors;
- satisfactorily address concerns about electromagnetic fields;
- occupy rights-of-way that do not exceed specific width limits; and/or
- forsake rights to exercise eminent domain authority.
- To avoid the difficult problem of uncompensated impacts on third parties, ETF status could be limited to projects that use strictly controllable transmission technologies, such as direct current or flexible AC transmission systems (FACTS).
- Ownership of ETFs by utility distributors and generators serving the region in which the facility is located could be restricted or barred altogether.
Exemption from Rate Regulation. Just as EWGs are eligible for market-based rate treatment, ETFs should be exempt from rate regulation under the Federal Power Act. Such projects would be structured on an at-risk basis; investment returns would be neither supported nor capped by traditional ratemaking formulas.
Exemption from Open-Access Mandate. Lacking market power and operating in many respects like independent power producers, ETFs should not be regarded as "essential facilities." They should be free to contract with entities wishing to ship power over these lines in a manner that meets their business objectives. They may choose to offer service on a tariffed basis, by auction, or alternatively, they might use their lines to move power purchased on their own account for sale to others on a merchant basis.
Streamlined Siting. The definitions governing ETF status would be established so as to mitigate or largely eliminate the local environmental impacts usually associated with transmission facilities. In exchange for accepting these restrictions, ETFs should be made eligible for a streamlined, federalized siting process modeled, perhaps, on the siting process for interstate gas pipelines. State concerns would be given weight and deference, but ultimate siting authority should rest with FERC to ensure an effective process with a broad regional perspective and closure.
The nation's grid will remain the indispensable energy lifeline for the vast majority of customers for the foreseeable future. Yet it is threadbare from overuse and underinvestment. It's time we take to heart the lessons of other industries: The key to robust competition lies in a strong network, and a market-based framework is the key to attracting the necessary investment. New technologies offer the pathway to renew the grid, and restore its full value, in harmony with today's environmental and land-use values.
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