Outsmarting the Grid

Deck: 

A trio of eager tech startups confronts an industry intent on preserving the status quo.

Fortnightly Magazine - February 2010

In light of all the excitement created by smart-grid regulatory initiatives and stimulus funding, three clever tech startups have come forward in the last several months with proposals for novel grid projects.

First, in California, the independent start-up, Western Grid Development (WGD), proposes to install energy storage devices ranging in size from 10 to 50 MW, using large-scale sodium-sulfur (NaS) batteries manufactured by the Tokyo Electric subdivision, NGK, at various discrete and strategic locations in PG&E’s service territory where the California ISO (CAISO) has identified reliability problems.

These storage devices, under WGD’s operational control, would remedy voltage drops, thermal overloads, plus other problems that could threaten line trips and loss of retail load, and so avoid conventional transmission line expansions that cost more and take longer to complete.

Second, in PJM, a company called Primary Power, a joint venture of Trans-Elect and the engineering firm Tangibl, backed by the private equity investor United States Power Fund III (controlled by EIF Management), proposes to deploy a total of four advanced, 500-MVAR static VAR compensators (SVC) at three separate locations within the PJM footprint. Though widely spaced (i.e., tens of miles apart), the SVCs nevertheless would operate as a single, integrated $200 million network (dubbed the “Grid Plus” system) to provide reactive power to boost overall physical system efficiency across wide areas of the PJM grid, producing (as claimed) $45 million to $485 million in energy savings per year.

Third, in Clovis, N.M., in perhaps the most remote corner of the Eastern Interconnection (a scant mile across the border from the sparsely populated Texas Panhandle), comes the startup firm Tres Amigas (www.tresamigasllc.com).

Owned and led by PJM’s ex-chief Phillip G. Harris, CAISO’s former head of market and grid operations, Ziad Alaywan (also CEO of the engineering firm ZGlobal), American Superconductor, and finally, the private equity fund Alt Energy, Tres Amigas has proposed perhaps the most audacious utility industry project seen in the United States since the nuclear heyday of the 1960s and ’70s, or maybe even the 1930s TVA. The project, with an initial investment cost of approximately $1 billion, would for the first time allow power producers to move market-relevant quantities of electric power and energy between and among the nation’s three asynchronous transmission grids: ERCOT and the Eastern and Western Interconnections. Tres Amigas would allow power producers and market participants to schedule “massive” amounts of power for transmission delivery anywhere in the United States.

To do this, Tres Amigas will create an underground high-voltage DC transmission facility on 22.5 square miles of land leased from the State of New Mexico, making up a triangular ring of about two miles of three discrete superconducting cable segments, multiple AC/DC voltage source converters (VSC), each rated at 750 MW for converting AC power to DC and back again. Each single superconducting cable segment would measure three feet in diameter and carry as much power as three separate high-voltage 765-kV AC overhead lines. The entire “superstation” would muster a total initial transfer capability (ATC) of 5 gigawatts (5,000 MW), expandable to 30 GW.

In this way, power could be sent by conventional high-voltage AC wave transmission to Tres Amigas at Clovis, where it would be converted to DC pulse transmission, then directed around the triangular ring to the desired exit point (a different point of the triangle for each of the three grids), where the appropriate VSC units would convert the flow back to AC current, for injection into the destination grid.

In theory, wind power from turbines in the Texas panhandle in ERCOT could be sent via Tres Amigas to Palo Verde and Los Angeles, or perhaps through the Southwest Power Pool to MISO and then PJM, for delivery to Chicago. Little Clovis could well become the renewable energy capital of the nation.

New Mexico’s Governor Bill Richardson and Senator Jeff Bingaman each have praised the project’s potential. As posited by David Raskin (Steptoe & Johnson), lead FERC counsel for Tres Amigas, in the project’s filed rate application submitted to FERC last December: “This configuration and particular set of capabilities does not exist anywhere else in the U.S. electric system, or in the world.

“No one has ever built a facility like it.”

Equal Footing

This trio of projects will test the bounds of prevailing industry and regulatory constructs.

First, in the case of WGD, because battery storage would be designed to avoid future transmission expansion otherwise needed in PG&E’s retail service territory, WGD argues that regulators should classify its project as a transmission asset, even though WGD would operate its energy project much like a traditional pumped storage generating unit; WGD would buy off-peak power at a low cost to charge its batteries, and then discharge them at the high-cost peak, in a manner similar to a capacitor discharge, when power is needed for voltage and grid support.

WGD in fact has applied to FERC for a declaratory ruling to award WGD with special transmission rate incentives of the sort authorized by FERC Order 679, under Federal Power Act sec. 219 (section 1241 of the 2005 EPAct law) (see FERC Docket EL10-19, filed Nov. 20, 2009).

This request seems like a reach, as FERC already has denied a similar idea. Two years ago, FERC ruled that California’s Lake Elsinore Advanced Pump Storage (LEAPS) project couldn’t qualify as a transmission asset to be controlled by CAISO as part of the grid, because LEAPS operation inevitably would involve CAISO in markets for ancillary services or even the energy commodity (see the Nevada Hydro Co., Docket ER06-278, March 24, 2008. 122 FERC ¶61,272).

CAISO, in comments filed at FERC on the WGD project, agrees that the LEAPS ruling should disqualify a battery storage project from the status of a “transmission” facility.

Yet WGD argues that early stage development risks “are particularly severe.” As a startup company funded by its principals (“who have borne all development costs to date”), WGD argues that it won’t be able to acquire financing or continue with project development without the rate incentives provided under FERC Order 679.

California’s State Water Project questions why, as a provider of demand response when it backs off its huge electric pumping loads that keep California’s aqueducts on tap, it should help fund WGD’s requested rate incentives (recoverable through CAISO’s RTO-wide transmission access charge), given that WGD in effect will be competing as another provider of a DR-like service—since energy storage functions very much like demand response; it augments supply when load is peaking.

Some have called on FERC to hold a technical conference to explore the role of storage before it issues a ruling. EPSA wants FERC to open a rulemaking on policy for storage facilities, as does CAREBS, the Coalition to Advance Renewable Energy Through Bulk Storage, which otherwise takes no position on the WGD petition (see comments, FERC Docket EL10-19, filed Dec. 22, 2009).

WGD argues, however, new tech startups providing energy storage will be left behind in the smart-grid revolution if they cannot earn the same rate incentives on smart-grid upgrades as transmission-owning utilities.

WGD asks FERC to “provide insight” on whether it perceives any barrier that could prevent CAISO from considering the WGD storage solution “on equal footing” with other proposed utility transmission alternatives.

Primary Power (PP) also has asked FERC to declare it eligible for rate incentives under Order 679, but the real issue stems from PP’s simultaneous demands for a stated guaranteed rate of return and guaranteed cost-of-service rate recovery, plus assurance that PJM will designate PP as the sole builder of the project, should PJM eventually incorporate the GridPlus regime into its Regional Transmission Expansion Plan (RTEP) (see, FERC Docket Nos. EL10-14, EL10-253, filed Dec. 11, 2009).

This odd combination of demands confuses the respective attributes of merchant transmission ventures and RTO-sponsored and rate-based projects developed by regional planners.

In short, merchant developers conceive and build their own project configurations, but in trade must accept full financial risk, and search out their own customers through open-season solicitations. Regional planners require no proof of benefits, and review the project only to make sure they can accommodate it without untoward adverse impacts.

By contrast, PJM regional planners scrutinize RTEP project applicants, demanding proof of benefits (e.g., reliability or economic), and reserve the right both to reconfigure the project plan as needed and to designate who will actually build the final project, according to what the planners feel is best to ensure a cost-effective and prudent result. That’s the price paid by would-be project sponsors to win certification from planners, plus the right to collect cost-based rates through the RTO’s transmission access charge.

As with WGD, PP claims it can’t win financing support from private equity investors as a merchant project sponsor without the requested incentives and guarantees.

However, since the Grid Plus project application openly flaunts and violates PJM’s tariff rules for grid project applications, FERC issued a deficiency letter on January 7, asking for various explanations for the nonconforming proposal. For example:

“Explain whether Primary Power has entered into negotiations with incumbent transmission owners in the zones in which Grid Plus will be located, and whether these negotiations have resulted in Primary Power being able to construct, own and/or finance Grid Plus.”

Distracted by Benefits

To understand the rationale of Tres Amigas, think of it as a transmission project designed specifically to eliminate congestion at a particular grid constraint. In this case, however, that choke point is the mother of all constraints—that being the present barrier that separates the nation’s three asynchronous grids.

In bridging that divide, Tres Amigas in effect will become the nation’s fourth interconnection, operating as a sort of in-between netherworld, not part of any RTO or ISO, or utility service territory. In fact, it will request authority from NERC to operate as its own separate and independent balancing authority.

All of this begs a central question: What happens to ERCOT, which up to now has remained a FERC-free zone, free from interstate commerce, as it remains electrically isolated from the Western and Eastern Interconnections?

This question explains why Tres Amigas filed two separate cases at FERC: First, a petition asking FERC to issue a jurisdictional disclaimer so that the completed project will not undo ERCOT’s exemption from FERC regulation under the Federal Power Act (FERC Docket No. EL10-22), and second, an application for authority as a merchant grid facility to charge negotiated, market rates for transmission service provided from one of the three grids to another (FERC Docket No. ER10-396).

The disclaimer case is devilishly complicated, involving subtle legal interpretations of the Federal Power Act and various court decisions, including, most notably, the U.S. Supreme Court’s 1973 opinion in Florida Power Corp. v. Florida Power & Light Co. In that case, the high court ruled that FP&L, though lacking any direct connections across state lines, was nevertheless engaged in federally regulated interstate commerce by interconnecting with FPC (which in turn was interconnected with Georgia), because FP&L electrons became “commingled” with Georgia electrons.

This language has sparked a lively debate over the technology, physics, and power flow dynamics implied in the Tres Amigas project.

For his part, engineer and Tres Amigas CEO Phil Harris offered testimony that no such illicit commingling will occur under his watch. Yet the fact remains that ERCOT and the Texas PUC each have prospered as a separate electrical nation unto themselves. Virtually all parties commenting on the project have conceded that Tres Amigas lies dead in the water if it can’t supply assurances that ERCOT utilities building transmission lines to link up with Tres Amigas in Clovis won’t forfeit their present immunity from FERC regulation.

Assuming Tres Amigas can hurdle that obstacle, it then must convince all parties that it won’t abuse its franchise by overcharging.

As with any other merchant grid project, the ability of Tres Amigas to negotiate higher rates will be limited by the value it offers, represented by the basis differential between the locational price of energy at the top and bottom of the line. That means Tres Amigas is primarily an arbitrage play on the price differentials between the three asynchro- nous grids, which could promote price convergence between various points within ERCOT and the Western and Eastern grids.

In its rate application, Tres Amigas has submitted evidence showing high, low, median, and average wholesale power price differentials between MISO, SPP, ERCOT, Palo Verde (the ICE hub), and CAISO in 2008.

That evidence, however, prompted the Texas Industrial Energy Consumers to argue that Tres Amigas will siphon low-cost nuclear and coal-fired power from ERCOT to other regions, causing retail electricity rates in Texas to climb. Tres Amigas countered, however, that the question of whether its project will be good or bad for Texas retail ratepayers is irrelevant to the question of whether the merchant project has assumed the requisite risk to warrant federal authority to charge market-based rates (see Answer of Tres Amigas to Requests for Denial of Negotiated Rates, FERC Docket No. ER10-396, filed Jan. 13, 2010).

Other parties warn, however, that with competition unlikely to emerge anytime soon in the relevant market (i.e., bridging the three asynchronous grids), Tres Amigas could exert market power and simply pocket those regional price differentials as rent.

As APPA General Counsel and Policy Vice President Susan Kelly mused, Tres Amigas “could exercise market power by virtue of its 100-percent control over what sounds very much like a potential essential bottleneck facility” (see Comments, Docket ER10-396, filed Dec. 23, 2009).

Despite its creativity, Tres Amigas still could end up as a bridge to nowhere. Its success depends entirely on whether it can convince other parties in ERCOT, SPP, and the Western Interconnection to build transmission lines to the superstation in Clovis, so that Tres Amigas receives injections of power to re-route among the various grids.

Otherwise, the project will just lie there, inert, with electrons circling aimlessly within its triangular, super-cooled underground ring, like some UFO landed in the vast emptiness of eastern New Mexico.

Even lead counsel Raskin concedes that without a jurisdictional disclaimer, “the unique benefits of Tres Amigas will be lost.”

Nancy Bagot, in her written comments as vice president of regulatory affairs for EPSA, gave her own unique spin on the issue:

“The commission,” she wrote, “must remain focused on the legal merits of the petition and not be distracted by the purported benefits.”