Tres Amigas Tie Up

Deck: 

Synchronizing networks to bring green power to market.

Fortnightly Magazine - July 2010

In 2008, testifying before the Senate Energy and Natural Resources Committee, T. Boone Pickens appeared as a persuasive, if unlikely, advocate for wind energy. He told the committee his company, Mesa Power, had just placed the largest single turbine order ever given and the Mesa Pampa Wind Project in Texas, when completed at a cost close to $10 billion, would generate 4,000 MW—enough energy to power 1.3 million homes. He also noted a potential pitfall: “[T]he large, flat open areas with adequate wind are usually located a long way from where electricity is needed. Since we can’t do much about where nature has put the wind, we have to do something about transmission to move electricity to market.”

Less than two years later, Pickens abandoned his project, saying he would build a wind farm in the Panhandle when transmission is built. Pickens’ change of fortune illustrates a problem. The United States is home to vast clean energy resources, but lacks a modern interstate transmission grid to deliver carbon-free electricity to customers in highly populated areas. Almost 300 GW of wind projects—output that potentially could meet 20 percent of the nation’s energy needs—now are waiting in line to connect to the grid because there isn’t enough transmission capacity to carry their power.

But transmission lines are only part of the solution. In order to fully integrate wind and other dispersed sources of energy into the system, America’s patchwork transmission networks need to be more closely interconnected and synchronized. That’s the goal of the proposed Tres Amigas merchant transmission project.

Grid Balkanization

Many industry studies have identified systemic problems, principal among them division of the nation’s transmission grid into three asynchronous alternating current (AC) networks with little existing transmission transfer capacity between them: the Eastern Interconnection (EI, also referred to as SPP), Western Interconnection (WECC), and Electric Reliability Council of Texas (ERCOT). Power sourced in one region can’t presently be delivered in another even if the price that would be paid in the latter is higher than that in the former (see Figures 2 and 3). This balkanization is a major barrier to renewable energy development.

High-voltage direct-current (HVDC) transmission technology provides a feasible way to interconnect asynchronous power grids and allow presently bottlenecked renewable power to reach load centers. Using voltage source converters (VSCs) to transform alternating current (AC) to direct current (DC) and then reconstitute it as synchronized AC, this technology can deliver active and reactive power independently, unaffected by loop flow or the congestion of parallel AC systems. VSCs permit real-time dynamic support of each interconnected AC system, improving stability, transfer capability, and reducing line losses. Fully controllable HVDC power transmission permits day-ahead and hour-ahead market scheduling, operation of inter-market power exchanges, and priced settlement of power transfers.

Recognizing a unique opportunity, Tres Amigas, LLC, a privately financed start-up company organized by Phil Harris, the former chief executive officer of PJM, has launched a merchant transmission project to be located on a 14,000 acre site near Clovis, N.M. The project will be a superstation hub using DC to link asynchronous power markets in the EI, WECC, and ERCOT, regulate the direction and level of power flows between them, and make possible efficient energy transactions now precluded by each market’s inaccessibility to the others.

The project would permit power sellers in ERCOT to schedule power to either the EI or WECC; power sellers in the EI to schedule power to ERCOT or the WECC; and power sellers in the WECC to schedule power to either ERCOT or the EI, thereby providing expanded markets for renewable and other sources of power. The project also would form a balancing authority within WECC and support planned HVDC transmission overlay projects nationwide.

As envisaged, the Tres Amigas project initially will have three energy conversion terminals, each with a 750-MW VSC employing insulated-gate bipolar transistors (IGBT), to provide 5 GW of capacity, scalable over time to 30 GW to accommodate additional demand. IGBT technology enables the VSC to change the AC wave form into a DC circuit with conventional voltage and current characteristics and then, with precise control, to change it back to an AC wave form. The terminals would be linked by several miles of underground liquid nitrogen-cooled cable manufactured by American Superconductor, enabling high power flows with low resistance. The project also includes up to 100 MW of battery storage to provide ancillary services and reactive power to firm intermittent renewable resources. An optimization engine will determine generation and transmission utilization, congestion, reliability indices, and variable market conditions.

The project is a merchant facility and won’t have captive customers or rely on regulated cost-based rates. Project sponsors will bear all risks. To succeed commercially, the project will have to generate income by selling transmission rights, ancillary services, and reactive power to customers that see advantages in extending to the project interconnecting transmission lines, such as AEP-MidAmerican, Southwest Public Service, Sharyland Utilities, Xcel Energy, and Public Service Co. of New Mexico. Project income will be a function of the margin created by differing power prices in the EI, WECC, and ERCOT, a fraction of which will be captured as transmission revenue through sale of long-term and spot transmission rights. The resulting dollars must be sufficient to permit the leveraged financing of a capital-intensive facility costing north of $500 million.

Negotiated Rates

To obtain required regulatory approvals, last December Tres Amigas filed two parallel applications at the Federal Energy Regulatory Commission (FERC), one seeking authorization to sell transmission rights at negotiated rates and the other seeking a disclaimer of federal jurisdiction over any transmission owner that constructs transmission facilities interconnecting the ERCOT grid to the project.

In its negotiated rates application, Tres Amigas proposed to offer for bilateral sale, point-to-point physical transmission rights based on firm transfer capability from one scheduling point to either of the other two scheduling points. Thus, for an ERCOT seller, firm transmission rights would be framed by the ability to schedule power from the ERCOT terminal to one of the other two terminals at the EI or WECC interconnections. Transmission rights therefore would entail firm point-to-point service from one delivery point to one receipt point, but also would include the right to redirect schedules to an alternative delivery or receipt point on a firm or non-firm basis as permitted under FERC’s pro forma open access transmission tariff (OATT) and the right to resell transmission rights in the secondary market.

The application contemplated successive open season auctions of transmission rights in time blocks of different duration representing up to 80 percent of the project’s initial capacity before commercial start-up, the amount of capacity offered and the applicable time blocks to be based on Tres Amigas’ contemporaneous assessment of the market. Transmission rights would be sold on a non-discriminatory basis to the highest creditworthy bidder. The application also proposed that Tres Amigas would retain the right to reserve up to 20 percent of the capacity at each terminal for sale in open season auctions after the project commences commercial operation, by which time all available capacity at each of the scheduling points would have been made available for sale bilaterally, in open season auctions, or under the OATT.

Citing a recent FERC order as precedent, the application also took note of Tres Amigas’ probable need to support early development efforts by selling transmission rights representing up to 50 percent of the capacity of the project at each scheduling terminal to anchor customers under bilaterally negotiated agreements. In doing so, the application argued that the rates to be charged, being competitively determined, would be just and reasonable and that capacity would not be withheld as a means of raising prices.

This March, FERC granted Tres Amigas’ application, subject to certain limitations. It accepted allocation of 50 percent of initial capacity to anchor customers, but denied Tres Amigas’ request to hold back 20 percent of initial capacity for discretionary sale. It also required that, before entering into an anchor customer agreement, Tres Amigas first must obtain FERC’s authorization; be prepared to offer the same terms to open season customers; and refrain from withholding capacity that isn’t committed to anchor customers during the open season process, either through creation of tranches of capacity or by offering less than the full amount of available capacity in any auction. As a practical matter, Tres Amigas must declare the amount of initial capacity it will offer at the outset of the open season process and allocate later capacity additions or availability, if any, under the OATT.

FERC found that “sufficient long-term checks are in place to ensure that negotiated rates for transmission service … will be just and reasonable,” including competition from capacity owners’ secondary transmission rights, options to purchase capacity on existing AC/DC interties, differences in the price of generation in the relevant markets, and Tres Amigas’ commitment to expand the project at cost-of-service rates if expansion pursuant to negotiated rates isn’t feasible. “With no captive pool of customers from which [Tres Amigas] can recover its cost,” FERC concluded, “the only way in which it will attract customers is to provide a service that has some economic value to market participants. If [it] does not offer some benefit to prospective customers, it will not be able to recover the investment for which it has assumed the risk.”

Disclaimer of Jurisdiction

Although opportunities exist to build transmission lines from competitive renewable energy zones (CREZ) in Texas interconnecting with the project, ERCOT utilities advised Tres Amigas they wouldn’t be able to obtain approvals in Texas to construct such lines absent a FERC disclaimer of jurisdiction—necessary, they asserted, to preserve ERCOT’s plenary exemption from federal oversight.

Accordingly, Tres Amigas filed an application at FERC requesting a three-part ruling that any transmission owner whose lines interconnect the ERCOT grid to the project won’t be subject to FERC jurisdiction as a public utility under federal law; transmission services over AC lines from ERCOT to the project (i.e., synchronized with the ERCOT grid) won’t be subject to FERC jurisdiction; and creation of a new AC to DC interconnection between the project and ERCOT won’t change the existing jurisdictional status of any ERCOT utilities or transactions.

The application advanced alternative legal bases for relief, the first an omnibus rationale that the AC electric grid in ERCOT, which isn’t synchronized with out-of-state systems, doesn’t allow locally sourced energy to “commingle” in interstate commerce and therefore isn’t subject to FERC jurisdiction. The second argument urged FERC to rule that Tres Amigas would be eligible for jurisdictional disclaimer under Section 201(b)(2) the Federal Power Act (FPA) if it were to obtain a wheeling order under Section 211. The third argument justified a jurisdictional disclaimer based on “the unique design of the Tres Amigas superstation, which will maintain the electrical separation of ERCOT and the interstate grids using new technology and a unique configuration of facilities.”

The FPA confers FERC jurisdiction over all transmission facilities that operate in interstate commerce but expressly recognizes ERCOT as a separate jurisdictional entity outside interstate commerce, regulated by the Public Utility Commission of Texas. Whether transmission lines and energy transactions are deemed to be, or take place in, interstate commerce depends, according to Supreme Court precedent, on a factual determination that electricity within a synchronized AC grid “commingles” across state lines. Tres Amigas argued that “commingling” doesn’t apply to electricity flows between asynchronous grids, such as ERCOT and the EI or WECC, linked by AC/DC converters. When so linked, for power to be scheduled from one interconnection to another, the current first must be converted from an AC wave to a DC pulse and then back to an AC wave synchronized with the receiving grid. As a result, the power isn’t free-flowing or commingled; arguably isn’t in interstate commerce; and therefore doesn’t subject transmission lines within ERCOT or the transaction itself to federal jurisdiction.

Tres Amigas’ second argument invoked FERC’s power, under the Public Utility Regulatory Policies Act of 1978, to order interconnection (FPA, Section 210) and wheeling (FPA, Section 211) by a non-jurisdictional entity without subjecting it to FERC regulation. By filing a voluntary application for interconnection under Section 210 or a wheeling order under Section 211, the parties to a proposed transaction may in principle take advantage of Section 201(b)(2) of the FPA, which states that “compliance with any order of the commission under the provisions of section 210 or 211 shall not make an electric utility or other entity subject to the jurisdiction of the Commission…” Tres Amigas noted, however, that an entity building transmission lines to interconnect the ERCOT grid with the project can’t be an electric utility, i.e., a “person. . . that sells electricity” as defined by the FPA, because, under Texas statutory law, “a transmission and distribution utility may not sell electricity…” Accordingly, it conceded, an order under Section 210 wouldn’t be obtainable.

Tres Amigas’ second argument therefore turned on Section 211, under which FERC would disclaim jurisdiction if and when Tres Amigas, itself an electric utility because of energy to be supplied from battery storage, obtained an order under that section directing the ERCOT interconnecting party, a transmitting utility, to wheel power to the project. Under the FPA a “transmitting utility” is an entity that owns or operates transmission facilities in interstate commerce and transmits power at wholesale. FERC therefore would have to find that, but for the jurisdictional exemption provided by Section 211, the ERCOT interconnecting entity would be operating transmission facilities in interstate commerce upon interconnection with the project.

To implement a disclaimer of jurisdiction under Section 211, Tres Amigas agreed to apply for a FERC order directing ERCOT transmitting utilities to wheel power over proposed transmission lines to the project. It also sought FERC’s confirmation that it would be entitled to receive a favorable Section 211 order upon demonstrating that the ordered wheeling will be “in the public interest,” won’t “unreasonably impair the continued reliability of electric systems affected by such order,” and will satisfy federal requirements concerning rates and terms and conditions of ordered transmission service.

Tres Amigas’ third argument urged FERC to disclaim jurisdiction because, among other circumstances, all the electric power flowing over interconnecting lines owned by the ERCOT transmission owner will be synchronized solely with the ERCOT grid and any power sourced in the WECC or EI will be converted by the project to ERCOT-synchronized AC current before entering the ERCOT lines. Tres Amigas also noted that the project would act as a balancing authority operating its own DC system, with several miles of DC transmission lines interposed between the ERCOT interconnection and the WECC and EI grids. Finally, Tres Amigas contended that the real and reactive DC power produced by the project’s VSCs would be fully controllable in contrast to uncontrolled power flows on an AC grid. For the foregoing reasons, Tres Amigas contended, electricity flowing in ERCOT interconnecting transmission lines won’t be commingled with electricity in FERC-jurisdictional grids.

In a parallel order this March, FERC denied Tres Amigas’ application for a disclaimer of jurisdiction. “Independent of whether ‘commingling’ occurs at the Project,” it said, “power transmitted to and from the Project crosses the Texas/New Mexico 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.