Incumbent utilities are now competing with private developers to build transmission lines. New business models may enable deeper decarbonization.
SunZia, a private transmission developer, is constructing lines to supply California with evening wind energy to compliment daytime solar production. Its turbulent history provides lessons for prospective developers.
The incoming Biden administration intends to increase funding for transmission, but existing regulations may hamper interregional grid development.
Scorching August heat in California left millions without power after state regulators were forced to instate rolling blackouts. On October 6th, the state’s three central energy organizations issued a joint report outlining how climate related weather and improper renewable resource planning contributed to the first rolling blackout event since the 2000-2001 energy crisis.
On August 14th, as the sun set and solar output began waning, grid operators prepared for an influx of natural gas to supply evening electricity. However, extreme temperatures caused consumer electricity demand to leap above predicted levels. Wholesale electricity prices climbed from under $40 per MWh at 8 am to $163 by 4 pm. Two hours later, prices spiked at $1,000 per MWh. The postmortem, authored by the California Energy Commission, the California Public Utilities Commission, and the California Independent System Operator, concluded that underperforming natural gas plants and electricity bottlenecks due to a lack of interregional transmission were the two main causes of the rolling blackouts.
Despite the shortfall of interregional transmission being constructed by utilities, a group of entrants called merchant transmission developers are attempting to widen grid bottlenecks. SunZia, a southwestern merchant project, is addressing California’s lack of interregional transmission head on. Beginning its path in the wind-rich pocket of central New Mexico, SunZia's project will traverse across Arizona towards California. As the sun sets and solar production wanes, the project will provide 4,500 MW of wind energy, reducing California’s reliance on evening natural gas.
In the wake of California’s blackouts, a flurry of articles surfaced, chastising California utilities for underinvesting in transmission. But, according to the Federal Energy Regulatory Commission, utilities really are building transmission. They're just doing it in limited locations. In the CAISO footprint, transmission investments sextupled from $293 million in 2001 to $1.8 billion in 2017. However, current regulations disincentivize work that extends beyond the borders of California.
In 2011, FERC created Order No. 1000. The ruling hoped to end the era in which regional planning entities granted utilities the exclusive right to build transmission projects. Under Order No. 1000, proposed projects would be awarded through a competitive bidding process. By allowing developers to compete for projects, optimized routing and contracting could reduce construction costs by 29% in the CAISO footprint, saving consumers money.
However, there was a catch. If incumbent utilities stuck to existing grid upgrades, projects under 200 kV, or small projects deemed by system operators to serve “local reliability needs”, then utilities could continue to build transmission without having to participate in a competitive solicitation process. By dint of executives' efforts at keeping projects small, only 6.8% of projects in CAISO have been competitively bid since the passage of FERC Order No. 1000.
Unfortunately, deep decarbonization will be more expensive and less reliable if the grid remains fragmented. The NREL Seams Study demonstrated how interregional grid connection could enable largescale deployment of renewables and reduce our reliance on uncompetitive fossil fuel generators. Hannes Pfeifenberger of the Brattle Group tells CEFF, “Order No. 1000 didn’t require interregional planning and no utility is really doing it. Even though the Seams Study shows the benefits of spending $80 billion on transmission to save $150 billion on generation costs, none of these projects are going anywhere.”
While regional planning entities allow utilities to develop projects to meet current electricity demand, merchants like SunZia identify areas where future transmission capacity might be needed. In 2006, the company identified a swath of land in Corona, New Mexico with over 11,000 MW of developable wind resources. “It doesn’t take long to look on an NREL wind resource map and see that New Mexico has some of the highest wind speeds in the entire country.” says Ian Calkins, a SunZia team member. However, existing grid infrastructure in the region could not transport high volumes of energy, leaving wind resources stranded.
Three years after SunZia realized Corona’s potential, the Department of Energy formally recognized this region as a “major geographic area rich in renewable energy resources that could not be developed without the addition of new transmission capacity.”
For the past 14 years, SunZia has been planning to interconnect wind energy with two 500 kV transmission lines. Running 520 miles westward to Arizona’s Palo Verde Hub, the carbon free electricity will then travel through a network of transmission lines to consumers in California.
SunZia may seem like a disruptive startup, but the project is not backed by fledglings. The project was conceived by the MMR Group, a multinational private holdings company, specializing in largescale infrastructure projects. To reduce risk, MMR formed a joint venture with Tucson Electric Power and Shell WindEnergy. The three companies own 86% of SunZia, however, the MMR group remains the majority owner at 80%. Two public utilities, Salt River Project and the Tri-State Electric Cooperative own the last 14% of SunZia.
Growing demand for decarbonized electricity, falling costs of wind energy, and successful partnerships seemed to provide bright signs for SunZia’s success. However, the slew of challenges SunZia has faced illustrates why so few merchant transmission projects exist. “While utilities are insulated from risks related to transmission development, merchant developers like SunZia are not.” says Calkins. “When incumbent utilities build transmission lines, they pass development costs on to customers and are guaranteed a rate of return.”
Regulators allow utilities to charge its captive monopoly customers to earn a 10% rate of return on transmission projects. In exchange, regulators require utilities to provide grid services to the public. Federal law requires utilities to grant generators “open access” to the grid. In other words, any electricity generator, such as a natural gas plant or a residential customer with rooftop solar, is entitled to use the grid to transport electricity free of charge.
However, SunZia is not a utility. It is not funded by ratepayers and is not guaranteed a rate of return. While FERC requires SunZia to leave 50% of its line capacity open for generators to use, SunZia generates no revenue for providing open access services. Pfeifenberger elaborates on this issue. “With a merchant transmission project that is integrated into the grid, there is a big free rider problem because there are many beneficiaries but there are not good ways of paying merchant transmission providers for the widespread benefit they bring to the grid.”
For SunZia to profit, it must find customers, known as anchor tenants, who are willing to purchase a percentage of the line’s capacity for exclusive use. Unable to rely on a set rate of return funded by ratepayers, SunZia is particularly sensitive to protracted time frames that are typical for transmission projects. Securing an anchor tenant is no guarantee. Lake Erie Connector, a merchant transmission line interconnecting PJM with Ontario, has completed siting and permitting, but remains in limbo because it cannot find an anchor tenant willing to sign a contract.
Beyond financing risks baked into merchant projects, SunZia entered the market at a turbulent time. Two years after the project began, the 2008 crash reduced overall demand for energy and the fracking boom threatened the competitiveness of New Mexican wind energy. Renewable projects were given a lift in the American Recovery and Reinvestment Act of 2009, which offered federal loan guarantees and grants to renewable energy projects. However, the viability of wind energy in the early Obama years was far from certain. SunZia listened as legislators in Washington considered cutting wind energy subsidies, like the Production Tax Credit.
SunZia has spent fourteen years conducting electrical studies, filing state and federal permits, and acquiring the right-of-way on private and federal land. From 2008 to 2015, SunZia struggled to comply with NEPA, which culminated in a 1050-page environmental impact statement.
Now, $110 million later, SunZia has established a route. It has weathered national and regional uncertainties and intends to finalize permits by 2022. The company hopes to procure materials for construction by 2023 and begin operations in 2024. Between now and the day SunZia’s wires are energized, another 900 million dollars will be spent to construct one of the two transmission lines.
In August 2013, SunZia secured First Wind as an anchor tenant. But after First Wind declared bankruptcy in 2016, SunZia was left empty handed. After a year of searching, SunZia selected Pattern Energy as the new anchor tenant. While SunZia is disrupting utility dominance in the transmission space, Pattern Energy is competing with utilities for consumer markets. Pattern has agreed to deliver 400 MW of wind energy to community choice aggregators in California.
SunZia and Pattern Energy illustrate a trend toward decentralization and decarbonization in the electricity sector. But some worry about SunZia’s shortcomings. The merchant model, which relies on anchor tenants, fails to provide certain grid services. Allotting 50% of available line capacity to anchor tenants is analogous to building private toll roads for cars. While SunZia may expand interregional transmission, the merchant model fails to increase grid interconnection. Pfeifenberger explains, “If you interconnect the grid, in addition to delivering power from renewables to load centers you have all these other benefits, such as diversification of renewable uncertainty and load uncertainty.”
California’s rolling blackouts illustrate that record spending on transmission does not reflect an increase in interregional planning or grid interconnection. Ian Calkins reflects on the recent blackouts, stating, “It would be interesting if SunZia existed today. It certainly would have helped mitigate the challenges California was facing during the blackouts.” In the months before the Biden administration takes office, renewable energy developers anticipate increased funding for transmission projects through a clean energy infrastructure bill. However, few conversations have centered around the public and private mechanisms that will shape how this money is spent.