Transcript A Vision for Transmission: COMPETITION Massachusetts Restructuring Roundtable Boston, MA

A Vision for Transmission:
COMPETITION
Massachusetts Restructuring Roundtable
Boston, MA
November 16, 2001
José A. Rotger
Manager, Regulatory Strategy
Is Transmission a Competitive Business?
• Historically, not treated as a business at all
– Generation and transmission planned together
– New transmission driven by generation plans
– Inter-area links for reliability ONLY, not economic
efficiency & trade – “must maintain self-sufficiency”
• But, industry restructuring has changed role
for transmission => economic trade
• New transmission competes against new
generation, demand-side measures,
distributed generation, etc.
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Problems with Conventional Wisdom
• Undermined by new technology
– More modular, less “lumpy” => changes economics
– Far less environmental/community impact => affects siting
• Undermined by new regulatory structure
– Allows incentives inherent in restructured electricity markets
to be applied to transmission investment
– Recognize that transmission competes with other solutions
(G, DG, DSM) to meet customer needs
– Owners bear risks, rewards of investments => No stranded
cost risk
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Framework for Market-Based Transmission
• Bid-based markets
• Security-Constrained Economic Dispatch
• Locational Wholesale Prices
– Preferably nodal
• Tradeable Financial Transmission Rights
– Supporters of transmission expansions receive FTRs
– Term of FTRs should be as long as possible
• PJM, NYISO have this framework in place
– ISO-NE, Ontario IMO to follow
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Benefits of Market-Based Transmission
• Benefits to the environment
– More transmission => more markets for cleaner energy
– Deployment of advanced technologies with much lower impacts
• Benefits to the community
– More underground transmission (faster permitting)
– Eminent domain not needed by market providers
• Benefits to consumers
– The right investments in the right place at the right time
– Protection from stranded costs
– Efficient competition among all sources of delivered energy will
lower costs to consumers
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Current Issues in Transmission
• Does a monopoly transco serve the best
interests of consumers?
– Transco will be a market participant because it will
affect market outcomes
– How will merchant transmission fit in?
• How will the RTO conduct transmission
planning?
– Will the transmission planning & expansion
process focus on reliability or economic needs?
– Will the incumbents control the process?
• Do we need a regional/national approach to
siting?
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RTOs & Market-Based Transmission –
What is needed?
• Defined & marketable property rights
– Supporters of transmission expansions receive Financial
Transmission Rights (FTRs) that can then be monetized via RTO
• Free entry by entrepreneurial transmission companies
– No de jure or de facto monopoly over new transmission
• Level competition between new entrants & incumbents
– Equal opportunity for new entrants to compete for new transmission
investments – regulated or market-driven
• RTO planning function: Maintain reliability
– Planning serves as “backstop” for market failure, not preempt it
– Threat of “socialized” investments undermines market alternatives
– Allow greatest competition among all alternatives
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The Alternatives
• Status quo: Gridlock in grid investment
– Endless debate about “net benefits” of project & who will pay
– No mechanism to address links between markets
• Monopoly transmission company (ITC)
– One transmission company:
• Operates under incentive rates
• Responsible for all congestion, losses, & reliability
• Makes unilateral investment & operating decisions to
maximize profit
– But, regulator must guess at correct incentive rates
• Why not let market set marginal transmission rates?
• Strong central planning by RTO
– Requires crystal ball, and consumers bear risk of imperfect
planning foresight
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So, how do we get there?
• Don’t fall prey to commonly held myths
regarding transmission expansion:
“Our Top 10 myths”
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Top 10 Myths About Grid Expansion
No. 10 Transmission is and will remain a
natural monopoly
Fact:
 True for grid operation, but NOT for additions and
expansions
 With LMP and tradeable property rights, G, T,
DSM, etc. all compete to meet new energy needs
 Free rider problems, economies of scale
arguments are being resolved by technology
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Top 10 Myths About Grid Expansion
No. 9 Free riders restrict market-based
transmission investment
Fact:
 New controllable technologies address free riders –
only users pay (HVDC, FACTS)
 FTRs discourage free riders and provide vehicle for
investment recovery – only users pay
 The combination of risk aversion (bankruptcy) and
well-designed energy markets (with volatility) prevents
or eliminates free riders (woe to the unhedged)
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Top 10 Myths About Grid Expansion
No. 8 Economies of scale (“lumpiness”)
restrict market-based transmission investment
Fact:
 New controllable technologies are smaller and more
modular (HVDC, FACTS)
 Modularity preserves options
 Grid capacity can match market demand
 Generation has residual economies of scale (even
with GTs), but few worries of market failures
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Top 10 Myths About Grid Expansion
No. 7 Need eminent domain and other
state police powers to site transmission
Fact:
 New cables are smaller and easier to place
underground (HVDC Light) in existing ROWs (railroads,
highways, pipelines, etc., just like fiber optic cables)
 New point source and converter devices allow
capacity to be increased in existing substations
 Siting regulations/statutes changed to reflect
merchant generation – why not transmission?
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Top 10 Myths About Grid Expansion
No. 6 Transmission takes too long to build
– need to “pre-approve” projects
Fact:
 New transmission technologies can approximate
project schedule for generation (e.g. 2-3 years)
 If RTO-sponsored transmission is pre-approved,
generators will locate at sending end of planned
upgrades (and what is the future of distributed
generation?)
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Top 10 Myths About Grid Expansion
No. 5 Transmission is only 5-6% of total
cost – why bother?
Fact:
 Marginal cost of transmission much higher than
average cost (10x? 20x?)
 Congestion charges visible under LMP/FTR
frameworks – N.E. Mass & Boston congestion costs
5/99-7/00 = $80+ million
 To achieve efficiency, get prices right at the margin
 or generators in remote locations will push RTO to expand
grid
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Top 10 Myths About Grid Expansion
No. 4 Why not over-build transmission – the
benefits outweigh any efficiency losses
Fact:
 “Must build to eliminate congestion” (at any cost) –
why bother with LMPs and FTRs? Let this market
structure work!
 Why saddle captive customers with uneconomic
transmission investments? (think nuclear)
 “Must build to mitigate market power” – there are
cheaper and better ways (behavioral solutions)
 “Must build to improve liquidity” – at what price?
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Top 10 Myths About Grid Expansion
No. 3 Only a central planning process can
efficiently reduce congestion
Fact:
 Backstop role for reliability-driven upgrades, but NOT
for economic upgrades
 Why forfeit the competition benefits of new entrants?
 Central planners are destined to be wrong – and the
burden is on captive customers, NOT shareholders
 Central planners may be biased and may NOT be
sufficiently independent
 Any residual central planning requires complete
independence and a competitive solicitation process
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Top 10 Myths About Grid Expansion
No. 2 We need incentive rates (PBR) to
build new transmission
Fact:
 Why not rely on market-based CMS -- LMPs and
FTRs? Let this market structure work!
 Why do we need incentive rates for the existing wires
in order to build new ones?
 Price caps (RPI – X): With LMPs & FTRs in place,
why pre-determine and lock in productivity
improvements (X)? Why not let the market set X?
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and the Number One
Myth about Grid
Expansion is…
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Top 10 Myths About Grid Expansion
No. 1 Market-based transmission cannot be
financed or built on basis of market rights
Fact:
 The US (and other nations) have implemented the
market structure (LBMPs & FTRs) necessary for marketbased transmission investments
 Let the markets work!
 TEUS is actively building transmission in USA and
Australia on a fully market basis – over 1,200 MW of in
service and proposed projects (& more to come)
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Our Solution
• Over $500 million in market-driven projects
• Australia
– Directlink
– Murraylink
– Southernlink
180 MW, 65 km u/g DC
Operation
220 MW, 180 km u/g DC
Construction
150 MW existing lines upgrade Permitting
• United States
– Cross Sound
330 MW, 40 km subsea DC
Permitting
• Final permit may be issued by December => operational by summer 2002
– Lake Erie Link
– Harbor Cable
325-975 MW, 120 km DC
330-990 MW u/g & subsea
Permitting
Development
• Other competitors: NU (CLIC), Neptune, GenPower
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Final Thoughts
• Market-based solutions are a reality
• Technology is changing the industry
• Trust, but verify
– Markets can and do work!
– But, ensure that the right structures are in place to
allow full and fair competition
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For more information
• Our web sites:
– US
– CSC
– Australia
www.transenergieus.com
www.crosssoundcable.com
www.transenergie.com.au
• Contact information:
– Jeff Donahue
– Ray Coxe
– José Rotger
(508) 870-9900 x105 [email protected]
(508) 870-9900 x106 [email protected]
(508) 870-9900 x108 [email protected]
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