Unlocking Electricity Decarbonization?

FERC Adopts Transmission Interconnection Reforms

On July 23, 2023, the Federal Energy Regulatory Commission (FERC) adopted Order No. 2023, a “landmark” order, which aims to significantly improve the interconnection of new generation and energy storage projects to the nation’s transmission grid. Currently, it often takes four to five years from the time a generation project seeks transmission interconnection until it receives service and can commence operations. As a result, thousands of megawatts of generation, the bulk of it renewable, are currently stuck in interconnection queues across the country. Unclogging the queue and efficiently interconnecting new generation is therefore widely viewed as a critical first step in accommodating the surge of renewable generation needed to achieve the Biden Administration’s goal of a carbon-neutral electricity sector by 2035, and the similarly aggressive goals of many states. The new rule is of critical importance to any entity involved in the electric sector because it fundamentally alters the process for obtaining interconnections, and places new and potentially burdensome requirements on both projects seeking interconnections and transmission providers who must provide those interconnections.

Key Takeaways

  • Order No. 2023 replaces the current first-come, first-served serial study process contained in its pro forma open access tariffs with a new cluster process. Generators seeking interconnection can enter the cluster during an annual 45-day open window. A system impact study is then conducted to determine the impact of all projects in the cluster on the transmission system. For projects that have not withdrawn from the cluster, a facilities impact study is conducted to identify network upgrades needed to accommodate all projects in the cluster. Restudies will be carried out if projects withdrawing from a cluster materially impact the initial studies. All projects in a cluster will have the same queue priority, and the costs of network upgrades will be allocated to those projects based on their proportional impacts.
  • Order No. 2023 requires transmission providers to publish a “heat map” showing congestion on their systems and providing information at the point-of-interconnection level intended to help prospective generation projects identify points of interconnection that are least congested and with the least costly network upgrades. Order No. 2023 eliminates the feasibility study provided in the current process, which interconnection customers often use to obtain information that should now be available in the heat map.
  • Projects seeking an interconnection will be required to provide a “commercial readiness” deposit of two times the costs of cluster studies if they elect to enter a cluster. If a restudy is required, the deposit will increase to 5% of the estimated network upgrade costs for which a project is responsible. The amount increases to 10% if the project moves forward with a facilities study and to 20% if the interconnection customer executes a Large Generator Interconnection Agreement (LGIA). If the customer withdraws, the deposits would be applied toward withdrawal penalties based on the increased costs of studies and network upgrades for remaining customers in the same cluster caused by the withdrawal. If the deposit exceeds these costs, any remaining amount would be returned to the withdrawing customer. Interconnection customers will also be required to provide study deposits of $35,000 plus $1,000 per MW for projects with 20 to 80 MW of capacity, $150,000 for projects with 80 to 200 MW of capacity, and $250,000 for projects with more than 250 MW of capacity. These deposits will be used to cover the costs of conducting cluster studies and any amounts remaining will be refunded. Finally, a non-refundable deposit of $5,000 will be required when a customer files its initial application for interconnection.
  • Interconnection customers will be required to demonstrate site control consisting of an exclusive right to construct generation facilities, which may consist of land ownership, lease rights, or options. Customers will be required to demonstrate 90% site control when an interconnection request is filed, which increases to 100% when the customer enters a LGIA. For sites that have “regulatory limitations,” which is likely to include most projects on federal public lands and wind projects on the outer continental shelf, a deposit-in-lieu option is available, requiring deposits toward the cost of interconnection studies of $10,000 per MW, with a minimum of $500,000 and a maximum of $2 million.
  • Order No. 2023 provides a process for customers with interconnection requests currently in a queue to transition to the cluster study process. Existing interconnection customers who have received a Facilities Study Agreement within thirty days after the relevant transmission provider makes its compliance filing will have the option of continuing with the existing serial study process, entering a special transition cluster, or withdrawing their interconnection requests without penalty. Customers who continue with the serial process will be required to submit a deposit equal to 100% of their estimated interconnection and network upgrade costs. Customers electing to enter the transition cluster will be required to make a deposit of $5 million, regardless of project size. Customers who elect to move forward will be subject to withdrawal penalties of nine times study costs regardless of actual impact on other projects. Customers who have not advanced in the serial process far enough to be eligible for a Facilities Study Agreement will be required to enter the transition cluster.
  • To address chronic delays in the study process, Order No. 2023 imposes penalties on transmission providers of $1,000 per business day for cluster studies that are delayed past a 150-day deadline, which increases to $2,000 per business day of delay for restudies and Affected System studies, and $2,500 per business day for facilities studies. Penalties are capped at the amount of study deposits, and transmission providers can challenge penalties if they demonstrate good cause for delays.
  • For “Affected Systems” – that is, transmission systems that are not directly connected to a new generation project but are affected electrically by the new interconnection – Order No. 2023 adds new deadlines for communications between the interconnecting transmission provider and the Affected System, deadlines for the Affected System to complete necessary studies, and new pro forma contracts governing cost responsibility for studies and network upgrades on Affected Systems, including situations where more than one system is affected. These reforms are intended to regularize the Affected Systems process, which is subject to few specific parameters under the current pro forma tariff.
  • Interconnection customers will also be allowed at least limited flexibility to add generation to an existing interconnection request, and to downsize generation during the study process, without these changes being automatically deemed a “material modification” triggering restudy requirements.
  • Transmission providers will be required to study energy storage projects using realistic assumptions about when those projects will draw power from the grid to charge their batteries and when they sell power onto the grid. Under current rules, these projects are often studied using the unrealistic assumption that they will draw power from the grid when supplies are short and prices are high, resulting in those projects having to bear costs for network upgrades that may be unduly expensive or even unnecessary.
  • Transmission providers will also be required to evaluate a specified list of advanced transmission technologies in cluster studies. Those technologies may either increase the capacity of the existing system or offer avenues for expanding grid capacity that are less expensive and faster to implement than constructing new transmission lines and other measures typically employed to upgrade transmission networks to expand capacity.
  • Order No. 2023 imposes new requirements on non-synchronous generators, generally solar and wind projects, to provide new types of technical information with their interconnection requests that will then be used in transmission providers’ study models. Order No. 2023 also expands low-voltage ride-through requirements for these types of generators.
  • Except for requirements for transmission providers to study advanced transmission technologies and for interconnection customers with non-synchronous generators to provide technical information and meet low-voltage ride-through requirements, Order No. 2023 does not affect the existing interconnection process for small generators with a capacity of 20 MW or less.
  • FERC declined the invitations of many trade organizations and independent generators to re-examine its basic paradigm for permitting transmission interconnections, which is based on a model requiring interconnection customers to finance 100% of the costs of network upgrades and for interconnection to be delayed until upgrades allow the transmission system to accommodate the entire capacity of the new project. Instead, FERC imposed several modifications on the existing approach but did not change the basic paradigm for transmission interconnections.
  • The nation’s transmission providers will be required to file tariffs complying with the new rule within 90 days of its publication in the Federal Register. Publication has not yet occurred but is expected soon.
  • Petitions for rehearing are due on August 28, 2023, which is the first step in what is likely to be a lengthy process of judicial challenges to the new rule.

Background and Analysis

Order No. 2023 is the first concrete action arising out of a FERC process that began with an Advance Notice of Proposed Rulemaking issued in July 2021 that sought input from interested parties on a variety of reforms aimed at expanding the nation’s transmission grid, improving transmission planning and cost allocation, and improving interconnection processes. In June 2022, FERC issued a Notice of Proposed Rulemaking (NOPR) proposing a long list of reforms to the interconnection process and seeking input from interested parties. Order No. 2023 adopts most of the changes initially proposed in the NOPR, but modifies or rejects a number of NOPR proposals in ways that are likely more conducive to investment in renewable generation.

For example, in the NOPR, FERC proposed that interconnection customers be required to show “commercial readiness,” generally consisting of a signed power purchase agreement or evidence that the project was selected in a competitive bidding process, before being allowed to enter a cluster. But FERC wisely abandoned this proposal, recognizing both that it could be subject to abuse by utility incumbents seeking to exclude their rivals from power markets and that it is inconsistent with the project development process. FERC replaced these “commercial readiness” requirements with a requirement for a deposit that, while still daunting, especially for smaller competitors, at least arguably creates a level competitive playing field for independent power producers.

While these reforms, taken as a whole, might reasonably be expected to improve the interconnection process at least marginally, they may come at a significant cost to project developers, especially those currently stuck in interconnection queues, who now face a Hobson’s choice of either withdrawing from the queue or moving forward at the cost of extremely large deposits and potentially draconian withdrawal penalties. Similarly, Order No. 2023 will impose potentially large withdrawal penalties on projects that are forced to withdraw from a cluster regardless of the cause of the withdrawal. This substantially increases the risk for project developers who are often forced to withdraw projects in the late stages due to problems with permitting, local opposition, financing, and other causes beyond their control.

There is little doubt that major reform to the interconnection process is needed. According to a recent report from the Lawrence Berkeley National Laboratory, over 10,000 projects representing about 1,350 gigawatts of generating capacity and 680 gigawatts of storage capacity were waiting in the nation’s interconnection queues at the end of 2022. The time spent waiting in interconnection queues is also growing, from an average of two years in 2008 to five years in 2023. The vast majority of projects stuck in queues are renewable. And the difficulties of lengthy waits for interconnection service are suggested by the fact that only 21% of all projects studied by the Lawrence Berkeley lab, and only 14% of solar projects, that filed an interconnection request made it all the way through the process to commercial operation.

FERC attributes these problems to a large number of “speculative” projects in the queue. To address this problem, FERC, therefore, proposes to allow projects to enter the cluster process on a “first-ready, first-served” basis, to require significant “commercial readiness” deposits and demonstrations of site control, and also to impose significant withdrawal penalties on interconnection customers who withdraw from the queue, with the penalties increasing as a project advances to later stages of the queue.

FERC also attributes these problems partly to inefficiencies in the study process and delays by transmission providers. It, therefore, mandates a number of reforms aimed at increasing the efficiency of the process, including setting specific, enforceable deadlines for transmission utilities to complete the study process and flexibilities for interconnection customers who wish to submit a single joint interconnection request or to modify their proposed facilities. In addition, several FERC mandates are aimed at improving the quality of studies and helping to ensure that they do not unnecessarily complicate or drive up the costs of interconnection. These include the requirement for realistic assumptions about how energy storage systems will be dispatched and the consideration of grid-enhancing technologies in the study process.

While the reforms to the interconnection process in Order No. 2023 are likely to improve the existing process, there is widespread skepticism that the order will improve interconnection backlogs and processing speed more than marginally. This skepticism is based in part on the fact that Order No. 2023’s core reforms – cluster studies that serve interconnection customers on a first-ready, first-served basis – have already been adopted by the nation’s regional transmission organizations (RTOs) and independent system operators (ISOs), as well as by a number of transmission utilities outside these organized markets, without substantial improvements.

Indeed, Order No. 2023 largely fails to address the root cause of interconnection backlogs, which is inadequate transmission capacity to accommodate all the renewable generation needed to meet the nation’s decarbonization goals. In this regard, Order No. 2023 can be viewed as a missed opportunity to institute fundamental reforms to the interconnection process, which could have included, for example, shifting from FERC’s current model to a “connect-and-manage” model, which has been used successfully in both the United Kingdom and in Texas’s ERCOT market to interconnect new generation faster and at a lower cost than under the FERC model.

While Order No. 2023 may be disappointing because FERC passed up the chance to embrace fundamental reforms to the interconnection process, all hope is not lost. FERC may well treat Order No. 2023 as the first step in a larger process of reform, as suggested by Commissioner Clements’s concurrence, which concludes that, while Order No. 2023 “can be expected to improve matters, more will be necessary to solve the problem,” and goes on to list a variety of suggested reforms, both modest and foundational. In addition, we anticipate that FERC will issue a second major rule arising from the July 2021 Advanced Notice of Proposed Rulemaking in the next few months, addressing transmission planning reform. That rule may well fill some of the gaps left by Order No. 2023.

Congress is currently considering a number of different proposals that could, if adopted, result in fundamental changes to the process of permitting new transmission infrastructure. These proposals could go well beyond the limited permitting reforms attached to the recent legislation increasing the nation’s debt ceiling. These additional reforms are currently being actively debated in Congress.

Next Steps

Interested parties may participate in one or more of the following processes:

  • Rehearing and Judicial Challenges: Petitions for the rehearing of Order No. 2023 are due thirty days after its publication, on August 28, 2023. Parties aggrieved by FERC’s orders may, following the denial of rehearing, seek review of Order No. 2023 in the U.S. Courts of Appeal.
  • Compliance Filings: Utilities subject to FERC jurisdiction, including the nation’s RTOs and ISOs, will be required to submit compliance filings meeting the requirements of Order No. 2023 90 days after its publication in the Federal Register. We anticipate that the filing deadline will fall sometime in early November.
  • Other Processes: As noted, a new FERC rule requiring reforms to the transmission planning process is likely to be issued in the next few months. FERC may also consider additional reforms beyond those adopted in Order No. 2023, likely through technical conferences or new rulemaking proceedings. Finally, transmission permitting reform is under serious consideration in the current Congress. Interested parties should follow all these processes and participate when the opportunity is available.

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