Debate intensifies over whether competitively bid electric transmission projects result in cost savings
It’s common knowledge in the power industry that the amount of clean energy needed to reach the nation’s decarbonization goals can’t be added to the grid until the United States has adequate transmission.
“Given the proliferation of renewables across large swaths of the country, it is likely that there will be significant pressure to build more transmission lines since a prerequisite for a renewable buildout is a robust transmission grid spread over large geographic areas,” Tony Clark, senior advisor at Wilkinson Barker Knauer LLP, told Daily Energy Insider in an interview this week.
At the same time, there’s an ongoing debate around which utilities will build and own these critically needed transmission projects, and whether such projects should be competitively bid.
“There is a good deal of discussion about how much transmission will need to be built in future years, and the answer to that question probably varies from region-to-region,” said Clark, a former commissioner at the Federal Energy Regulatory Commission (FERC). “It is largely driven by the generation mix, state public policies, and resource development taking place in each area.”
The U.S. Department of Energy (DOE) concurs and in a recent report said that nearly all regions in the United States would gain improved reliability and resilience from additional transmission investments.
“Some regions have acute reliability and resilience needs which additional transmission deployment can address,” according to the National Transmission Needs Study released on Oct. 30, 2023, by the DOE’s Grid Deployment Office.
To meet the Biden administration’s goal of a carbon-free power sector by 2035, the study says that the U.S. must more than double the existing regional transmission capacity and expand existing interregional transmission capacity by more than fivefold. And those regional and interregional transmission needs increase even further to achieve the administration’s goal of economy-wide decarbonization by 2050.
“It is critical that transmission projects are able to get built to relieve congestion, bring cheaper generation to market, and for states to be able to meet their renewable energy and environmental goals,” wrote Marc Brown, vice president of state affairs at the Consumer Energy Alliance, in an email to Daily Energy Insider.
That ability is what’s mired in debate.
FERC in 2015 issued a final rule known as Order No. 1000, which repealed federal right of first refusal (ROFR) requirements for regional projects, but not for local projects. Order 1000 also doesn’t prohibit states from enacting their own ROFR requirements.
Some experts say that FERC’s elimination of the federal ROFR was a well-intentioned but mistaken effort to expedite construction of interstate electric transmission.
And since Order 1000, regional transmission organizations (RTOs) — which facilitate the buying and selling of electricity between utilities and other market participants, and monitor the market to prevent market manipulation — increasingly select who will build a transmission project through a competitive bidding process.
“This is a matter of theory vs. practice,” said Clark, adding that in practice, FERC’s competitive bidding theory hasn’t worked. “And it is delaying projects and increasing costs to consumers,” he said. “The bidding process alone adds at least a year — if not years — to project timelines.”
Just as concerning, Clark pointed out, is that the bids themselves are often “wildly unrealistic.”
“When merchant developers seek to place the projects in service, they are frequently asking to charge rates in excess of the original bid, and much more than the incumbent utility would have been able to construct the project,” said Clark.
Brown agreed, saying that “certain so-called competitive processes incentivize lowball bids, which leads to delays, after-the-fact cost increases, and higher prices.”
“Additionally, some winning bidders have no accountability to regulators who help ensure rates are affordable and energy is reliable,” said Brown.
Also agreeing that competitively bid transmission projects haven’t delivered on promised savings is a utility coalition known as Developers Advocating Transmission Advancements (DATA), which is comprised of Ameren Services Co., Eversource Energy, Exelon Corp., ITC Holdings Corp., National Grid USA, Public Service Electric and Gas Co., and Xcel Energy.
The coalition in December 2023 published a white paper suggesting that costs for competitively bid projects were actually higher than initial estimates.
“An updated analysis shows that competitively developed projects on average have exceeded cost baselines by 6 percent,” concludes the DATA white paper. “With certain limited adjustments that are reasonable and appropriate, average recoverable costs exceed baselines by 12-19 percent.”
Furthermore, the coalition says its review of bid and cost data for certain projects reveals that competitively developed transmission projects exceed cost expectations at the time of award by 59-66 percent on average, and that competitively developed transmission projects with cost caps in winning bids have exceeded those cost cap amounts by 57-67 percent.
“These analyses contradict prior conclusions that Order No. 1000 solicitations yield cost savings for customers, and that cost caps resulting from competitive solicitations provide meaningful cost containment protections for customers,” the white paper says.
The coalition last month filed its white paper with FERC in its transmission rulemaking docket. FERC has proposed reinstating the federal ROFR so that utilities would have the right to build a regional transmission line if they agreed to jointly own the facility with another company or entity.
“FERC’s proposal to reinstate a form of a federal [ROFR] is a common-sense measure that is a recognition that the current bidding process is not working,” said Clark. “It would ensure that certain needed projects would be built in a timelier fashion, while providing appropriate regulatory oversight of spending and cost recovery.”
On the other side, proponents of competitive bidding defend it for producing accountability and cost savings.
Josiah Neeley, senior fellow in energy policy at the R Street Institute, a center-right, free market think tank, said the ROFR increases costs.
“It is common sense that eliminating competition drives up prices. This common-sense conclusion is backed up by the best research, which shows that the use of competition in electric transmission projects results in substantial cost savings,” Neeley testified during an Oct. 23, 2023 Oklahoma Senate Energy and Telecommunications Committee hearing.
Research conducted by the R Street Institute, he said, has found that eliminating competition in building transmission projects could result in billions in increased costs.
Neeley also cited the study released in April 2019 by The Brattle Group that found competition resulted in an average cost savings of 20-30 percent.
Likewise, LS Power, a competitive transmission developer and sponsor of the Brattle study, has said that the competitive processes bring accountability.
However, Clark counters that such competition negatively impacts utility costs. “The failure of the bidding process ultimately adds costs to customer bills,” he said.
Clark highlighted what he called “one particularly egregious example:” the DCR Transmission LLC project approved by the California Independent System Operator (CAISO), the non-profit Independent System Operator serving California.
CAISO says in a FERC filing that DCR Transmission seeks to recover nearly $300 million more than was originally bid to win the project — more than double the original agreed-upon project costs. CAISO wants FERC to reject DCR Transmission’s proposal.
“If approved by FERC, that will flow through to customer bills,” Clark explained. “Examples like this are a good part of the reason several states have been enacting their own state ROFR laws, which helps prevent this sort of situation.”
