From the Milken Institute Review, January 23, 2024:
RICHARD SCHMALENSEE, the former dean of the MIT Sloan School of Management, is a professor emeritus of economics and management.
Unless you’ve devoted 2023 exclusively to bingeing Suits reruns, you probably know that the Biden administration aspires to eliminate all carbon emissions from electric power production by 2035, mainly by substituting wind and solar for coal and natural gas. And that’s just the beginning. By substituting clean electricity for fossil fuels throughout the economy, the White House aims to achieve net-zero carbon emissions by 2050 – meaning that enough CO2 is removed from the atmosphere to offset any remaining emissions from human activity.
Give the president credit for audacity. The administration seeks to transform the massive, capital-intensive electric power sector in a little over a decade and to reshape all U.S. energy use in less than three. But this is not mission impossible. Most analysts have concluded it is technically feasible to get from here to there at warp speed. However, one major hurdle – a hurdle that has received relatively little attention – could prove a deal-breaker.
Increasing the role of electricity in transportation, heating buildings and myriad other uses will, of course, increase electricity demand more rapidly than the overall rate of economic growth – and that will entail a disproportionate expansion of high-voltage transmission capacity to move the power from where it is generated to where it is needed. Indeed, a slew of studies agree that achieving net-zero emissions by 2050 efficiently will depend on increasing transmission capacity by at least 150 percent and perhaps by as much as 400 percent in less than three decades.
A casual look at recent history suggests that such a dramatic expansion in transmission capacity would not be all that difficult. Government-mandated investments in transmission in the U.S. typically earn generous rates of return. And annual investment in U.S. transmission roughly quadrupled from less than $5 billion before 2005 to $20-25 billion since 2013.
But don’t pop the champagne corks just yet. Because of the growing importance of variable renewable energy, or VRE, generation (the catchall term for wind and solar), the sorts of investments in transmission needed to decarbonize the U.S. electric power system at reasonable cost are systematically different from most of those made in the recent past. And they face more serious obstacles. Indeed, without fundamental reforms in planning and permitting, investments in costeffective transmission can’t possibly keep up. Rapid economy-wide decarbonization might still be technically feasible, but the price tag would probably be politically unacceptable.
Set aside the inevitable increase in total demand for electricity to displace all the uses of coal, oil and natural gas. Simply shifting from fossil generation to VRE generation will require significant expansion of the transmission system to perform new, related functions. First, investment will be required to connect numerous, often relatively small VRE generators to the transmission system, typically in areas without significant pre-existing transmission capacity. In the jargon of the business, this is called the “generation interconnection” function.Historically, electric power was provided by regulated utilities or government enterprises that were the only providers in welldefined service territories. Each typically generated all the electricity that was consumed in its service territory and delivered it to customers over high-voltage transmission lines and low-voltage distribution lines that it owned. Most generators were fossil-fueled, and it was usually efficient to locate them relatively near major demand centers. In the 1960s and 1970s, transmission lines were built to link adjacent utilities to make the systems more reliable and to bring power from a few humongous hydroelectric generators to demand centers. Electric utility regulation was almost exclusively the job of state governments; long-distance, interregional transmission of electricity was rare.
Beginning in the late 1990s, though, electric power systems in many parts of the country were restructured, with the business of generation separated from the business of transmission and the establishment of organized wholesale markets for electricity. Seven nonprofit independent system operators (ISOs) have grown over time to manage transmission systems and to supervise organized wholesale markets that meet about two-thirds of the nation’s electricity demand. For those of you willing to dive into the details, here’s the dance card:
The other three ISOs have complex boundaries:
- New York ISO serves New York State.
- ISO New England serves the six New England states.
- California ISO serves most of California.
- Electric Reliability Council of Texas (ERCOT) serves most of Texas.
- Midcontinent ISO (MISO) and Southwest Power Pool (SPP) each serve all or parts of 15 states.
- Pennsylvania-New Jersey-Maryland Interconnection (PJM) serves all or part of 13 states.
Roughly, MISO’s territory runs from Minnesota south to Louisiana, SPP borders MISO to the west, and PJM’s territory runs mostly west from its three founding states. ERCOT has only weak interconnections with the rest of the nation for political reasons. Accordingly, it is not subject to federal regulation.
To encourage competition among generation companies in wholesale electricity markets, the Federal Energy Regulatory Commission (FERC), which has authority over transmission systems other than ERCOT, issued Order 888 in 1996. This required transmission operators to allow all generators to connect to their systems on nondiscriminatory terms. But new generators were required to pay for new lines as well as for reinforcements to existing lines needed for the system to maintain reliability. And as long as a relatively small number of large fossil-fueled generators located near demand centers needed new connections, this process was relatively smooth.
But all that changed beginning in the first decade of this century. Thanks to a combination of federal subsidies for VRE generation, the imposition of VRE mandates by many states and dramatic declines in the cost of wind and solar generation, investment in VRE generation grew rapidly. By no coincidence, old fossil-fueled generators, particularly the large coal-fired plants that dominated production for decades, began to be retired.
This complicated the interconnection process in two ways. First, VRE generators large enough to be connected to the transmission system (i.e., utility-scale wind and solar) require lots of space and thus are located far from where demand is concentrated. But connecting a new VRE generator in a rural area where there is not much pre-existing transmission capacity often requires expensive upgrades to the transmission system. Meanwhile, connecting offshore wind generators, which will almost certainly play a major role in decarbonization, involves building completely new undersea transmission networks as well as reinforcing the onshore system. Consider, too, that utility-scale VRE generators tend to produce less electricity than the fossil generators they replace, so the required number of connections between generators and transmission systems increases in order to deliver the same amount of power. During 2022, for instance, 166 utility-scale generators were retired to be replaced by 614 generally smaller new generators, while total generating capacity was essentially unchanged.
The second new job that the transmission system must perform to enable decarbonization at reasonable cost is the “long-distance” function. The quality of VRE resources varies substantially from region to region, with the cost of solar generation lowest in the Southwest and the cost of wind generation lowest in the middle of the country. Moreover regionwide shifts in winds and cloud cover change geographic patterns of VRE generation availability very rapidly, so interregional connections serve to enhance overall reliability as well as to increase supply and reduce the average cost of power. As a consequence, longdistance (particularly interstate) transmission of electricity has much greater value in VREintensive systems than in fossil fuel-dominated systems. So planning long-distance transmission investments at the national level is necessary if an efficient, reliable nationwide grid is to be constructed.
The history of natural gas transmission is instructive. By the 1930s it had become clear that the nation would benefit enormously from piping natural gas from the Southwest to demand centers in the Northeast. To facilitate this, the Federal Power Commission (later renamed the Federal Energy Regulatory Commission, or FERC) was given authority in 1938 to license interstate natural gas pipeline routes, along with the power of eminent domain to facilitate acquisition of rights-of-way. Interstate transmission of electricity had less potential value then, and neither FERC nor any other federal agency has even been given comparable sweeping authority to authorize the construction of electricity transmission lines that cross traditional regional boundaries. Moreover, no entity has responsibility or authority for national-level transmission planning.
As noted earlier, the U.S. has nonetheless invested heavily in electricity transmission in recent years. But a close look reveals that most of the post-2005 surge in investment was in local or regional projects undertaken in a single provider’s service area to enhance reliability or to replace aging equipment – not to perform either the generator interconnection function or the long-distance function. Regulators are generally sympathetic to local projects. Interregional projects are a different story.
Throughout the country there are long and growing queues of proposed VRE generation and complementary electricity storage projects that have applied for connection to the transmission grid – about 10,000 projects at the end of 2022. Note, too, that the installation of very-high-voltage (above 345,000 volts) transmission lines – the sort of lines that are suitable for moving power efficiently across hundreds of miles – declined from 1,700 miles per year in the first half of the 2010s to an average of 645 miles per year in the second half of that decade. Only 567 miles were completed in 2021, and only 198 miles in 2022. Thus despite their growing importance, new long-distance transmission lines are becoming increasingly rare....
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