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Exploring Grid Connectivity & Performance-Based Regulation in the Energy Transition

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By: Marc Kodack, CESP Non-Resident Fellow

In the U.S. many discussions have been presented about the energy transition. Solar, onshore and offshore wind projects have high visibility within these discussions because of their decreasing costs and the increasing amount of energy that is generated collectively across the U.S. by these projects. These kinds of projects form the backbone of multiple government pledges and accompanying actions to reach net-zero by some future date. However, the energy transition consists of a large variety of integrated policy and regulatory components some of which are given much less public visibility and consideration. As net-zero is a desired end goal by many different entities, these integrated components must all be addressed, not just the highly visible generating aspects of solar and wind projects. Grid interconnection and alignment of utility rewards with public policy goals are examples of other components of the energy transition that receive less discussion, but directly affect how successful renewable sources of energy will be for communities to reach net zero.

Even if the owners of solar and wind projects can bring together multiple partners, including those in finance, regulatory, customers, and interested parties to site, construct and eventually operate each of these kinds of projects to generate energy, the projects must connect to the local grid to provide that energy to end users, whether they are local or at some distance. The length of time needed for a project to connect to the grid may be lengthened if multiple other projects are also seeking a connection given that there is now an industry shift from a limited number of large projects to many smaller projects. Currently, a grid operator will require engineering studies to determine what effect each project will have on grid reliability. Until each study is completed, there can be a multi-year delay in when completed projects provide the energy they plan on generating.

For example, PJM, which operates the regional electric grid in 13 states in the mid-Atlantic and Washington D.C., had 2,500 projects (equating to 225,000 MW) of proposed generation it was studying in 2022. Approximately 95% of these projects are renewable energy related. To create an expedited project assessment process, PJM has proposed to the Federal Energy Regulatory Commission (FERC), the federal agency that oversees grid-related issues, to prioritize about 450 of these projects. If approved, starting in 2024 the process would shift from first come-first served to a first ready-first served priority. The result would be avoiding completing studies for projects that may not be ready to connect to the grid. Other changes include reviewing clusters of projects instead of each project individually and projects that do not require grid upgrades move towards connection more quickly. The overall result would be reductions in the delays in grid connection.

Parallel to PJM’s efforts, FERC proposes a first ready-first served priority nationally so that the now 8,100 generation (1,000 GW) and storage (400 GW) projects queued across the U.S. can connect to a grid. Currently, reviewing each project takes 3.7 years. Almost 75% of these projects fail to finish the review process for a variety of reasons, such as lack of financing issues.

As grid connection changes are being examined, efforts are also occurring that would better align public policy goals, e.g., net zero, with incentives for greater utility spending and performance related to reaching net zero. The traditional approach is to use a process that equitably determines what a utility’s costs are and how those costs should be divided among its’ rate payers, the cost allocation model for setting utility electric rates. The reward is that a utility is guaranteed a certain profit for its capital investments. However, this model is linked to and biased by these capital expenditures creating impediments to actively seeking new opportunities to meet customer’s energy needs, such as through renewable energy. Thus, a cost allocation model may not be advancing desired public policy goals.

An alternative to this model is performance-based regulation (PBR) whereby reducing greenhouse gases and modernizing through innovation are emphasized. Currently, Hawaii is the only state to fully implement PBR. PBR uses performance measures, specific targets, financial incentives, and penalties. Rates are set over multiple years which encourages a utility to experiment with innovations, e.g., distributed energy systems, by providing a utility with more flexibility to meet performance goals while also providing information on how revenue is affected using new low-cost technologies. Other states are also examining portions of a PBR framework including North Carolina, Illinois and Maine.

Although less visible to glistening solar panels in the sun or spinning blades on a wind turbine, grid connection and advancing the public policy goal of net zero through performance-based regulation are two other components of the energy transition that are as necessary as encouraging more solar and more wind generation. Integrating the full breadth of all the components is the only way that net zero can be achieved. Leaving out any component will result in further delays, stretching the time frame to reach it.

Image: Quora.com