Energy & Infrastructure Alert | May.16.2018
On April 19, 2018 the Federal Energy Regulatory Commission (FERC) adopted reforms to the procedures (LGIP) and pro forma agreement (LGIA) pursuant to which generators can interconnect with electric utility transmission grids. FERC's goal is to improve certainty for developers of electric generating and storage projects that interconnect to the interstate transmission grid, promote informed decisions about generator interconnection costs and timing, and enhance the interconnection process.
Since FERC issued its landmark Order No. 2003, generators have been able to rely on FERC's standard form of interconnection agreement and related procedures to interconnect, rather than having to negotiate interconnection arrangements individually.
However, despite the availability of standard procedures and agreements, generator interconnections continue to present substantial uncertainties with respect to timing and costs of constructing interconnection facilities. Advancements in technology, including the deployment of utility-scale energy storage devices, such as lithium ion batteries, have presented additional challenges, as developers seek to interconnect combined generation and storage projects that use the same interconnection capacity for generated and stored energy sales.
1. Advancing Energy Storage, Right-Sizing Interconnection Facilities and Upgrades
Several of the reforms adopted in Order No. 845 will benefit developers of energy storage resources. These reforms represent a natural extension of FERC's efforts over the past several years to remove barriers for energy storage resources to participate in wholesale energy, capacity and ancillary services markets. Although certain of the reforms outlined below will benefit developers of renewable and conventional generation, these reforms could have a more profound impact on development and interconnection of energy storage projects, both stand-alone storage and combined storage plus generation projects.
Definition of Generating Facility
In addition to developing stand-alone energy storage devices, developers are increasingly adding storage to existing renewable generation projects or developing new combined generation and storage projects. Previously, to interconnect their storage facilities to the transmission grid, storage developers were required to use rules and agreements designed for the interconnection of generating facilities – i.e. renewable or thermal facilities that generate, but do not store, energy. Although some transmission providers have interpreted the term "generating facility" to include storage, FERC determined that a revised definition was necessary to provide clarity across all wholesale electric markets. Accordingly, Order No. 845 directed transmission providers to revise the definition of "generating facility" in the LGIP and pro forma LGIA to include storage devices, whether developed as a stand-alone project or in combination with another generating facility. The revision mirrors FERC's 2013 directive to revise the small generator interconnection procedures and agreement to include storage within the definition of generating facility.
Interconnection Service Below Full Generation Facility Capacity
Another problematic issue for both energy storage and generation developers has been the requirement under the current LGIP for developers to request interconnection service based on the full generating or storage capacity of their planned facilities. Order No. 845 explained that, for example, advances in wind turbine technologies that slightly increase capacity and that occur after an interconnection request has been filed could require the submission of a material modification request; instead, the developer might prefer to maintain the original capacity rating. Also, to avoid substantial network upgrades, a developer may conclude that it is economic to limit the facility's output, if that will avoid the need to pay for the upgrades.
To accommodate these types of concerns and avoid the construction and cost of unnecessary interconnection facilities and transmission upgrades, FERC directed transmission providers to revise their LGIPs to allow interconnection customers to request interconnection service that is lower than the full generating capacity of their planned generation or storage facilities. In turn, interconnection customers will be required to install control and protection devices to prevent the generating facility from injecting energy above the specified level of interconnection capacity. The change in the LGIP should help generation and storage developers avoid paying for unnecessary interconnection facilities and transmission upgrades, and thereby reduce interconnection costs and construction timelines.
Use of Surplus Interconnection Capacity
Interconnection customers, and especially those with intermittent or peaking generation assets, do not use all of their allocated and paid for interconnection capacity during many periods. As a result, this "surplus" interconnection capacity can be used by another generator or energy storage device when it is not being used by the interconnection customer. Following the lead of the MISO "net zero" option adopted in 2012, Order No. 845 directed transmission providers to revise their LGIPs and standard LGIAs to establish an expedited process for the interconnection of additional generating facilities to use any surplus interconnection rights. As stated above, transmission providers currently conduct interconnection studies to identify interconnection facilities and network upgrades based on the nameplate capacity of a planned generating capacity. The LGIP and LGIA revisions directed by FERC will allow new generating facilities, including storage, to take advantage of surplus interconnection capacity through an expedited interconnection process. Accordingly, entities requesting surplus interconnection service will not be required to obtain interconnection rights for their additional generator or storage capacity via the standard interconnection queue process.
FERC rejected comments that surplus capacity should be offered to third parties on an open access basis. Instead, FERC ruled the interconnection customer or its affiliate has priority to use surplus interconnection capacity. If neither the customer nor its affiliate wishes to use surplus capacity, it can be offered to unaffiliated third parties. FERC expressly determined that assignment of surplus capacity is not subject to open access principles, and thus modified the approach previously adopted for MISO net zero interconnection service.
A potential risk relating to using surplus interconnection service is that it is tied to the original interconnection agreement. If the interconnection agreement for the original customer terminates, so does the agreement for the surplus customer. Still, the availability of surplus interconnection service will create opportunities for developers to interconnect projects relatively quickly and likely at a much lower cost than if they went through the standard interconnection process.
2. Improved Certainty for Interconnection Customers
In Order No. 845, FERC determined that "the current interconnection process may hinder timely development of new generation, stifle competition, result in uncertainty and inaccurate information, or potentially unduly discriminate against new technologies." In addition, FERC expressed concern that these deficiencies in the interconnection process could become exacerbated if left unresolved. Accordingly, FERC directed transmission providers to make additional reforms to their LGIP and LGIA that are intended to benefit interconnection customers by increasing certainty in the interconnection process.
Option to Build
To interconnect generation projects to the grid, developers and transmission providers must coordinate the construction and ownership of (1) discrete transmission facilities – known as generation tie-lines, (2) a substation at the point where the generation tie-line interconnects with the grid, and (3) upgrades to the transmission providers transmission system. Under FERC's standard LGIA, the interconnection customer is responsible for the costs to construct all of these facilities, subject to refund for qualifying transmission upgrades; but the transmission provider is responsible for constructing and owning some interconnection facilities and all transmission upgrades. If the transmission provider cannot construct its facilities in time to meet the interconnection customer's construction timeline, the interconnection customer can elect to build the facilities itself.
To give interconnection customers more control and certainty in the construction of interconnection facilities and transmission upgrades, FERC directed transmission providers to revise their standard LGIA to allow interconnection customers the option to build regardless of whether or not the transmission provider can meet the interconnection customer's construction schedule. In building the transmission provider's interconnection facilities and network upgrades, the interconnection customer must comply with all laws that would be applicable to the transmission provider, including reliability standards. FERC acknowledged, however, that there may be barriers outside of FERC's jurisdiction that prevent interconnection customers from exercising this option to build (e.g. state laws and eminent domain). Interconnection customers will not be able to exercise the option to build if they are unable to construct for reasons outside of FERC's jurisdiction.
Parties to a standard LGIA have the option to pursue binding arbitration to resolve a dispute, but only if all of the parties to the LGIA consent to the arbitration. In response to concerns from developers about arbitration and the unilateral ability of a single party to block it, FERC required transmission providers to revise the standard LGIA to allow any disputing party to unilaterally exercise a right to pursue non-binding dispute resolution. Under the revised procedures, the disputing parties must appoint a neutral decision-maker within 30 days of the receipt of a request for non-binding dispute resolution. In turn, the decision-maker must render a decision within 60 days of his or her appointment. At the close of the dispute resolution process, the interconnection customer could still pursue arbitration or submit a complaint to FERC under Section 206 of the Federal Power Act. However, like an arbitration, a FERC complaint proceeding could require several months to conclude. Accordingly, the new dispute resolution procedures are intended to provide a more efficient alternative to resolve disputes between LGIA parties.
3. Promoting Informed Interconnection Decisions
Among the most serious interconnection risks for generation developers are delays in the interconnection study process and determinations by the transmission owner or provider that a project's interconnection is contingent upon the construction of upgrades to be constructed by another developer. The uncertainty around these risks has resulted in disputes between transmission owners and developers, and in some developers withdrawing their projects from consideration before obtaining a generator interconnection agreement. Commenters stated that if developers had more information about these risks, they would be better equipped to make decisions about whether or not to proceed with their projects or to initiate a dispute with the interconnection transmission owner.
Published Method for Identifying Contingent Facilities
A perennial challenge for many interconnection customers has been the lack of transparency around a transmission provider's identification of interconnection facilities and network upgrades that must be developed and funded by higher-queued interconnection customers as a condition of granting service to the lower-queued customer. Accordingly, FERC directed transmission providers to include, both in their interconnection study reports and in their pro forma interconnection agreements, the transmission provider's method for identifying contingent facilities. In addition, transmission providers must post sufficient base case data, including all assumptions and contingency lists, to their open access same-time information system (OASIS) site or a password-protected website. Once implemented, interconnection customers will be able to verify the need for the contingent facilities identified in their interconnection studies and agreements.
Interconnection Study Deadlines
Transmission providers must conduct interconnection studies to identify facilities necessary to interconnect a generation or storage project to the grid. Under the current LGIP, transmission providers must use "reasonable efforts" to complete interconnection studies on a timely basis. Without information about a transmission provider's success in timely completing other studies, it has been difficult for developers to determine whether the transmission provider has satisfied the "reasonable efforts" standard. Accordingly, FERC revised the LGIP to require transmission providers to post interconnection study metrics online (to their OASIS websites) and to file information reports with FERC. The new requirements will increase transparency of interconnection study timelines, thereby enabling interconnection customers to determine if the transmission provider is satisfying the "reasonable efforts" standard.
4. Interconnection Process Enhancements
Order No. 845 directed transmission providers to implement further changes to their interconnection procedures that are intended to remove barriers to entry for generation developers. As discussed above, Order No. 845 directed transmission providers to revise their interconnection procedures to allow interconnection customers to request interconnection service that is below the full capacity of their planned generating facilities. In addition, Order No. 845 addressed the use of surplus interconnection capacity. As discussed below, Order No. 845 also directed transmission providers to offer provisional interconnection agreements and to develop procedures for identifying permissible technology changes proposed by interconnection customers.
Provisional Interconnection Agreements
As discussed above, delays in the interconnection study process can pose a significant risk to the timely construction of a planned generation project. Currently offered on a voluntary basis by some transmission providers, provisional interconnection agreements offer developers the ability to interconnect a project before all studies or necessary transmission upgrades are complete, subject to operating restrictions. For some developers, a provisional interconnection agreement can help avoid a default under a power purchase agreement that sets a deadline for initial deliveries of power. Accordingly, Order No. 845 required transmission providers to offer provisional interconnection service to their interconnection customers. Transmission providers will continue to have discretion on managing provisional interconnection studies and agreements. FERC stated that it is not adopting a pro forma provisional interconnection agreement at this time.
It is not uncommon for a developer to decide, after submitting an interconnection request, to change the technology that it intends to use to construct its generating facility, including generating turbines, transformers and other equipment. Even small technological advancements can reap significant returns in improved costs or power production. However, under the current interconnection process, it can be difficult for a developer to determine whether a change in equipment will represent a material modification of its interconnection request, and thereby require the developer to abandon its existing interconnection position and submit a new request. Accordingly, FERC directed transmission providers to revise their interconnection procedures to include a process for technological changes. In addition, transmission providers must define permissible technological advancements that would not constitute a material modification.
Order No. 845 will take effect on July 23, 2018. Subject to FERC's action on requests for rehearing or appeals, transmission providers must prepare and submit revisions to their LGIP and pro forma LGIAs by no later than August 7, 2018. The full text of Order No. 845 is available through the FERC website (click here). For more information please contact the Orrick attorneys listed below.