DC lines make sense for merchant developers – former FERC chairman Pat Wood

Cost allocation is a more significant hurdle to building new transmission than siting, said Pat Wood, principal for Wood3 Resources and former FERC chairman.

“The core issue – it’s not siting,” Wood said at the Gulf Coast Power Association conference in Houston on April 4. “The biggest issue in transmission is trying to determine the beneficiaries. You can still get a transmission line sited; it’s how you get it paid for” that is prohibitive to new transmission development, he said.

For merchant developers, then, DC transmission lines make the most sense, Wood said. He noted that the interconnections that AC lines have and the difficulty of tracing where the power flows along an AC line’s route make it difficult to determine the beneficiaries.

With the exception of its termini, “DC is like a toll road with no exit,” Wood said. “You don’t have flows of power on and off making it difficult to ascertain where the power is.” 

Wood predicted that the number of DC lines in the United States will increase over the coming years, and will support the merchant model for transmission investment, in which there is not a fixed purchaser or fixed formula to pay for cost of transmission.

He cited two drivers: supply and demand.

“There’s a need for it, but there’s a lot of people out there with the merchant transmission model that are getting good money behind them that are pushing it, going through the planning processes” in the West, Wood said. “Those are very long, complicated proceedings but I do think that plenty of AC lines will come from that. I also expect there will be a number of DC lines coming through that as well that will support and sustain the merchant model. 

Wood noted that a study done 12 years ago evaluated three future scenarios for what the transmission grid would look like by 2015: a big buildout, no buildout, and a hybrid buildout. The study predicted that the hybrid model was most likely to emerge, and that more DC lines would be built “as people saw the necessity to move chunks of power from the middle of the country to the periphery,” where load centers are, he said.

American Electric Power (NYSE:AEP) was an advocate for this view in the 2006-2008 timeframe, before the recession when there was “a lot of enthusiasm” about new transmission, Wood said. “I think that day will come again.”

Wood noted that this was before the proliferation of state renewable portfolio standards and the development of Midwest wind on a grand scale.

Merchant transmission development may also be a solution to developing interregional transmission lines, given the difficulties that arise in sorting out interregional cost allocation, Wood speculated. 

Despite the development of two merchant transmission lines in New York, the Empire State takes a hard line on transmission, he said.

“People blame the tough siting process in New York but I think, honestly, it’s the fact that no investor could ever find a way to get his money back for a transmission project that wasn’t a die-hard reliability project,” Wood claimed. “Because New York is a kind of retail market, the state does not want to be paying for transmission that’s competing with generation,” Wood said, adding that the PJM Interconnection and ISO-New England ISO (ISO-NE), are more moderate on the issue. 

“Even New York with its stridency that says only true blue reliability projects go into transmission rates – everything else is dealt with on an as-negotiated basis. Well, on an AC system you really can’t ascertain who the beneficiaries are and therefore you don’t get transmission built.”

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.