Viability of SunZia project ‘remains to be seen,’ report says

A report by the Sonoran Institute of Tucson, Ariz., and Headwater Economics of Bozeman, Mont., concludes that the jury is still out on whether the SunZia transmission project, intended to transport renewable energy from New Mexico to Arizona and beyond, can be economically viable.

As envisioned, the SunZia project is a 530-mile, 500-kV project intended to capitalize on New Mexico’s largely untapped wind resources. The project’s planning area includes a swath of central New Mexico where more than 11,000 MW of developable wind resources has been identified.

Since the project was launched, however, market conditions have changed.

“The SunZia transmission project proposal entered the energy market at a turbulent time,” the report noted. “The Great Recession reduced overall demand for energy. At the same time, federal and state policies were seeking to stimulate renewable energy development.”

The report focused on market and policy factors that affect the proposed transmission project, including its “merchant transmission” model, the need to enhance reliability and reduce congestion on the existing grid, and the plan to move renewable energy necessary to meet states’ renewable portfolio standards (RPS).

While the report’s concern about what it called “the unclear outlook for the energy investment tax credit (ITC) and production tax credit (PTC)” has been largely abated by the renewal of those credits, it identified other market factors that have not been reduced.

“While downward cost trends within the solar and wind industry are likely to make these renewable technologies more competitive in the long term, for now natural gas prices are near historic lows,” the report noted. “As a result, natural gas is projected to capture more than half of the growth in energy generation capacity from 2011 through 2035 nationwide,” possibly reducing the attractiveness of renewable energy sources.

The SunZia project is designed as a merchant transmission line and uses a business model that is “based on demand for transmission capacity that cannot be or is not being met by incumbent utilities,” the report said. In addition to satisfying a perceived demand for capacity, project proponents note that SunZia’s additional transmission pathways would increase grid reliability and relieve congestion.

However, the report noted that investments in several major transmission and grid upgrade projects in Arizona and southern California have helped to add capacity while lessening congestion.

The report pointed to the U.S. Department of Energy’s (DOE) 2006 National Electric Transmission Congestion Study, which identified critical congestion issues in southern California as well as in and around Phoenix and Tucson, Ariz. The report also said input provided in preparation for DOE’s 2012 congestion study indicates that, from the perspective of Arizona’s utilities, there are no significant congestion issues that are not being addressed through existing and permitted transmission projects.

Developments including reduced congestion and increased transmission capacity elsewhere would reduce the value of the SunZia project, the report noted.

Concerns over competition

The report also discussed two other projects planned for the New Mexico-Arizona area: the Centennial West Clean Line and the Southline transmission project.

The report could not conclude whether the Centennial West project could overlap between the wind resources being targeted by the SunZia project because Clean Line has yet to identify a specific set of routes to be considered.

Southline, the report noted, seeks to address needs similar to those being addressed by SunZia. Both projects “aim to respond to increased growth in energy demands, ensure the grid’s reliability, relieve congestion, and enhance renewable and conventional energy generation.”

However, there are important differences, the report stated.

The size of the proposed new and upgraded lines for Southline would provide between 1,000 MW and 1,500 MW of additional transmission capacity, which is less than the 3,000 to 4,500 MW estimated for SunZia. Also, because Southline’s enhancements extend only slightly north of Tucson and not to end points that have access to transmission lines shipping power to California, Southline’s primary beneficiaries are likely to be Arizona utilities and their customers.

“While the proponents of all three projects see a market opportunity to offer transmission service to future renewable energy generation facilities, it is unlikely that the current market would support the simultaneous development of all three projects,” the report stated.

Politics in play

The report said the financial viability of the SunZia transmission project, as currently proposed, “is dependent on the ability of potential [generation] customers … to exploit market opportunities to export New Mexico wind resources to Arizona and California.”

Those opportunities changed in 2011 when the California legislature passed Senate Bill 2, which placed a high priority on using in-state generation to meet renewable generation demand. Beginning in 2017, 75% of the contracts for renewable energy must “deliver both energy and renewable energy credits either through direct interconnection with the California grid or by grid operation strategies that simulate direct interconnection.”

That reality, which is important to energy generators in New Mexico and Arizona that SunZia is designed to serve, gives SunZia a competitive advantage over similar projects.

“Generators utilizing the line could conceivably compete for power purchase agreements in California’s first-priority category based on deliverability under the RPS categories,” the report noted.

However, politics are constantly changing, and the reality of an “all California” approach to renewable generation may conflict with the ideals that spawned the approach, prompting lawmakers to consider reforms, the report said.

Considering the larger number of moving targets that have the potential to affect the line, the report concluded, “Whether enough factors will align to make the SunZia project viable remains to be seen.”