Opportunities and market challenges addressed at TransForum East session

The challenges and drivers for transmission development were highlighted early Dec. 1 at an opening panel of the TransForum East 2015 conference held in Washington.

American Electric Power (NYSE:AEP) has several companies focusing on transmission development and the corporate parent plans to spend more than $2bn annually in the sector due to four factors driving transmission investment, according to Dan Rogier, managing director at Transource, a partnership between AEP and Great Plains Energy (NYSE:GXP).

Those four factors are the changing generation landscape, the aging of the existing grid, emerging mandates on environmental and physical security issues and the geographic location of possible projects, Rogier said Dec. 1 at the TransForum East conference sponsored by TransmissionHub.

AEP’s transmission investment vehicles include Transource, AEP Transmission, and partnerships with other companies through Electric Transmission TexasPrairie Wind Transmission and Pioneer Transmission, and the companies own or are currently developing independent system operator-approved projects in 13 states, Rogier said.

Echoing recent comments from AEP Chairman, President and CEO Nicholas Akins, Rogier said about 40% of capital expenditures at AEP in the coming years will be on transmission, with smaller percentages on distribution and generation assets.

With the Clean Power Plan issued by the U.S. Environmental Protection Agency and states adding renewable resources, the generation landscape will continue to change, and the geographic location of new generation can drive transmission spending, Rogier said.

AEP has utility assets near the Utica Shale in Ohio and the Eagleford Shale in Texas, where oil and natural gas production spending is driving load growth, which can boost transmission requirements, he added.

A good amount of existing grid infrastructure is getting old and near the end of its useful life, with more than 50% of current lines over 40 years old, Rogier noted. If 25% of facilities are replaced between 50 and 80 years in service, the investment need would increase by $5bn over the next decade, he said.

FERC’s Order 1000 has changed the way companies develop transmission projects, with policies still evolving in different regions of the country, Rogier told the audience. At AEP, the company has seen a shift to smaller projects compared with larger, inter-regional facilities being planned a few years ago, he said.

That trend is likely to continue given the public’s disdain for seeing new utility infrastructure sited, added Steve Mitnick, president of Build Energy America and former CEO at Conjunction LLC, which sought to develop the Empire Connection transmission project in New York. Build Energy America is a research group focused on the economics of energy infrastructure investment.

“The public doesn’t want utility infrastructure. . . They want a microgrid” built around local solar and wind resources and not new transmission facilities, Mitnick told the gathering.

The lower returns on transmission investments and the focus on the cost of transmission hinder the policy debate to promote the value of electricity, and the minimal costs associated with transmission that show up on a consumer’s utility bill, Mitnick said. For decades, 1.5% of consumer spending in the U.S. has been on electricity, which should be touted as illustrating the good value of utility infrastructure, he said.

With the transmission portion of a consumer’s utility bill generally less than 5% of the total bill, transmission costs should be unnoticeable to the consumer, Mitnick asserted. “It’s insignificant” in the bigger picture, but gets highlighted for the high cost of a few large projects, he said.

Power markets that emphasize nodal pricing are great for short-term outcomes, but they do not support long-term investments, and transmission infrastructure is a very long-term investment, Mitnick said.

Mitnick recounted the demise of the Empire Connection project nearly 10 years ago and noted that large transmission projects can be broken into smaller facilities to accomplish the same power flows, which he said will be happening more often amid lower returns on equity for transmission investments.