Future drivers for transmission investment include aging infrastructure, the need for reliability and a robust grid, and the fact that transmission enables energy efficiency, Josh Batchelder, vice president – Power, Energy & Utilities Division, CoBank, said on June 29 during TransmissionHub’s TransForum West event held in Denver.
Noting the retirement of certain coal plants as well as the growth in natural gas and renewable energy, he said that there is a “need for changing infrastructure.”
There is also grid complexity that is driven by distributed generation and the industry is dealing with such matters as cybersecurity, he said.
Batchelder also said that threats to transmission investment include disruptive technologies, which, as noted in his presentation, involves a shift from centralization to decentralization due to renewables, energy storage and distributed generation. His presentation – which he delivered during the panel titled, “Where is the money going to come from?” – also noted that declining FERC returns on equity (ROEs) may occur, but are likely not a threat to investment.
As noted in Batchelder’s presentation, those investing in transmission include investors who are seeking a steady payment stream. On the equity side, investors include utilities, joint ventures between utilities, private equity/infrastructure investors, and hybrid joint ventures, his presentation noted.
“[O]n the debt side, you’ve got commercial banks and institutional investors, so the end result is that there’s accelerated investment in transmission,” Batchelder said.
He also discussed why money is being invested in transmission projects. As his presentation noted, the 10-year Treasury rate has declined 2.92% since 2006, and the S&P average return of 7.93% is lower than the FERC ROE range of 9.8% to 12.38%. Also, factors of lower cost of capital, higher return than market and lower risk than market make the relative benefits of transmission highly attractive, his presentation noted.
Bank financing is available at every stage and project type, and debt capital markets access becomes easier as a credit profile improves, according to his presentation, which also noted that once energized, regulated transcos can issue at strong investment grade rates.
Market pricing indicates that transmission debt has good marketability and good demand from debt investors, according to his presentation.
Among other things, Batchelder said that transmission is a robust, scalable and growing segment of the well-capitalized utility sector.
He noted that there is “access to numerous sources of equity and debt because of the predictability of the cash flows.”
As noted in his presentation, the financing structure depends on the type and stage of project(s). He said, “Debt capital is really only available once the project has been mostly sited and permitted, and construction has begun.”
Fellow panelist, Michael Ferguson, director, US Energy Infrastructure, Standard & Poor’s, discussed the “energy transformation in the country,” involving, for instance, “distributed generation [and] we have more gas-fired generation.”
Another pressure on the market has been the proliferation of renewables over the last couple of years, he added. As noted in his presentation, the growth in renewables is fueled by cheaper costs, renewable standards and tax incentives.
He noted that “decentralization is already happening, but we think that more of it seems inevitable.”
As noted in his presentation, while short-term financing solutions include looking for ways to monetize renewables and capitalizing on a commodity pricing environment, long-term financing solutions include participating in transmission projects as well as looking at, as he said, the “viability of battery storage.”
Questions to consider pertaining to credit risks of grid transformation include how are carbon costs considered, whether consumers prefer low-carbon solutions, and whether the regulatory framework is transparent and consistent, according to his presentation.
In addition, questions to consider pertaining to credit risks of new transmission build include whether there is a stable regulatory regime, whether transmission assets are well positioned, where are new generators located, and whether battery storage will compete, according to his presentation.
Also speaking on the panel was Roman Fontes, senior investment officer, Western Area Power Administration (WAPA), who noted, among other things, that in order for a project to qualify for WAPA’s Transmission Infrastructure Program, a project “must have at least one terminus within the western 15 geographic states, has to be in the public interest …, it can’t impact negatively any system,” and it has to have eventual certainty of repayment.
He added, “I say eventually because when we get involved in development, there’s a lot of uncertainty – we don’t know who your offtakers are …, so we’ll work with you hand in hand to figure that out.”
As noted on WAPA’s website, Section 402 of the American Recovery and Reinvestment Act of 2009 authorizes WAPA to borrow up to $3.25bn from the U.S. Department of the Treasury to develop new or upgraded electric power transmission lines and related facilities, with at least one terminus (geographical point) within WAPA’s service territory, that facilitate the delivery to market of power generated by renewable energy resources.
WAPA is currently partnering on these projects: the Centennial West Clean Line project; the Electrical District No. 5 – Palo Verde Hub Project; the Southline Transmission Project; and the TransWest Express Project, according to the website.