Time To Remove The Roadblocks To A National Transmission Grid

Nov 17, 2010 - Gilbert E. Metcalf - Investors.com

On the campaign trail, President Obama is promoting his green jobs agenda as an antidote to high unemployment. And though it's an approach that doesn't always attract bipartisan support, one aspect of it should — and has: the construction of a true national electricity grid.

One especially unusual and attractive aspect: it's a green construction project that can be financed privately. What's more, such investments, as Google makes clear, will not need to be government-financed — just one reason that "grid" improvements have attracted rare, bipartisan support.

Few policies attract support from both Obama and Newt Gingrich. The development of a national inter-connected electricity grid is one of them. The president has promoted what he describes as a "newer, smarter electric grid" that "will make our energy bills lower, make outages less likely and make it easier to use clean energy."

Former Speaker Gingrich has chosen a different emphasis — but reached the same conclusion. "You've got to rebuild the electric grid," he said, "because, as I keep telling all of my left-wing environmental friends, if you want people to drive electric cars, there has to be electricity."

Indeed, there's a bipartisan understanding that adding new interstate high-voltage lines to connect and expand what are now three barely linked regional electricity distribution systems can both help bring new, less-expensive power to parts of the country where prices are high and serve as a transmission highway to cities for wind and solar power, generated in remote locations.

Over 50 years ago, President Eisenhower championed an interstate highway system for its national security and economic development benefits. Today, Susan Eisenhower, chair of the Eisenhower Institute and the president's granddaughter, has advocated a built-out grid as a latter-day version of the interstate highway system — infrastructure that sets the stage for prosperity.

The electric power industry is on board, as well; wary of power peaks and the risks of blackouts, it seeks the reliability that an extended and improved national transmission network would ensure.

Yet, over the past decade, during which we have added 15,000 miles of new interstate natural gas pipelines, we have added just 685 miles of new high-voltage interstate electric power transmission lines. Improving on that record will require two key, related realizations: first, that an improved and expanded grid can actually be financed privately and second, that doing so will require crucial public (i.e., regulatory) cooperation.

Traditionally, investments in our transmission and distribution grid — a system built incrementally over the past century by private utilities — have been financed through retail payments for electricity. This remains a robust and available revenue stream, expected to total, over the coming decade, some $2.6 trillion.

By comparison, I estimate — based on projections of the North American Electric Reliability Corporation — that investment costs for transmission lines of 230kV or higher over that same period will be $90.8 billion.

Even if these estimates are too conservative by half, improving our transmission grid will cost only 5% to 10% of our total expenditure on electricity between now and 2018. For the average residential customer in the United States, this translates to as little as $5 a month and at most $10 a month on their electric bill.

There are a number of ways that private investments in the grid can be structured that will make public financing unnecessary. One of the more promising approaches is known as "transmission congestion charging."

Here's how it works. Peaks in power demand allow those who own high-voltage lines to earn a healthy return by serving power-hungry utilities. If there were no congestion on transmission lines, then all electricity would be provided by the lowest cost generators.

But congestion in areas of high demand, caused by too much power flowing across too few lines, requires system operators to shift from lower-cost to higher-cost electricity. If private developers can lay claim to the margins that this shift creates, they will likely find investing in new transmission lines to be an attractive business model.

In an ideal world, the full cost of private investment in grid expansion would be covered by transmission congestion charging. In the real world, however, the numbers are unlikely to add up. Costs that aren't covered, namely those associated with the advance construction of spare capacity, can be spread uniformly to users on a per-megawatt or megawatt-hour basis or allocated directly to the beneficiaries of new investment in transmission capacity.

A clear system of cost-allocation is essential for attracting private investment. And here government has an important role to play. The patchwork quilt of grid regulation — based in the 50 state public utilities commissions, established when power distribution was extremely local — today poses a significant obstacle to interstate grid investment.

Regulators may respond more to minor NIMBY objections than to the benefits that an improved grid can provide the overall economy — and faraway cities. For example, in 1990, American Electric Power proposed a 90-mile project spanning the West Virginia/Virginia border. Gaining local approval and rights-of-way for the project took 13 years; constructing the line took less than three years.

Simply put, potential investors seek assurances that new transmission lines won't be rejected by states and localities after capital has been irretrievably spent on planning and development. Although the Electricity Policy Act of 2005 took the first steps toward giving federal officials the right to preempt state objections — through the establishment of so-called National Energy Corridors — court rulings since have blunted the legislation's impact.

The outline of a federal preemption regime that is sensitive to state concerns has started to take shape. Legislation proposed by New Mexico Sen. Jeff Bingaman, chair of the Senate Energy and Natural Resources Committee, recognizes the economic potential for solar and wind power in the West, where an improved grid will be necessary to accommodate such intermittent power sources.

To date, however, legislation has stalled — and has, moreover, been flawed by dividing federal siting authority between the Department of Interior and the Federal Energy Regulatory Commission, agencies with different missions and sensibilities.

We need to give a lead agency the responsibility for transforming and expanding the national grid, even as it consults with others at both the state and federal level. And we have to understand that the value of a national grid outweighs parochial concerns such as those of New England governors who objected to high-voltage lines that could bring wind-generated power from the Midwest into competition with offshore wind turbines.

It's worth keeping in mind that the payoff for breaking the regulatory logjam that has slowed or blocked grid construction goes beyond keeping on the lights, air-conditioners and computers in New York, Chicago and Los Angeles. An improved and extended grid could truly be the green jobs creator that the Obama administration has sought both in response to climate change and the economic downturn. If only we could get started on it.

• Metcalf is a professor of economics at Tufts University and a research associate at the National Bureau of Economic Research. He is the author of a recent report, "Financing a National Electricity Grid: What Are the Issues?" (published by the Manhattan Institute).