A level playing field for wind power is vital if wind is to succeed in competitive power markets. Yet because wind power is site specific, intermittent, and sometimes far from customers, the danger is that it could be punished under some of the transmission pricing schemes now being proposed across the United States to deal with the increasingly contentious issue of access to the wires.
Before the Energy Policy Act (EPAct) of 1992, utilities in need of a few megawatt hours simply swapped with their neighbours. It was considered a professional courtesy. But the EPAct changed all that, requiring utilities to shop for power from each other and from independent power companies. It was not long before a utility owning the lines in one part of the country discovered it could prevent competition from elsewhere by blocking transactions or charging exorbitant tolls for transmission. If the lines were crowded, someone had to get bumped.
Recognising that something had to be done, the Federal Energy Regulatory Commission (FERC), charged with regulating interstate commerce, posted a Notice of Proposed Rule making, nicknamed the "Mega-NOPR." Order 888, setting the rules for open access to the transmission grid and implemented in 1996, was the result.
Transmission rules are still under development. California, Texas, New England and the Pennsylvania-New Jersey-Maryland system have set up regional independent system operators (ISOs) and six others are on the way. While there are serious risks for wind power in the new world of transmission, it is possible to eliminate them. California, continuing its trend setting role in wind, is showing us how.
IN THE BEGINNING
The purpose of Order 888 is to provide "open access" transmission for all electric generators who wish to conduct wholesale power transactions. The Order sets rules for how owners of transmission lines can charge for use of their lines, requiring them to charge others the same rate they charge themselves, subject to FERC's approval. Utilities must have a single tariff that covers both point-to-point service and "network integration transmission service," referred to as NITS. The idea behind integration transmission is a bit like that of a subway pass: it allows a power marketer to buy unlimited access to a transmission service. Though some think NITS is the way to go, it is still only one of a variety of transmission pricing systems being kicked about.
What Order 88 does not specify is what the transmission rates should be or how to set prices, leaving it up to industry's initiative. A wide variety of pricing proposals have been made (box). The most common approach now, and the one suggested by FERC, is to base rates of pay on capacity, with take-or-pay conditions. Most transmission charges are based on whether the capacity is firm or interruptible, and how far in advance the reservation is made. The FERC order also requires transmission users to buy "ancillary services," such as spinning reserve and voltage support, which previously were included in transmission services. An on-line market for transmission and ancillary services has been set up using the Open Access Same-time Information System (OASIS).
When FERC released Order 888, it also opened a docket on whether its initial "pro forma" tariff should be replaced with a single capacity reservation tariff, or CRT. According to Kevin Porter of the National Renewable Energy Lab (NREL), the CRT concept was an attempt to have a uniform national standard, but it was considered too inflexible and "never got off the ground." He says the open access approach is already passe. "The electric power industry has moved from an open access transmission world that is focused on individual utilities, to an ISO world in which efforts are devoted to developing a regional transmission tariff and an institution to support the emergence of regional power markets."
Not so ISO simple
FERC has encouraged the formation of regional ISOs and these are already operating in New England, the East Coast, Texas and California, with others planned (table). With an ISO, the transmission system owners continue to own the wires, but turn over control to an independent company. This arrangement is designed to make access more equal to all parties, but setting up the ISOs has proven to be a difficult task at times.
Some question whether ISOs will be able to overcome their inherent conflicts. Can a utility own the transmission system but not control it? Can the owners of a transmission system -- the big utilities -- have the same level of access to their system as non-owners -- especially when the non-owners are also competing with the owner for customers? "The ISO approach is not moving as quickly or painlessly as people had hoped," says Swisher. The IndeGO ISO in the Northwest was put on hold in March when the huge Bonneville Power Authority refused to participate. In December, a number of utilities led by First Energy, a utility holding company in Ohio and the 12th largest investor owned utility, broke away from the planned Midwest ISO to form the Alliance ISO, strategically located between the Midwest, Pennsylvania-Jersey-Maryland and New England ISO.
The solution could be for the wires to be sold off to an independent company that would also run the grid. With no vested interest in providing access, an indpendent transmission company (TRANSCO) would better be able to ensure a fair market. Swisher is among those who believe the difficulty of setting up ISOs may eventually lead to the formation of TRANSCOs that would both own and operate the wires. Independently owned TRANSCOs, Swisher believes, could eliminate the inherent conflicts of ISOs and reduce the opportunities for gaming the system.
Wind in the whirlpool
There is still time to influence transmission access and pricing rules for the many ISOs still being developed. For intermittent sources like wind and solar, some ISO frameworks could become real market barriers.
A capacity based system is not good for wind. It requires a generator to reserve a block of transmission capacity in advance, even though it may not be able to use the capacity. If a wind farm produces power about a third of the time, on average, it would pay three times more for transmission than conventional plants. An option is for wind generating companies to reschedule at the last minute, for a fee, but this too is punishing. The rescheduling fees proposed by the Bonneville Power Administration, for example, would cost a 15 MW wind plant more than the cost of actually using the transmission lines. Order 888 itself specifies a penalty if energy deliveries vary 1.5% from scheduled amounts.
One solution proposed by FERC is to give generation companies the ability to resell capacity they do not use. If a market for last minute capacity develops, wind and solar companies will reserve capacity in advance and sell the extra. However, as researchers at the Lawrence Berkeley National Laboratory point out, solar generators will inevitably need to sell excess capacity at night, when demand is low, and wind generators will have to sell capacity at the last minute, making it a risky undertaking. Since there is a price cap for resold capacity, they would not be able to recover all costs, and would still be penalised.
Another possibility is that wind and solar generators will be bundled together with dispatchable power sources, like gas turbines. The resulting semi-renewable power product could take advantage of reserved capacity. Finally, regional power pools or ISOs can set up rules that reflect "regional practices." With FERC's approval, an ISO could institute policies favourable to intermittent renewables.
A problem for wind in remote areas is distance sensitive transmission rules. If a wind power generator wants to supply a customer three utility systems away, it will have to pay transmission charges for all three systems, a process known as "pancaking." In the current system of individually owned and operated transmission systems, pancaking prohibits most long distance transactions. ISOs that have a single "postage stamp" rate within the system will increase the range of possible transactions. Porter points out that if ISOs are large enough, concerns about pancaking could be eliminated. "If they take hold, instead of having 160 tariffs on file you may only have ten ISO tariffs. We're a long way away from that, but we may ultimately get to that point," he says.
So far distance based rates are not common. "Pancaking can kill deals. People don't even think about it," says Porter. "Distance based rates may do the same thing." While some ISOs have set up zones within their system, only Texas uses a distance sensitive rate. The Electric Reliability Council of Texas (ERCOT) set up rules that allocate 70% of the transmission cost as a postage stamp price, based on the transmission customer's maximum electrical demand. The balance of the costs are charged under the megawatt-mile approach, a combination of the amount of power and the distance of transmission. The rules were challenged in court by Houston Lighting & Power, Texas Utilities Electric, and the City Public Service Board of San Antonio, but were upheld in January by District Judge W. Jeanne Meurer.
Another approach to charging for transmission has been set up to meet the needs of public utilities -- municipally owned utilities and rural power co-operatives, the so-called Munis and Co-ops -- which do not own transmission wires. Under the old system, these marketers had to set up multiple point-to-point transactions with the transmission owning utilities, resulting in expensive and complicated service. NITS is a proposed solution.
California trend setting
California seems to have solved most of the important transmission barriers for wind. "For the generator, it's about the best possible system," says Eric Miller of Foresight Energy, a green power wholesaler. "It worked out really well, even for intermittent generators." Instead of penalising a generator for not delivering its reserved capacity, as suggested by FERC in Order 888, the ISO will simply buy power from the spot market to make up the difference -- and bill the generator for the power. If the generator delivers too much, the ISO will sell the excess on the spot market and pay the generator for it. Miller believes it is a significant improvement over FERC's recommendation. "If you don't deliver, someone else will deliver for you and charge you the market price," he says. "It's a pure market. It doesn't impute motives and assess penalties based on whether you are a bad person. It's all you can really ask."
California uses postage stamp pricing within the state, with added fees only when congestion occurs at specific points. The state is divided into four zones; if the boundary between the zones becomes congested, the ISO charges as much as $150 per MWh to all power buyers. The transmission rules are "probably the most stellar achievement of California's deregulation," Miller adds.
There are three key players at the heart of California's deregulated utility system -- the power exchange, the independent system operator and Scheduling Co-ordinators. The California Power Exchange (PX) and the Automated Power Exchange (APX) are two markets for power in California, where buyers and sellers get together and make deals, setting a market price in the process. The ISO runs the transmission system. A Scheduling Co-ordinator acts as a broker between generators and the ISO -- and between customers and the ISO. The Scheduling Co-ordinator composes a schedule of transactions for every hour of the day and submits it to the ISO to reserve the lines for his or her clients.
Transactions can also take place outside of the power exchanges, in direct (bilateral) contracts. A direct contract can give a wind plant operator a reliable market at a known price for a longer time frame than selling in the power exchange, but it may also tie the seller in at a lower price than the pool allows.
The green advantage
APX runs two separate power markets, one of which -- the Green Power Market -- is for in-state renewable generators exclusively. APX has proposed replacing this with "Green Tickets." If the system is introduced, each Green Ticket will represent one MWh of power from a renewable generator and will be traded separately from the power. The price of the Green Tickets will be set in a market exchange and will provide the premium for the green power. Similar proposals have been made by Enron with its Green Tags approach, and by the American Wind Energy Association, with its Renewable Energy Credits, part of the association's Renewables Portfolio Standard. Green Tickets also emulate the Green Label system in the Netherlands.
One advantage of the APX for renewables is that it allows generators to reserve capacity with only a two hour notice, enabling wind plant operators to guess more accurately what their output will be at the time of delivery. The larger PX requires a 24 hour advance notice, though it is scheduled to open an hourly market by the end of June. So far, the PX handles 70-80% of the business in the state, with most of the rest taking place in direct contracts.
The existing transmission arrangements of today's "qualifying facility" (QF) wind companies in California have so far been allowed to remain in place, protected by a so-called "grandfather" clause. Such clauses prevent new regulations from being applied retroactively to existing practices. The protection will last until the existing contracts expire or are renegotiated. Most commonly, QF companies sell to their host utility over the utility's own transmission and distribution lines.
While California's approach may be beneficial for wind power, much of the rest of the country has yet to set up rules for transmission. Future ISOs may or may not have power exchanges attached to them. Porter fears that without integrated power exchanges, ISOs will be more likely to impose the penalties suggested by FERC for deviating from the scheduled power delivery.
FERC chairman James J. Hoecker has pointed out that ERCOT, the federal power marketing administrations, the Tennessee Valley Authority, municipal utilities and most electric power co-operatives are not subject to the FERC's jurisdiction -- and thus not subject to the open access rule. This amounts to almost one-third of the nation's transmission grid. "This 30% gap raises serious questions about the future competitiveness and efficiency of the interstate power marketplace," according to Hoecker. He wants to see FERC given greater jurisdiction as part of any federal utility restructuring legislation.
To make transmission markets as economically efficient as possible, Steven Stoft, of California's Lawrence Berkeley Laboratory, has suggested creating a two-tier pricing system, where transmission access charges are based on energy transmitted and congestion charges are based on capacity reservations. The access charges are intended to cover the fixed costs of the transmission company, constituting 80-90% of its costs. Stoft argues that this approach would lead to a least cost technology mix as well as reduce the penalty for intermittent renewables, without creating a special condition for them.