Instead of traditional return on equity regulation, where transmission owners receive a set percentage of their investment back as profit, a shared savings incentive returns a portion of the system-wide cost-savings created by an investment to the asset owner.
FERC is considering a shared savings incentive as a solution to the slow adoption of Grid Enhancing Technologies in the United States, as compared to other countries. A technical conference on September 10, 2021, will explore the idea in depth.
Learn more about this approach, first proposed to FERC by the WATT Coalition and Advanced Energy Economy, in June 2020, through the frequently asked questions below.
GETs are advanced transmission technologies that increase the capacity and efficiency of the existing grid. Dynamic line ratings, power flow control and topology control are the leading technologies available today.
Improving the capacity of the grid reduces costs for consumers, produces more just and reasonable rates, and was specifically directed by Congress. The American regulatory reward system encourages large capital investments, not lower cost technologies. This proposal would align incentives for these investments in the public interest. Markets with performance-based transmission incentives, including the UK and Australia, have seen much wider adoption of GETs, and WATT believes that this model will be successful in the United States as well.
Refer to FERC’s Notice of Proposed Rulemaking on this issue for information on FERC’s approach to Grid Enhancing Technologies.
Shared-savings or another performance-based incentive will encourage TOs to pursue the GETs deployments that offer the most system value. Any incentive based on the size of capital investments such as ROE on invested capital would have little impact, as stated by FERC Chairman Glick in his response to the NOPR.
It would apply to all Grid Enhancing Technology projects which increase the capacity, efficiency and/or reliability of an existing or newly planned transmission facility, with a benefit-cost ratio of at least 4:1. The projects must cost less than $25 million, with differentiated strategies for small projects, less than $2.5 million.
The proposal also suggests that FERC consider proposals from asset owners to design programs for small project deployment of GETs. Instead of approving each project individually, FERC could evaluate a set of criteria and objectives for deploying GETs, developed by the transmission owner. If approved, the owner could then implement GETs under those conditions with the standard small-project incentive.
No, this proposal creates two tracks depending on the cost of the installations. Projects under $2.5 million, or “small projects” would have incentives capped, while larger or “mid-sized” projects (up to $25 million) must use competitive processes to determine incentive levels based on system benefits. This differentiation allows small projects to be in service on faster timelines and without prohibitive administrative burden, while ensuring that customers get the maximum benefit from larger installations. FERC’s NOPR shows that small projects are more likely to have desirable cost-benefit ratios, and that cutoffs at $2.5 million and $25 million match the highest value projects with the correct level of regulatory oversight.
Yes, under the Federal Power Act, section 219(b)(3), FERC was directed to “encourage deployment of transmission technologies … to increase the capacity and efficiency of existing transmission facilities and improve the operation of the facilities.” The incentives must also align with FERC’s other mandates: to support reliability, establish just and reasonable rates, and be administratively workable.
Under the WATT Coalition/AEE proposal, project developers are only eligible for shared savings for the first 3-years of the project’s operation, unless those projects continue to show a cost-benefit ratio higher than 4:1. In that case, the project developer could reapply to FERC for another 3-year period. For small projects, the incentive would be a set percentage of the benefits, with 25% suggested in the proposal, and could be capped at $10 million.
This proposal makes no changes to existing planning processes. Depending on the RTO, other opportunities to consider GETs may be already in place. This ensures that GETs benefits are not double-counted in traditional project assessments. For projects costing less than $2.5 million, a TO or RTO may propose a project or program for consideration of incentives to FERC at any time.
Consumers still get most of the benefits of Grid Enhancing Technologies in terms of cost-savings. Other protections include capping project costs, providing cost-benefits analysis up front, and, where appropriate, capping the incentive and/or using a competitive process.
For larger installations costing more than $2.5 million, project developers submit their proposals to the Planning Authority which include the project along with the proposed share of the savings (%) that they would take. The Planning Authority then evaluates all projects submitted to resolve the same problem, and awards the project to the developer who proposed the overall lowest cost option (which includes the solution plus the share of the savings). The competitive nature of the program ensures the customers are protected – the project with the highest net consumer benefit will be selected.
Projects costing less than $2.5 million, in the interest of timely and workable program implementation, should not undergo a competitive proposal process. FERC should establish a standard percentage of the benefit that would be shared with the project owners. WATT and AEE propose 25% as a reasonable value.
Benefits are calculated by running production cost models with and without the reduced congestion enabled by GETs installations. The difference between the system costs between these scenarios is taken as the net benefit, which is then evaluated against the cost of the GETs installations required to achieve the congestion reduction. FERC’s NOPR shares confidence that cost-benefits analysis tools are mature and accurate. In Paragraph 47 they write: “The widespread use of benefit-to-cost ratios for evaluating economic transmission projects in RTO/ISO transmission planning regions demonstrates the reasonableness of employing benefit-to-cost ratios to determine whether transmission projects merit ROE incentives premised upon economic benefits.” Further, the NOPR states that ex-ante evaluation by modeling is preferable to attempting to measure benefits ex-post.
Where there is an RTO, they will evaluate the benefits and costs of projects. For non-RTO regions, the planning authority or balancing authority (which may be the local TO) would complete this evaluation.
For larger projects costing over $2.5 million, any qualified market participant can propose a project to the RTO, balancing authority or planning authority. If the proposer is not also the incumbent transmission owner where the project is to be located, the incumbent will have a right of first refusal to construct or install the GETs project. For smaller projects costing up to $2.5 million, or for programs of such smaller projects, the proponent is the incumbent transmission owner, or the RTO on its behalf.
Yes, FERC would make the determination on whether or not incentives are justified and would award incentives directly to the applying party. After the projects are approved by the RTO, or other authority, the project is presented to FERC for traditional rate base cost-of-service recovery which would include a Return On Equity (ROE) on the total project investment and the third-party-approved share of the savings generated by the project.