Financing a National Transmission Grid: What Are the Issues?

Executive Summary

In more than half of the states of this country, utilities must by law provide some amount of wind-generated, sun-generated or other variety of renewable energy to their customers. In most parts of the country, demand for electricity is surging. Under such conditions it isn't surprising that there has been an abundance of investment capital for expanding generating capacity.

But even a doubling or tripling of generating capacity would accomplish little if the present lack of capacity to transmit new and lower-cost power, renewable and otherwise, across an extended electric grid is not expanded. Because renewable-energy sources often originate in locations far from population and industrial centers, where power is needed most, a high-voltage transmission infrastructure must be financed and developed to move power across great distances. So must a political infrastructure through which all of the jurisdictions along its path can be heard. If Washington concentrates on constructing the appropriate regulatory structure to facilitate building out a national transmission grid, private capital should be sufficient to finance it.

Construction of transmission lines simply for the sake of ensuring reliability will have to more than double over the next five years. An equivalent amount of capacity must be added for the sake of bringing alternative power sources online. It is estimated that investment costs for 230 kV lines or higher in the period 2009-2018 will be $90.8 billion (in constant 2008 dollars), reflecting growth in anticipated need. The present value of expenditures for electricity over the coming decade is $2.6 trillion. Even if investments in transmission infrastructure turn out to be double the estimates made here, they would still account for only 7 percent of electricity's total retail cost.

The relevance of the comparison turns on what happens to the savings ratepayers realize by using electricity provided by the lower-cost generating capacity new transmission makes available. If private developers know they have a claim on that stream of income, their interest is likely to be awakened. But that income will not cover all of their costs, which also reflect the necessity of building spare capacity ahead of need and therefore revenues. The cost that isn't covered would have to be allocated either to the parties that directly benefit or to everybody. A new generator, for example, clearly benefits from access to the transmission grid. Interstate-transmission trunk lines, on the other hand, are probably better suited to what is known as cost socialization.

Besides needing to know in advance how they can make back their costs, would-be investors need to be sure that individual states and localities do not have absolute authority to reject the siting of high-voltage transmission lines in their area. A federal government that was committed to clearing a path for private transmission developers could probably avoid having to contribute any funds of its own.

While the restructuring of wholesale electrical markets into generation, transmission, and distribution organizations has created all sorts of planning and coordination difficulties, one of its goals has been to shift financial risk from retail customers to investors. Doing that allows them to earn rates of return reflecting the amount of risk they assume, and contributes to efficient capital investment.

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