Summer II Group 2

Abstract

On July 21, 2011 Congress laid out federal regulators for the payment of constructing and selection of new power lines. This is the part of the beginning of a long-term policy that will help The United States move towards a way to supply the demand for electricity through renewable resources. Before this regulation, bordering power companies were not required to work together. However, with the passage of this directive bordering corporations must work together. The long-term intent is so integrate the entire United State power grid. Although there are many benefits, costs for this project are not inexpensive. Through research it was found that although initial costs for this project are heavy, once the system is installed it will be very beneficial. As with all new technology, implementation may not always yield instant results. Long-term effects of the project include reduce costs for the consumer and producer of electricity as well as a way for corporations to stop using non-renewable resources and move towards renewable resource energy production. It was concluded that the system if successful over the long term will be beneficial for the planet, consumer, and producer. However, it would require delicate research to try and put an exact number on actual savings over a fifty plus year period.



Introduction

The United States of America (U.S.) has a fast changing economy with great demand for new and fast improvements. Currently the entire world is searching for ways of providing energy at more affordable prices. There has been an increase in research technologies involving biofuels, solar panels, electric vehicles, and many other energy price reducing innovations. It affects not only the way we buy energy but also the way energy will be used and even produced. Power Grid Integration is one of the ways that green technology helps the world we live in be more environmentally safe. The article brings forth information regarding the decision by Federal Energy Regulatory Commission and Congress to integrate America’s power system. We address the financial side of this integration; who will it effect, at what cost, and why should we move toward this new power grid system. The government view; what role they will be playing in this major change, how both the market and environment will be changed. To finalize our team weighs the pros and cons of this shift; answering our central question, how effective is the power integration system going to be for America?


Background

History of Order No. 1000

The Federal Energy Regulatory Commission (FERC) issued Order No. 1000, “Final Rule on Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities”, with the intention of organizations that manage electric grids within the U.S. to cooperate with one another. Through the new rule and the cooperation of the organizations, the FERC is pushing for developers to build power lines across several states and multiple electrical jurisdictions.

Since 1996, FERC has required open access to transmission facilities to address undue discrimination and to bring more efficient, lower cost power to the nation’s electricity consumers through Order No. 888. Only after 2007 did FERC change the rule that requires coordinated, open and transparent regional transmission planning processes to address undue discrimination with Order No. 890. Before Order No. 1000, planners only considered two benefits if building new transmission lines. The two justifications either stated that the new power line would have a reliability benefit or an economic benefit. For planners to see a new power line as being more reliable, it would need to reduce outages by strengthening the electric grid. To show an economic benefit, the lines would need to lead to reduce electric rates by increasing open competition in power markets. State public service commissions decided what consumers would pay because large utility companies owned the power plants, transmission and distribution. By having no competition, price allocation was not an issue.

FERC Decisions

The decision to pass Order No. 1000, unanimously, strengthens regional planning processes and allocates the cost of new transmission lines to those who will benefit from it. Prior to Order No. 1000, organizations would be put off from the cost of building new lines because it was not required for shared payment. By allocating costs of these installations to those who benefit, it gives the organizations more reason to build renewable energy facilities and it helps meet certain state goals of renewable energy. Order No. 1000 instructs planners that planned transmission lines will be prioritized if they meet certain goals, e.g., serving renewable energy and making the lines more affordable.

FERC believes that Order No. 1000 is an important step in moving toward a more sustainable energy source until the year 2019. During this time period, approximately sixty percent of the new generating capacity will be wind and sun. These generators are to be located distant from population centers, according to John Wellinghoff, chairman of FERC (Wald). Having transmission lines installed and maintained by cooperating organizations will allocate costs and provide more efficient energy to consumers who would not have access otherwise. Also, by way of Order No. 1000, states will be better equipped to reach their goals of integrating large amounts of wind and solar power into their energy contribution.


Power Integration – The Financial Aspect

Consumer and Producer Costs

From a consumer point of view, one would ask why how exactly this new system is going to be beneficial. For the younger generations this increase in costs for the next fifteen to twenty years will be beneficial for the fifteen to twenty years after, but for the older generations this dip just looks like another bill that they don’t want to pay. Why should they pay for something that they are not benefiting from? Benefits of changing the power grid on the financial aspect can be both positive and negative.

Moving toward an integrated power system will be very effective for both the producer and consumer in the long run. Integration will improve our economic status in many ways; one of these ways concerns a decrease in the use of carbon based fuels. Moving toward sharing a power grid allows the market for green energy to expand in more ways than ever dreamt of before. For example, the growth of solar, wind, and nuclear energies are expanding because of shared resources and improving technologies. Because of these, changes renewable energies have become more profitable over the years. By using more natural resources like solar power, we will be able to have more reusable energy, since energy stored is energy that is saved. This is not only an environmental benefit but also a benefit to our pockets. The change also helps smaller energy companies’ benefit from a larger profit because they are able to partner up with well-established corporations like the Edison Electric Institute (Bloomberg). Both sides in this partnership will benefit; large companies will gain inside information that smaller companies have collected directly from consumers. This merge will be providing great opportunities all around for both consumers and producers. The long term benefits clearly over power the short-term negatives aspects of the system.

Overall with moving to regional areas, evidence has shown that operating efficiencies have increased while costs have decreased (Blumsack 167). Though the production costs have declined it has not yet lowered prices for the consumer; these benefits can take years to get back to the consumer. With the new integration system it would be beneficial for a high- and low-cost area to combine. With this combination the prices for the high-cost center will go down, but on the negative side the lower-cost area will have the high probability of increasing; this only occurs if the profits from the low-cost area are not redistributed appropriately. For the upper class, this change will be positive, receiving the quality energy and paying less for it. While the lower class will be suffering from paying higher fees and getting a minimal positive outcome, many smaller companies are concerned for these consumers who will not benefit from the new system (Bloomberg).

Projected Savings

At this moment the Power Integrations has generated a market cap of $842.2 million, the dividend yield of the stocks is 0.7%, and the annual average earning growth of 8.3% over the past 10 years (“gurufocus.com”). That is .83% per year, with this marginal growth the market is only to get better with the great demand that the United States has for power. This increase in the stocks will be of assistance to that of our economic status, making a greater market profit. Looking at the figures you are able to quickly infer that the costs associated with the RTO (Recovery Time Objective) are on the larger side, but as a market price, it is very small. For example, looking at the PJM (Pennsylvania/New Jersey/Maryland power pool) the marginal costs from 2004 were only 42 dollars per megawatt per hour making the operating cost 9 cents per megawatt per hour, which is less than two percent of market price (Blumsack 168). This proves that with the start of something new even the producer will have to pay money to help start the long term benefits.

As mentioned earlier, Jon Wellinghoff, the chairman of the Federal Energy Regulatory Commission, predicted that until 2019, 60 percent of new generating capacity would be wind and sun, and often distant from population centers. “Strengthening and expanding the system for reliable integration of these resources will require significant investment in transmission,” Wellinghoff said, “the existing transmission system was not built to accommodate this shifting generation fleet.” Experimenting with the power grid is necessary for multiple reasons. For one extending these transmission lines extend the network for power trade being able to harness more natural energy helping move the world in a better direction (“Wind Energy: The Facts”). With moving toward green friendly energy, energy providers will be able to improve voltage management; giving you the quality energy you need without acquiring a higher cost. Merging this energy will also provide a better financial ending, production rates may almost drop to twenty cents per megawatt per hour! Once this integration is perfected, the consumer will see a great decrease in the cost of energy (“Wind Energy: The Facts”).


Benefits and Risk Issues – A Government View

Congress’ decision for United States power grid integration has caused many debates regarding the actual benefits that the consumer will acquire and how they match up against the risks posed. The underlying message given by the Federal Government with Congress’ decision was that these benefits greatly outweigh any risk taken. Some of the metrics that the government intends to focus on include but are not limited to: wholesale markets, generation efficiency, and environmental effects (Blumsack 182). These topics support strongly the power grid integration for the United States but do not touch base with those topics that present some problems such as cost.

Wholesale Markets

The current electric market limits connections between states bordering cities or counties. Because states are responsible to dictate how the consumer will be receiving power then different approaches are taken. For example, in the state of Florida, Florida Power and Light (FPL) provide the services for almost the entire state. This is not the case across the entire Eastern United States and much less when comparing cross-continental electric companies such as American Electric Power. In the state of Virginia alone, the Appalachian Power Company Services those within the Appalachian mountain areas and some areas of West Virginia (AEP). The state of Pennsylvania also splits the electric generation between the eastern and western areas of Pennsylvania between First Energy, Pennsylvania Power and Light, and PJM (First Energy, PPL). The east generates power through the consumption of cheap coal because of the large investments that were made in steel during the 1980’s while the west focuses on nuclear energy as its main source of energy. Considering multiple states a system where all companies work together to service the consumer will positively affect the consumer. Through the combination of the various grids a network of communication between companies may be effectively achieved. These networks will help reduce costs for companies and in turn may reduce prices for consumers as well.

Generation Efficiency

Geographic regions significantly affect what resources are available to produce electric power for the required regions. In the case of Pennsylvania, the integration between the eastern and western power grids will essential lower costs for the western inhabitants of the state; nuclear power is more expensive than coal generated power (Blumsack 159). These benefits are not limited to state boundaries. Applying this system to the entire United States will ensures that energy generation comes at lower prices from the sources where it is available. It is not to say that those companies that already provide power will discontinue their service and file bankruptcy but rather, be alleviated from generating large amounts of power at more expensive prices. In the long-term companies may be able to efficiently generate power and service areas for lower prices than those current since they may have generators outside the state or may have attained access to a less costly source of production. However, because ultimately it is not the administration that governs the flow of electricity it has been determined that integration will be a costly project. The project needs new equipment to effectively make transfers between power grids of bordering regional areas. Initial costs for this project are not inexpensive.

Since location greatly affects power generation and integration will allow companies to perform trades of “power” then production efficiency becomes an important topic. Returning to the state of Pennsylvania, extra power generated may be traded to another company. This other company may produce most of its power through the consumption of diesel fuels. However, because they received their power from Pennsylvania they paid only a fraction of what they would have normally, both companies have benefited through trade. Over the last decade natural gas has been more often selected as the method to generate electricity (Summers). Natural gas costs for power generation are much lower than the costs incurred by using coal or other fuels. Regional areas that have access to such gas may be better fitted to provide cheaper power through the integration project. This idea also applies to power generated through renewable resources such as wind, water, and sunlight. It promotes power companies to band together under one umbrella for the U.S. It would be interesting to find how exactly the renewable resource contributions to the continental grid decrease overall spending on power once a system has been established. This is where the initial costs will demonstrate the overall decrease in power production for the residents of America.

Environmental and Seams

After integration it would be unwise to say that no changes to the environment will occur. The environment will greatly be affected by the selection of key generators to produce the electricity for broad regions of the nation. These areas may suffer from increased workloads or increased use of resources, coal, natural gas, fission, and fusion (Blumsack 179). Bordering areas may then be converted into the same type of energy production or may even have the opportunity to develop energy from renewable resources. The integration allows drastic changes to begin occurring since a larger system will be more versatile in providing for the consumers, especially when examining a long-term period of time. Nevertheless, those areas that suffer from increased loads for some period of time may exhibit larger quantities of environmental pollution at the cost of an innovation for the infrastructure of the cumulative power grid. However, it would open the way to make changes to the seams of the electricity infrastructure that at this moment is clearly impossible without large sums of money. The integration system offers power companies a method by which to grow and provide better and cheaper service to their consumers without having to wait for available funds or by taking loans.

Aside from building new power lines, new power grids may also be set in place. Modern grids such as those shown at POWERGRID Europe last year are moving towards green integration. These grids, aside from generating and storing energy from traditional non-renewable sources, they also have great capacities for integration from renewable sources, i.e. wind, water, and light (Davis). The problem has already been identified and manufacturers have already begun addressing the problems with current energy production. This conference at Amsterdam detailed how exactly current grids could be updated; the presenters suggested: integration. America is not the only one that has the opportunity to begin setting the example for a move towards a renewable energy source.


Argument – Benefits

Order No. 1000 directly impacts the planning process for new transmission lines, the cost to those who benefit, and promotes competition in regional transmission planning processes. The new FERC rule will help build critical new transmission lines. The cost of building new transmission is extremely expensive if only one individual were to fund it, but with the new rule, it becomes more affordable. For example, if a new line costs $1 billion, a person or an organization may look at the situation and be persuaded to avoid building the power line because of the high price. If that same cost were to be allocated to an entire region that sees benefit of the line, then the price becomes relatively cheap and more reasonable. Through what the FERC calls “broad cost allocation,” the cost of a new transmission lines would be split among those who will benefit from the new energy source. For those who do not see any benefit, the FERC has clearly stated that these ratepayers cannot be forced to pay for any of the new lines (Wald).

For transmission providers, splitting costs lessens the burden of expenses and allows them to build more lines to reach more areas. PJM Interconnection’s Atlantic Wind Connection (AWC) is a new proposed line off the shore of the Mid-Atlantic States is a prime example. The AWC has been estimated to cost $5 billion. These lines will be 15 to 25 miles offshore and will run approximately 300 miles from New Jersey to Virginia with connections to the mainland at several locations. Prior to Order No. 1000, PJM thought that this project would not make much economic sense due to the high cost that would be incurred by only their company. However, due to the project now cost-effectively meeting renewable energy standards with offshore wind, the AWC is now a possibility and may actually be a project worth starting.

Often times, congestion can occur in transmission lines during high demand and generators cannot provide distant consumers with energy because of this. When this happens, power prices usually rise in the overloaded area. Building new lines will free up the bottleneck and maintain a more stable price point for consumers and allows the generators to provide energy more easily (Loeb & Loeb). By building new lines, the generators will have a decreased chance of blackout for an area and also have the ability to provide power to areas that did not receive power before. New developers can also compete with incumbent generators due to the FERC’s new rule. This new rule makes it easier for new, hopeful energy suppliers to participate in the free market of the electric grid. By allowing more companies to provide service, consumers are able to shop for more competitive rates and there can also be transmission lines that reach rural or untouched parts of the country.


Works Cited

American Electric Power, AEP. “Careers.” Web. 9 Aug 2011< http://www.aep.com/careers/location.aspx>.

Bloomberg. “ U.S., seeking to reshape electric grid, adopts new power line rules.” Fuel Fix. 22 Jul 2011: n. Page. Web. 07 Aug. 2011
<http://fuelfix.com/blog/2011/07/22/u-s-seeking-to-reshape-electric-grid-adopts-a-power-line-rule/>.

Blumscak, Seth. “Measuring The Benefits and Costs Of Regional Electri Grid Integration.” 28.147 147-183. Print.
<https://scholar.vt.edu/access/content/attachment/4d82fd52-1b3e-4a56-9bf2-643718c085d3/Messages/f7175f2d-275a-4f83-863d-8c96881bf5b4/147-184.pdf >.

Davis, Kathleen. “POWWERGRID Europe brings smart grid future to Amsterdam.” RenewableEnergyWorld.com. 20 Apr 2010:n. Web. 11 Aug. 2011
< http://www.renewableenergyworld.com/rea/news/print/article/2011/03/powergrid-europe-brings-smart-grid-future-to-amsterdam>.

“Economic Aspects: Integration Cost and Benefits.” Wind Energy: The Facts n. page. Web. 08 Aug 2011.
<http://www.wind-energy-the-facts.org/en/part-2-grid-integration/chapter-7-economic-aspects-integration-costs-and-benefits/>.

“FERC Helps Line Up Clean Energy Projects with New Rule.” Center for American Progress. Web. 11 Aug. 2011.
<http://www.americanprogress.org/issues/2011/07/ferc_order_1000.html>.

“FERC: Industries - Transmission Planning and Cost Allocation.” Federal Energy Regulatory Commission. Web. 11 Aug. 2011.
<http://www.ferc.gov/industries/electric/indus-act/trans-plan.asp>.

“FERC Order No. 1000.” Smart Grid Legal News : Public Utilities Lawyer & Attorney : Stevens & Lee Law Firm. Web. 11 Aug. 2011.
<http://www.smartgridlegalnews.com/transmission-1/ferc-order-no-1000/>.

“FERC Releases Order No. 1000 — Renewable Energy Insights.” — Renewable Energy Insights. Web. 11 Aug. 2011.
<http://www.renewableinsights.com/2011/07/ferc-releases-order-no-1000/>.

First Energy. “Current System Outage Maps.” First Energy. Web. 9 Aug 2011
< https://www.firstenergycorp.com/outages/opco-outages.jsp>.

Loeb & Loeb LLP. “United States: FERC Issues Final Rule On Transmission Planning And Cost Allocation Requirements.” Mondaq. Web. 03 Aug. 2011.
<http://www.mondaq.com/unitedstates/x/141068/Energy+Law/On+July+21+2011+the+Federal+Energy+Regulatory+Commission+FERC+issued+Order+No+1000+a+
Final+Rulemaking+that+amends+the+transmission+planning+and+cost+allocation+requirements+previously+established+in+Order+No+890>.

Pennsylvania Power and Light, PPL. “Basic Information.” 1 Jun 2011:n. Web. 9 Aug 2011
<http://www.pplweb.com/newsroom/ppl+media+access/basic+information.htm>.

Power Integrations. “Fuel Systems Solutions Reports Second Quarter 2011 Results: Second Quarter 2011 Revenue of $116.6 Million and EPS of $0.19.” Market Watch. 09 Aug 2011: n. page. Web. 10 Aug. 2011. <http://www.marketwatch.com/story/fuel-systems-solutions-reports-second-quarter-2011-results-2011-08-09?reflink=MW_news_stmp>.

Power Integrations. “Power Integrations Names Ben Sutherland Vice President, World Sales.” Market Watch. 02 Aug 2011: n. page. Web. 08 Aug. 2011.
<http://www.marketwatch.com/story/power-integrations-names-ben-sutherland-vice-president-worldwide-sales-2011-08-02?reflink=MW_news_stmp>.

Power Integrations. “Power Integrations Reports Record Revenues: Quarterly sales topped $80 million for the first time.” Market Watch. 02 Aug 2011: n. page. Web. 08 Aug. 2011.
<http://www.marketwatch.com/story/power-integrations-reports-record-revenues-2011-08-02?reflink=MW_news_stmp>.

“Power Integrations INC. (POWI) President And CEO Balu Balakrishnan Sells 1,000 Shares.” Gurufocus.com. 09 Aug 2011: n. page. Web. 11 Aug. 2011.
<http://www.gurufocus.com/news/141795/power-integrations-inc-powi-president-and-ceo-balu-balakrishnan-sells-1000-shares>.

“Rovi’s CEO Discusses Q2 2011 results Earning Call Transcript.” Seeking Alpha. 09 Aug 2011: n. page. Web. 08 Aug. 2011
<http://seekingalpha.com/article/286190-rovi-s-ceo-discusses-q2-2011-results-earnings-call-transcript>.

Summers, David. “The Growth of the Natural Gas Industry.” Oilprice.com 26 Jul 2011:n. page. Web. 9 Aug 2011
< http://oilprice.com/Energy/Natural-Gas/The-Growth-of-the-Natural-Gas-Industry.html>.

Wald, Matthew. “U.S., Seeking to Reshape Electric Grid, Adopts a Power Line Rule.” The New York Times. 21 Jul 2011: n. page. Web. 10 Aug. 2011
<http://www.nytimes.com/2011/07/22/science/earth/22grid.html?_r=2&src=me&ref=science>.


Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License