Progressive Policy Decisions Help The Merchant Model Stick

Renew Grid Magazine, Vol. 2 Issue 2

March 2011

By Jay Ryan, Vincenzo Franco, and Marisa Swenson

New transmission development is a prominent topic on the agenda of the electric utility industry and the Federal Energy Regulatory Commission (FERC).  A key reason for this priority is that 30 U.S. states and the District of Columbia have renewable portfolio standards that mandate that a portion of electricity come from renewable resources. 

Transmission, however, has been described as the Achilles' heel of renewable energy development, because renewable energy resources located far from load centers and existing lines need new transmission to reach markets.  Maintaining the reliability of the grid over the coming years will also require transmission expansion, according to the North American Electric Reliability Corp. (NERC).

The traditional business model for transmission development is for utilities to plan and construct new transmission facilities and rely on regulated cost-based rates to recover costs and earn a return on equity. The costs of a new facility are not borne directly by the users of the new line. Instead, they are typically socialized among the utility’s ratepayers or are incorporated into a regional transmission rate in the context of a regional transmission organization (RTO).

Over the last decade, a different business model has emerged in which merchant transmission developers - increasingly backed by private equity - assume all the market risk associated with the development of new transmission lines. Transmission service over these merchant lines is provided at negotiated rates, rather than cost-of-service rates. This merchant business model provides an alternative and flexible approach to the development of new transmission. Favorable FERC policies have contributed to the success of this model, which introduces - to some degree - a level of competition into transmission development.

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