Weekly Climate Recap: Transmission and more Transmission

In case you were worried I wasn’t talking about transmission enough, I have two stories on transmission for you below… both are US focused and from DOE, you’re welcome. Also I guess the IRA has had a huge impact on the US economy, who would have guessed?

🔌 DOE Gets Serious About Transmission

In an announcement on 2023 Oct 30, the DOE revealed a US$1.3B commitment in three different transmission lines that cross 6 states. These lines will allow ~3.5GW of additional grid capacity throughout the US. This announcement marks the first projects that are being supported by the Transmission Facilitation Program.

The TFP will help to build new interregional transmission through overcoming financial hurdles that the development of these large-scale transmission lines face as well as the upgrading of existing transmission and connection of microgrids. Under the TFP, the DOE can borrow up to US$2.5B through three financing tools.

1. Capacity contracts where DOE is an anchor customer that will buy up to 50% of planned line rating for up to 40 years and sell the contract to recover the cost
2. Loans from DOE
3. DOE participation in PPPs within a national interest electric transmission corridor to accomodate an increase in electricity demand.

The projects selected by DOE include:

1. Cross-Tie 500kV Transmission Line (Nevada, Utah): The Cross-Tie is a proposed 214-mile, 1500 MW transmission line that aims to connect existing transmission systems in Utah and Nevada. Its primary goals are to increase transmission capacity, enhance grid reliability, relieve congestion on other key transmission lines, and expand access to low-cost renewable energy in the region. Construction is set to commence in Q1 of 2025, and it is projected to contribute 14% of the estimated 2,300 GW-mi of new transmission needed by 2030 in the Mountain region to reduce power sector emissions enabled by the Inflation Reduction Act (IRA).
2. Southline Transmission Project (Arizona, New Mexico): The Southline Transmission Project is a proposed 175-mile, 748 MW transmission line connecting Hidalgo County, New Mexico, to Pima County, Arizona. This project aims to promote renewable energy development in southern New Mexico and deliver clean energy to growing markets in Arizona, reducing reliance on fossil fuel generation. Construction is scheduled to start in Q1 of 2025, and it is expected to contribute 14% of the estimated 935 GW-mi of new transmission needed by 2030 in the Southwest to reduce power sector emissions enabled by the Inflation Reduction Act (IRA).
3. Twin States Clean Energy Link (New Hampshire, Vermont): The Twin States Clean Energy Link is a proposed 1,200 MW high-voltage direct current (HVDC) transmission line connecting New Hampshire and Vermont. It is designed to expand the capacity of the New England electric grid, enhancing its resiliency, reliability, and efficiency by providing access to clean energy from Quebec, Canada. Additionally, it will allow the New England grid to export surplus power to Canada as the offshore wind industry in the region expands. Construction is anticipated to begin in Q3 or Q4 of 2026, and it is projected to provide 79% of the 1.5 GW of new transfer capacity needed for interregional transmission in the North East region, as per the Needs Study.

It is important to note that DOE is not purchasing electricity from these projects. The loans provided are to enable the developers to achieve the financing required in order to construct these projects. As offtakers are lined up, the project can then pay DOE back. This intended purpose is to be a cyclical source of capital that can then be redeployed for future transmission projects. Government backing of these projects is a key derisking tool to enable risk averse sources of capital to come in and finance the projects.

Takeaway: This announcement by DOE is incredibly positive in my point of view. It was only a few weeks ago that the IEA report came out specifying the huge amount of effort needed to transform our grids that I covered here. DOE getting serious about transmission inspired confidence that with continued investment, transmission can get to where it needs to be. While this is a drop in the bucket of transmission needs, it represents a solid start and proves that DOE has the funding, tools, and structure to facilitate transmission development. DOE is a critical institution to commercialize these merchant transmission projects and enable these projects to be built.

⚡ DOE Releases Transmission Needs Study

In case it wasn’t clear enough, I am honed in on any transmission story and think that this aspect of the energy transition deserves the attention. Accordingly, the National Transmission Needs Study from the Department of Energy that helped to inform the transmission lines announced in the first story. Some of the key takeaways from the report are outlined below and present an interesting summary and chart of future paths that transmission in the US may take.

Historical Transmission Investments Declined in the Second Half of the Last Decade, and Were Focused Primarily on Incremental Reliability Needs

• Average spending per year varied greatly with between $0.17 in Florida and $5.90 in New England between 2011–2020 per MWh of annual load.
• Build out of transmission varied heavily as well with Alaska building 5 circuit miles and Texas constructing 800 circuit miles.
• Much of this investment during the period was during the first half of the decade with transmission investments declining since 2015 in several regions.
• The driver of past transmission growth has been the need to address incremental reliability.
• Only 70 miles of interregional transmission (the most useful) were added per year on average.

Persistently High Wholesale Market Price Differences Between and Within Regions Show That Several Regions Are Experiencing Transmission Congestion and Constraints Today

• Through analyzing wholesale market price differentials we can identify where congestion and constraints exist.
• Specific times and high-value periods are reported to play an outsized role in the value of transmission with 50% of transmission congestion value coming from only 5% of hours.

DOE

Capacity Expansion Studies Demonstrate That Significant Future Transmission Investments are Necessary to Address Anticipated Needs Under a Wide Variety of Future Scenarios

• Studies conducted show that within-region transmission must increase by 20% to fulfill a moderate loan growth future. Interregional must grow by 25% for this scenario.
• A high clean energy growth by 2035 scenario requires an increase of within-region transmission of 64%. Interregional must grow by 114% for this scenario.
• High load growth will require 128% increase in within-region transmission. Interregional must increase by 412% to meet this scenario.

Takeaway: If that first story made you excited about transmission development in the US, then this story may sober you up a little, sorry. As the reported figures call for numbers such as 128% increase of within-region and 412% increase in interregional, it is important to take a step back away from this granularity and understand just exactly what this means. To me, this study just drives home the point that is already well understood. A clean energy future requires a huge amount of transmission buildout and importantly must focus on interregional development, a truly national grid that can shift electricity generation regionally to meet load requirements.

💼 IRA Economic Impact Analysis

A new report from E2 dives into the economic impact that the Inflation Reduction Act has had on the US economy over the period of 1 year. To recap, the IRA was passed in 2022 and was a transformational piece of legislation that brought US to the table for climate goals. The headline figures as reported by E2, in the first year following the signing of the IRA, private companies revealed investments of over US$86B across 210 projects focused on clean energy and electric vehicle projects that are estimated to create approximately 75,000 jobs.

E2 takes this analysis one step further by analyzing the broader economic benefits and multiplier effect of these investments and created jobs. When these are analyzed, the report finds the following

1. 403,000 new job, including 100,000 permanent jobs
2. US$156B added to US GDP
3. US$111B in new wages for workers
4. US$32B in incremental tax revenue for federal, state, and local governments

These above figures take into account direct effect, indirect effect, and induced effects. To briefly define each term, direct is the changes associated with the initial job creation. Indirect is inclusive of the supply chain responses from the direct effects. Finally, induced effects are the effects of increase household spending as direct and indirect workers spend their wages.

E2

The announced investments since the passing of the IRA are dominated by electric vehicles projects. Accordingly, the EV sector is expected to support 185,700 jobs annually for 5 years as a result of this new investment.

Takeaway: When we look at the economic impact of a piece of legislation such as the IRA, we need to account for the far reaching effects, the indirect and induced effects. The combination of the direct and indirect investments and job creation show a huge opportunity for US domestic manufacturing, clean energy production, transportation investment, and the modernization of infrastructure in the United States. The IRA truly is a booster shot to jump start the might of the World’s largest economy to take the energy transition seriously.

What Else is in the News

• The Inflation Reduction Act is the Act that keeps on giving us news to talk about! In a report from the US Environmental Protection Agency, the IRA incentives have the potential to reduce building related emissions more than emissions in any other end-use sector with an expected decline of 52%-70% from 2005 levels expected. The IRA will encourage the transition from fossil fuel equipment to electrification and adoption of distributed sources of energy such as solar, energy storage, and energy efficient appliances. Through the IRA SEction 179D tax deduction for energy-efficient commercial buildings, the owners and developers of buildings can qualify for tax deductions per square foot depending on the level of energy efficiency improvements made.
• Ørsted announced Tuesday this week that it is abandoning two of the eight offshore wind projects that it is currently developing in the US on the basis of project delays, increased interest rates, and permitting timelines. The Wind 1 and Wind 2 project cancellation decision was taken as part of an ongoing review of their US offshore wind portfolio. A provision related to the company stopping development will amount to between DKK 8–11 billion or US$1.1–1.6B as an impact to Q4 2023 EBITDA.
• The nature of clean energy assets is well understood, a more expensive upfront cost followed by a lifetime of lower operational costs. While extremely attractive under low rates, given the higher capital requirement, this often means more debt. With more debt and the higher rates that have been instilled by central banks to curb inflation, renewables projects and stocks are getting hit hard. This article from Corporate Knights dives into this issue and what the impacts have been, definitely worth a read.