Finding Funding for Grid Enhancing Tech Including DLR

Transmission line capacity is everyone’s problem. Congestion drives up consumer prices, creates long interconnection backlogs that hinder the integration of renewable energy and the reliable delivery of electricity. It's reasonable to estimate that a substantial proportion—perhaps as high as 30% to 50%—of IOUs globally are experiencing transmission line capacity issues that range from moderate congestion to severe bottlenecks. Consensus among various reports and articles published by the North American Electric Reliability Corporation (NERC) and Federal Energy Regulatory Commission (FERC) indicate that a significant portion of IOUs in the U.S. report transmission line congestion and capacity constraints that are impacting the adoption of clean energy and driving up consumer prices. What's more, a 2020 report by the International Energy Agency (IEA) indicated that approximately 50% of global grid infrastructure will require upgrades or expansion by 2040 to meet increased demand and accommodate the growing share of renewable energy.  

Globally, IOUs are addressing the problem by building new transmission lines to gain significant increases in capacity and accommodate long-term grid expansion, and by implementing GETs such as DLR. However, news lines come at a high cost with long implementation times and substantial environmental impacts. On the other hand, DLR is a cost-effective and faster solution for increasing capacity on existing transmission lines, offering significant financial and environmental advantages. DLR is especially attractive when immediate capacity increases are needed or when regulatory and environmental constraints make new transmission lines challenging to build. Many IOUs are implementing a two-pronged approach.  These operators are implementing DLR to maximize capacity on existing lines, while planning for additional new lines in the future. The following compares typical costs of the alternatives:

You’ve Chosen GETs and DLR. How Can You Fund the Project?

Undoubtedly, new infrastructure will need to be built to accommodate the demand––which will take years. Grid Enhancing Technologies (GETs), like Dynamic Line Rating (DLR) can buy time and reduce costs while providing more capacity in the short term. While dramatically less expensive than new lines, IOUs must still find ways to fund GETs projects. Fortunately, to support IOUs, FERC and state and local governments have implemented several programs that can help. In July 2023, FERC published the Transmission Incentives Order 679, to provide specific incentives that ease the adoption of GETs for utilities. The following is an overview of some available programs, but we encourage IOUs to investigate all available options with the guidance of professionals and experts in the space. And, for more information and tools, visit the US. Department of Energy website.  

1. FERC Transmission Incentives

Cost Recovery Incentives for GETs Deployment: FERC provides utilities with cost recovery incentives through rate adjustments. IOUs can file transmission tariff proposals with FERC, allowing them to recover the costs of deploying GETs through the rates charged to customers. These incentives include:

A. Formula Rates

IOUs often use formula rates, which automatically adjust transmission charges based on changes in costs, including those associated with GETs deployment. By incorporating the costs of GETs into these rates, utilities can recover their investment without the need for a separate rate case filing.

B. Construction Work in Progress (CWIP) in Rate Base

CWIP allows utilities to recover the costs of building new transmission projects, including GETs, before they are fully operational. This reduces the financial burden during the implementation phase and allows utilities to earn a return on their investment sooner.

C. Deferred Recovery through Regulatory Assets

If a utility incurs expenses that it cannot immediately recover through rates, it can apply to FERC for the creation of a regulatory asset. This allows the utility to defer the costs and recover them over time, spreading the financial impact on ratepayers.

D. Accelerated Depreciation

For certain investments like GETs, FERC may allow utilities to use accelerated depreciation, which shortens the period over which costs can be recovered. This allows utilities to recoup their investment more quickly.

E. Return on Investment/Return on Equity Adders

FERC may grant ROI/ROE adders as an incentive for deploying GETs. This provides the utility with a higher return on equity for the portion of their transmission projects that includes advanced technologies like DLR or AAR. To access FERC transmission incentives, utilities must apply under FERC Order 679, which is the order that provides incentives for advanced transmission technologies such as DLR. To participate the utility will need to:

Prepare a Section 205 filing: According to FERC, “Utilities seeking performance-based incentives, such as a higher Return on Equity (ROE), must file under Section 205 of the Federal Power Act (FPA)”. This involves submitting an application to FERC requesting a transmission rate adjustment that typically involves a higher ROE for investments in GETs like DLR. This filing needs to demonstrate that the investment will improve grid reliability, efficiency, or capacity. It should include:

• A detailed cost-benefit analysis that shows how the deployment of GETs will deliver system-wide benefits such as improved capacity utilization, reduced congestion, and enhanced reliability.
• A specific incentive structure such as ROI/ROE adders, accelerated depreciation, or construction work in progress (CWIP) in rate base treatment.

2. State Regulatory Support

State commissions: Many states’ regulatory commissions are supportive of innovative grid technologies that help improve grid efficiency. IOUs can work with state regulators to gain approval for cost recovery incentives at the state level, including passing on costs for GETs like DLR to ratepayers. In May of this year, the U.S. government issued the Federal-State Modern Grid Deployment Initiative. Twenty-one states have now joined the initiative and offer cost recovery mechanisms at the state level, supported by this federal initiative.  

Green bonds and other state-level funding: Some states provide access to green bonds or other funding mechanisms designed to promote sustainability and energy efficiency, which can help fund GETs.

3. Federal and State Grant Programs

Federal grants and stimulus packages: IOUs can leverage federal funding from programs like the Infrastructure Investment and Jobs Act (IIJA) or other Department of Energy (DOE) initiatives aimed at modernizing grid infrastructure. These programs often allocate funds for the integration of GETs such as DLR.

State-level programs: Some states offer funding through grants or matching funds for utilities to invest in grid modernization projects that include DLR technology. Programs vary by state and can be applied for at the state level.  

4. Public-Private Partnerships

Collaborations with technology providers: IOUs can collaborate with private sector technology companies that offer DLR and other GETs. These partnerships can sometimes include shared funding models, where both the utility and the private sector company share the cost of deployment.

Utility-Community Collaborations: By engaging with local communities and other stakeholders, IOUs can develop shared funding models, especially in areas where GETs enhance local grid resilience or renewable energy integration.

5. Ratepayer-Backed Mechanisms

Securitization: Using securitization (which involves issuing bonds that are backed by future ratepayer revenues) IOUs can finance grid investments such as GETs. This method spreads the costs of the investment over time and reduces the immediate financial burden on the utility.

Revenue Decoupling: Revenue decoupling strategies can separate a utility’s revenue from its energy sales, allowing utilities to invest in technologies like DLR without the fear of losing revenue due to increased efficiency.

6. Regulatory Pilot Programs and Demonstrations

FERC and state pilot programs: FERC and state commissions have supported pilot programs for new grid technologies. These demonstration projects may come with partial or full funding for deploying technologies like DLR, providing IOUs a lower-risk method to fund and deploy such solutions. IOUs can apply to FERC for support with a demonstration project, which is also often supported by a private sector vendor or supplier of GETs technology.  

Demonstration grants: IOUs can apply for demonstration grants funded by the Department of Energy (DOE) or other federal agencies to test and scale technologies such as DLR.

7. Third-Party Ownership and Leasing Models

Third-party financing models: In some cases, third-party entities finance, own, and operate GETs such as DLR, while IOUs pay for their services over time, reducing the need for large upfront capital investment by the utility.

Leasing arrangements: IOUs can also explore leasing options, where a third party owns the equipment (such as DLR systems), and the utility leases it over time, thereby spreading the cost of implementation.

By leveraging these options, IOUs can mitigate the financial burden of investing in Grid Enhancing Technologies while enhancing their grid infrastructure and meeting regulatory or environmental goals. The combination of federal incentives, regulatory reforms, and private partnerships provides multiple paths for securing the needed capital.

8.  Return on Investment – DLR Rapidly Pays for Itself

Beyond funding strategies that offset the initial cost of DLR, the rapid return on investment of DLR shouldn't be overlooked. In a July 2022 study by MIT, the ERCOT system in Texas was evaluated to understand the potential cost savings of implementing DLR compared to using Static Line Ratings (SLR), Ambient Adjusted Ratings (AAR) and DLR. If found that compared to the annual cost of $10.3b, when using SLR, AAR reduces costs by $356 million (35%), and DLR could reduce costs by $776 million (77%).  

Conclusion

There are many programs at the Federal and State level that can help fund GETs implementation. To take advantage of FERC’s incentives for GETs deployment, utilities need to engage in strategic planning, regulatory filings, and stakeholder collaboration. By filing applications for ROE adders, utilizing cost recovery incentives like formula rates and CWIP, and aligning with FERC’s proposed updates to the Transmission Incentive Policy, utilities can secure the financial support needed to deploy technologies like Dynamic Line Rating. Once deployed, research shows that utilities will achieve a rapid return on investment through savings over SLR or AAR alone.