FERC Order 845’s ‘option to build’ impacts renewable developers as much as the PTC and ITC

Diliff, CC BY-SA 3.0 , via Wikimedia Commons

by Peter Boos, Burns & McDonnell

Although the Federal Energy Regulatory Commission (FERC) issued Order 845 a few years ago, developers of renewable generation are still discovering how it affects them and can provide greater flexibility and control for their projects.

Issued in April 2018, Order 845 — among other things — required transmission providers to revise their large generator interconnection agreements (LGIA) to allow interconnection customers the option to build their own interconnection facilities, including the generation tie-lines, substations at the point of interconnection, and transmission upgrades. Previously, interconnection customers were limited to using alternatives only when the transmission provider would not be able to meet the proposed in-service dates.

In this landmark ruling, FERC acknowledged the uncertainty in the market that previous restrictions had created, impeding the growth of renewable generators. This order may have received less fanfare than either the production tax credit (PTC) or investment tax credit (ITC) and their subsequent extensions, but it has comparable impact. Transmission providers’ resources are not limitless. They are subject to the same schedule constraints as the rest of the market, and other system priorities can take precedence sometimes over renewable generator projects.

The rapid growth of renewable generation has already created some resource constraints for transmission providers. Order 845 helped alleviate some of those problems while also positioning for the anticipated continuing rapid expansion of renewable generation in the near term. The extensions of the PTC and ITC, through 2021 and 2023 respectively, would have exacerbated the challenges for transmission providers to meet the needs of renewable generators while simultaneously maintaining the rest of the transmission system.

The option-to-build feature introduced alternatives for renewable generators at the onset of their development process. The regulated monopoly of transmission providers stifles competition and might not return the least-cost option to renewable generators. The ability to use qualified third-party suppliers to design and build interconnection facilities adds healthy competition into the market. This opportunity to maximize value, control cost, obtain schedule flexibility and drive project efficiencies makes the option to build an important factor to consider in project development.

Meeting Reliability Standards

It is important to note that Order 845 did not change the ownership structure of the interconnection facilities. Should the renewable generator choose the option to build, ownership rights of the interconnection facilities still transfer to the transmission provider. Constructing those facilities to the reliability standards of the transmission provider can create logistical challenges if not addressed properly. Reviews of drawings, conducted by the transmission provider, can be especially cumbersome if the third-party supplier is not prepared and knowledgeable of the transmission provider’s expectations.

Fortunately, most utilities have preferred engineering and construction providers that are well-acquainted with their standards. These third-party suppliers can be identified by the transmission provider or found on each of the regional transmission operators’ (RTO) websites.

The identified companies will have been subject to rigorous approvals for quality, safety and knowledge, attesting to their qualifications for the renewable generator. Furthermore, onboarding a preferred third-party supplier early in the development process can give the renewable generator additional insights into general arrangement requirements, substation footprint expectations, and rational cost estimates for the project.

Optimizing Schedule and Budget

Another driver for selecting the option to build is improving schedule. Before the introduction of Order 845, renewable generators had the right to look for third-party suppliers to complete the interconnection facilities, but only if the transmission provider could not meet the schedule demands. While that process has not changed, the renewable generator now can onboard third-party resources earlier in development. Exploring this option early in the development cycle can result in lasting benefits to the project schedule.

Engaging these resources early in design development gives design continuity to the project, reducing errors and making review cycles more fluid. Many larger suppliers can transition a design-only project to full engineer-procure-construct (EPC) delivery. This allows the renewable generators to meet the transmission provider’s qualifications while maintaining financial control and alleviating resource constraints.

Competition is a common underlying theme when employing the option-to-build strategy. When renewable generators procure the interconnection facilities scope from third-party suppliers, the market can better dictate cost for those facilities. This optimizes the opportunity to achieve savings in both the design and construction phases.

Also of note, the renewable generator who opts to build can dictate how funds are administered to bring the maximum value to the project. For instance, a design-bid-build approach allows the renewable generator to leverage internal skill sets to manage coordination and risk on the project. Alternatively, an EPC approach shifts the project execution responsibilities and risk to the third-party supplier. Either approach — or a blend of the two — allows renewable generators to maintain cost control by choosing the approach most appropriate for the project budget.

Efficiency Through Scale

The option-to-build strategy should not impede the renewable generator from engaging qualified third-party suppliers for support beyond the execution of the interconnection facility. The generator’s and transmission provider’s reliability and performance expectations can vary significantly, depending on the purpose of the facility. By selecting the option to build, the renewable generator can manage the different reliability and performance requirements within the same project. Combining the execution of the collection substation, gen-tie and interconnection substation scope for a single supplier should result in cost savings attributable to the efficiency achieved in scale. This project consolidation also streamlines coordination, resulting in schedule savings, and enables the renewable generator to right-size the resources to properly manage the project.

Electing the option to build gives renewable generators an opportunity to achieve greater flexibility and control on their project. However, choosing the right supplier remains critical to project success. The recommended path is to engage the preferred engineering and construction suppliers identified by the transmission provider. That helps the renewable generator access the proper knowledge and experience necessary to meet all reliability requirements. Combine that with scaling the project scope and team, and a developer can reap benefits from schedule gains, reduced risk and maximized cost savings.

Peter Boos, PE, is an engineer who leads electric transmission and distribution project development for the renewables market at Burns & McDonnell.

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