by Michael Giberson
If completed, the Tres Amigas project will encourage renewable power development and efficient power flows. Publicly traded wind power and superconducting cable company American Superconductor Corp. (Nasdaq: AMSC) is a large minority shareholder and the planned supplier.
Tres Amigas LLC has proposed building a three-way superconducting HVDC link between the three separate power systems that span the United States and much of Canada: the Eastern Interconnection, the Western Interconnection, and the Texas (ERCOT) Interconnection. The three systems currently are linked by a small number of separate and relatively unimportant DC interties. The proposed three-way link would allow substantial quantities of power to be moved among the three systems.
Public statements by Tres Amigas[pdf] and partner American Superconductor Corporation (Nasdaq:AMSC) highlight the way the project can help foster development of renewable power in the region and it would be helpful for accommodating the large amount of wind power capacity expected to be built in the area but as a practical matter the project should be a good deal for all kinds of power plant developers and for power consumers. The American Superconductor news release indicates that the company acquired a minority equity interest in Tres Amigas, LLC for $1.75 million in cash and stock, and the company will hold one of four seats on the Tres Amigas board of directors. Tres Amigas is also supported by Alt Energy, LLC, a Connecticut-based investment and advisory firm.
The project is as a very early stage, and not all financing has been secured. In addition, numerous federal and state regulatory approvals will be required. Recent news reports indicate that Tres Amigas CEO Phil Harris has been encouraging New Mexico landowners and energy developers to be prepared to offer supporting statements to regulators when the appropriate time comes. (Links to several other early reports are in this post from Knowledge Problem on the Tres Amigas announcement.)
Basic economics tells us increasing trade opportunities between markets of any kinds tends to increase overall economic efficiency. In electric power systems the benefits from transmission links and increased trade can include more efficient use of generation capability, increased system stability, and the ability to economize on stand-by reserves. More efficient use of generation results when the joined systems can reduce reliance on high cost peaking units by importing cheaper power from their neighbor instead. The joined system will have more generators available to exert stabilizing influences in response to short term disturbances, aiding reliability. In most conditions, each of the systems should be able to safely reduce the quantity of reserves held for reliability, too, when transmission interconnection capability is increased.
A more complete analysis would have to consider the costs of the link, the efficiency of the scheduling process, the ability to share reserves, and other costs and benefits. The key to finding a benefit comes from at least a minimal amount of diversity among the interconnected systems. If the systems have identical generation characteristics, costs, load profiles, and coincident peak loads, then the gains from trade will be modest. Differences among the system open up opportunities to benefit from trade.
In a case such as the Tres Amigas proposal, estimating the size of the benefits available will require extensive modeling of the three power systems to be connected, including generation and consumer load characteristics, as well as detailed modeling of the innovative three-way superconducting HVDC link between the three systems.
(Some additional observations with some links to economics articles are available in this Knowledge Problem post on the economics of transmission interconnection.)
Distribution of benefits from trade between power systems
Generally, increased trade between regions should tend to equalize prices across the regions, meaning that consumers in the formerly high-priced regions would see lower prices, but consumers in the formerly low-prices regions may see higher prices. In certain conditions it is possible that efficiency gains would allow consumers in all regions to see lower prices.
The producer’s story is approximately the flip side of the consumer’s story. As increased trade tends to equalize prices, producers in the formerly high-priced areas would see lower prices, while prices in formerly low-priced areas would see higher prices. The typical expectation is lower prices on average. High cost generation would become less profitable and may be driven from the market. Lower cost generation will run more frequently, but may earn lower profits given lower average prices.
Yet, with stronger interconnections and flexible trading rules between regions, each area should be less likely to need to resort to costly emergency procedures to manage the occasional stressful situations that arise in power systems. The costs avoided represent savings to consumers, but not necessarily profits sacrificed by generators since not every emergency is accompanied by high power prices.
Benefits for renewable energy
The portions of the three interconnections near the Tres Amigas site feature good wind and solar power resources, and Tres Amigas has been pitched as a “renewable energy hub.” Certainly, once power is put onto the transmission system there is no distinction between renewable and fossil-fueled or other electric power. Yet there are reasons to believe that renewable power plants will see a bit more benefit than traditional dispatchable generating resources.
Linking renewable resources together over larger areas tend to reduce the net variability in output experienced by the grid, since wind and solar conditions at different sites are not perfectly correlated. In addition, the degree of correlation tends to fall the further the resources are from each other. The ability to shift power from region to region will therefore tend to reduce the in-system accommodations needed to compensate for renewable power output fluctuations. So if Tres Amigas is built, the three interconnections should be able to accommodate wind and solar power resources at lower cost, with the result that more renewable power generation is likely to
be built in the area.
Recent news reports indicated the possibility of grid-connected battery storage as a component of the Tres Amigas project, which would further enhance the projects ability to promote low marginal cost generation (including nuclear, wind and solar) while also supplying low-cost short term energy balancing services (and so not requiring additional balancing services from natural gas units). Much would depend on the battery design, and no details on the possible battery component have been reported.
Challenges the Project May Face
NIMBY: Transmission projects tend to face a number of challenges, and an innovating proposal like the Tres Amigas project may face more challenges than more traditional projects. Transmission projects tend to offer benefits to generators at one end and consumers at the other end, but few benefits to those landowners and communities that only see the transmission lines. While the Tres Amigas project itself will be relatively contained and will offer direct economic benefits to the community hosting the facility, the project will only be valuable to the extent it is linked to upgraded transmission lines in each of the three regions.
ERCOT is already developing upgraded transmission lines that will come near the proposed Clovis, NM, site, and the regional transmission system operator in the part of the Eastern Interconnection that would be linked to Tres Amigas is evaluating a number of plans for the area. Plans in the Western Interconnection are not as far along in the area, but the support of the New Mexico state government for the project may be seen as an encouraging sign. Commonly seen NIMBY-based opposition to transmission has tended to be muted in the area as transmission expansion is seen as aiding in the development of wind power projects, and such projects are seen as bringing significant local economic benefits.
TEXAS: Because Tres Amigas would result in expanded wholesale power trade between ERCOT and power systems outside of the state of Texas, some observers have suggested the proposal will run aground on federal-state jurisdictional issues. The Texas Interconnection managed by ERCOT is wholly within Texas and predominantly under the jurisdiction of the PUC of Texas and Texas state law. Texas policymakers have devoted significant resources to maintain the state’s authority over the system, and it is believed by many observers that Texas policymakers will veto any proposal that would undo the state’s jurisdiction over ERCOT and the Texas Interconnection.
Current links between ERCOT and out-of-Texas power systems are very small, relatively speaking, and have been allowed without significant change to state jurisdiction over the system. The large scale of trade possible under the Tres Amigas proposal may invite FERC to reconsider the current division of jurisdictional duties. Tres Amigas is proactively seeking an opinion from FERC stating that the project would not upset existing jurisdictional boundaries around ERCOT.
TECHNICAL: Two kinds of technical issues must be overcome before the Tres Amigas can deliver on its potential, the first involves the application of American Superconductor’s technology (profiled here) and the second involves development of the right operating practices. American Superconductor has been built on the promise of transmission efficiencies from use of superconducting materials. After over 20 years in business, the company turned its first profit in the last quarter of 2008. That profit was only the result of recent acquisition of a company manufacturing parts for wind turbines.
Other issues are more a matter of business systems design. Tres Amigas will need scheduling rules that facilitate the flow of power from where it is most available to where it is most needed. A key problem arises in the need to simultaneously coordinate a power transaction with matching transmission capability. Power systems are becoming increasingly efficient at coordinating the dispatch of generating resources and flows of power with the systems, but scheduled flows between systems get accommodated by ad hoc rules which are not as efficient.
In principle, a unified system dispatch would efficiently coordinate use of generation and optimize power flows, including power flows across regional borders. However, given extensive differences in power systems and operational procedures among the three interconnections, a unified system dispatch likely would not work. Nonetheless, some explicit coordination of trade between regions can yield substantial efficiency gains while allowing individual systems to maintain diverse operating procedures. The current best approach along these lines is termed “market coupling,” with a tri-lateral market coupling process now in place among the power markets in the Netherlands, Belgium, and France. (Additional discussion and links are available in this Knowledge Problem post on market design issues.)
The Tres Amigas project is innovative proposal that faces considerable barriers. To some extent the proposal is ahead of its time, but given how long it will take for complementary transmission lines to be built in the three interconnections, it is probably necessary to launch the project “ahead of its time,” so that the necessary coordination can be done.
How far ahead of its time is it? The public remarks so far are a little light on the timing. A news release from the New Mexico State Land Office [pdf] reports that the current lease with Tres Amigas gives the company two years to evaluate the proposed site. That news release suggests that power will be flowing “by 2014.” Given the speed at which regulatory processes move and the speed at which transmission planning and development usually moves, five years strikes me as a very optimistic projection for Tres Amigas. Achieving the full vision laid out in early announcements 5 GW transfer capability into or out of all three interconnections could easily take ten years, or more.
With innovation comes a certain amount of uncertainty. Currently the links among the three systems are almost non-existent, so any increase is likely to offer benefits. We will learn the size the benefits, and at what cost they can be achieved as new information emerges over time.
Michael Giberson is an instructor and research associate at the Center for Energy Commerce at Texas Tech University’s Rawls College of Business, blogs on energy economics and other topics at Knowledge Problem.