Transmission Pricing and Renewables: Issues, Options, and Recommendations

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Open access to the transmission system, if provided at reasonable costs, should open new electricity markets for high-quality renewable resources that are located far from load centers. Several factors will affect the cost of transmission service, including the type of transmission pricing system implemented and the specific attributes of renewable energy. One crucial variable in the transmission cost equation is a generator's capacity factor. This factor is important for intermittent renewables such as wind and solar, because it can increase transmission costs several fold due to the traditional use of take-or-pay, capacity-based transmission access charges. This report argues that such a charge is demonstrably unfair to renewable generators. It puts them at an economic disadvantage that will lead to an undersupply of renewable energy compared with the least-cost mix of generation technologies. We argue that congestion charges must first be separated from the access charges that cover the fixed cost of the network before we can design an efficient tariff. We then show that, in a competitive market with a separate charge for congestion, a take-or-pay capacity-based access charge used to cover system fixed costs cannot be justified on the basis of peak-load pricing. An energy based access charge, on the other hand, is fair to intermittent generators as well as to the usual spectrum of peak and base-load technologies. This report also reviews other specific characteristics of renewables that can affect the cost of transmission, and evaluates the potential impact on renewables of several transmission pricing schemes, including postage-stamp rates, megawatt-mile pricing, congestion pricing, and the Federal Energy Regulatory Commission's "point-to-point" transmission tariffs.

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