Federal Policy Supports New Transmission, But Will It Be Enough?

The last Congress passed three major laws designed to accelerate the clean energy transition—the Inflation Reduction Act of 2022 (IRA), Infrastructure Investment and Jobs Act (IIJA), and CHIPS and Science Act. The expansive scope of these laws includes everything from expanded tax credits to direct investments in energy-related programs.

The policies undoubtedly amplify the demand for new renewable energy resources; however, a rapid expansion of renewable generation capacity is increasingly dependent on the development of new transmission.

This raises the critical question; will new federal policies also spur the necessary development of new transmission needed to accommodate the clean energy transition?

Federal Spending Drives Clean Energy Transition

The IRA provided much of the new federal funding over the past 18 months. The IRA will provide a historic $369 billion to support clean energy and climate-related activities. This could be an underestimate as many tax credits are uncapped (i.e., no maximum expenditure) or may persist longer than expected.

For example, many in the energy industry believe that the clean electricity tax credits start expiring in 2032; however, an overlooked provision may render this date meaningless. Specifically, the tax credits do not phase out until greenhouse gas emissions from electric generation decline 75% from a 2022 baseline, even if it is later than 2032.

This provision—and other legislative nuances—will generate strong and sustained demand for new renewable resources well into the next decade. This will translate into a heightened and sustained demand for new regional and interregional transmission lines capable of moving energy from renewable-rich zones to demand centers.

The second law impacting the energy industry is the Infrastructure Investment and Jobs Act (IIJA). The IIJA provides roughly $80 billion in energy-related funding, which includes programs specifically targeting transmission investments.

One key source of IIJA funding is the Transmission Facilitation Program. This program establishes $2.5 billion for loans, capacity contracts, and partnerships. The program is designed to assist “shovel-ready” projects and began soliciting proposals in November 2022. In addition, the Department of Energy (DOE) can serve as an “anchor tenant” on new and upgraded transmission lines by buying up to 50% of the planned commercial capacity of lines for a term of up to 40 years.

The IIJA also includes $10.5 billion in funding through its Grid Resilience and Innovation Partnerships Program. This program allocates funding to grid resilience ($2.5 billion), smart grid grants ($3 billion), and grid innovation programs ($5 billion). Both distribution and transmission projects may receive funding, with full applications due Spring 2023.

Further, the IIJA broadened the DOE’s authority to designate National Interest Electric Transmission Corridors (NIETCs). It also clarified Federal Energy Regulatory Commission (FERC) authority on backstop citing. Under the updated legislation, FERC has the authority to issue construction permits when a state denies a siting application within an NIETC. With no NIETC designations currently in effect, the DOE intends to designate such corridors on a route-specific, applicant-driven basis to address roadblocks as they arise.

The final law, the CHIPS and Science Act, authorizes roughly $68 billion for research and development, but Congress has not fully appropriated funding for these programs.

Outlook for New Transmission Remains Unclear

The new policy and funding landscape reflects a clear effort to accelerate the clean energy transition. And yet, the ability to develop regional and interregional transmission remains a critical challenge that may impede progress.

Notable barriers include disagreements on regional cost allocation, a lack of long-term, interregional transmission planning, and an excessive backlog of projects in interconnection queues. FERC has acknowledged the challenges and initiated reforms.

For example, FERC has proposed rules requiring transmission providers to identify transmission needs through multiple long-term scenarios that incorporate a minimum set of factors (e.g., future resource mix and demand, trends in technology and fuel costs, extreme weather events, etc.).

In a separate rulemaking proceeding, FERC intends to speed up the generator interconnection process with first-ready, first-served cluster studies, updated modeling requirements, and firm deadlines with penalties to speed up interconnection studies.

FERC has also initiated a rulemaking to amend its transmission “backstop” siting authority. The Energy Policy Act of 2005 granted backstop siting authority to FERC, but legal challenges ultimately rendered the authority useless. Provisions in the IIJA expand FERC’s authority, allowing the agency to issue construction permits for transmission infrastructure denied in a state siting application.

Even with these improvements, large infrastructure projects must overcome local opposition (e.g., NIMBYism), lengthy environmental reviews, and persistent legal challenges. This led Senators Schumer and Manchin to agree to a “side deal” focused on infrastructure permitting reform as they passed the IRA.

Senator Manchin has proposed reforms to expedite permitting for critical energy infrastructure (e.g., natural gas pipelines and electric transmission), but the proposal has repeatedly failed to pass the Senate. Most recently, the permitting reform language was rejected as an amendment to the National Defense Authorization Act.

Continued delays in permitting reform could ultimately benefit alternative technologies. In many cases, transmission permitting for offshore wind involves fewer stakeholders and jurisdictions. Small modular reactors may revitalize communities by using existing infrastructure (e.g., retiring coal plants). Long-duration storage may be sited closer to load, assuming the technology can reach commercial scale.

With both political parties interested in the issue, permitting reform may resurface in the new Congress. However, until reforms become a reality, the lack of new regional and interregional transmission will remain a long-term hurdle crimping renewable energy development.

Path Forward Amid Uncertainty

The clean energy transition—spurred on by recent federal policy—will need new regional and interregional transmission. Failing to plan and construct new transmission will result in sub-optimal outcomes for the electric grid (e.g., a new generation asset contributes to transmission congestion). In a worst-case scenario, the energy transition drives higher costs due to the inefficient allocation of capital and more reliability challenges as system constraints grow.

With transmission playing a critical role, the pace of the clean energy transition will be heavily influenced by the rules under development at FERC. Transmission providers should use all opportunities to engage with FERC on the outstanding rulemaking proceedings. Even with one vacant seat, FERC is likely to support reforms that address persistent challenges.

As the industry looks to resolve siting and permitting challenges, gaining alignment across FERC, state regulators, and myriad other stakeholders will be critical. Developers of transmission have an ongoing stake in getting these challenges resolved (or at least in making progress).

Once FERC issues final rules, transmission providers should closely review their development strategy and business plans. New opportunities may emerge along paths with common policy interests (e.g., aggressive clean energy targets).

And finally, transmission providers would benefit from looking past interconnection queues and carefully consider where and when new generation may be built (e.g., offshore wind, tall-tower onshore wind, etc.).

In all cases, transmission owners and operators should be ready to move quickly once FERC issues final rules. The recent legislation passed by Congress ensures there will be unprecedented demand for interconnection and for new regional and interregional transmission.

Paul Quinlan is a clean tech manager with ScottMadden. In this role, he assists clean energy and utility clients with market research, strategic planning, business planning, modeling, and due diligence evaluations. He co-leads ScottMadden’s grid edge community of practice.

Harrison Schaff has been a research analyst with ScottMadden since 2021. Prior to joining the firm, he was an undergraduate intern at NASA, where he worked in the Science Mission Directorate. Harrison graduated from the University of Virginia, where he earned a B.A. in physics and economics.