Tuesday, September 14, 2010

Analysis: Project Development in a Grid-Locked World

originally posted on Clear Sky Advisors' website on May 16, 2010:

In an open conference call on March 24, 2010, Hydro One warned of the capacity issues it is currently facing in connecting distributed energy generation projects to the grid. Hydro One is the largest transmission and distribution company in Ontario. It operates over 96% of the province’s high-voltage transmission capacity by revenue and is among Ontario’s largest low-voltage “Local Distribution Companies” (referred to as LDCs). Hydro One’s assets, including 280 transmission stations and over 1,000 distribution and regulation stations, cover 75% of the province. Whether or not other LDCs find themselves facing the same issues as Hydro One, it is fair to say that the latter’s ability to implement the FIT program will play a significant role in the program’s overall success. 

Rude Awakening or Asleep at the Wheel?

Three years after RESOP was launched in Ontario, Hydro One states that they have only recently begun to fully appreciate the impacts of decentralized power generation and is now in the process of working through various solutions to meeting its Green Energy Act commitments.  While Hydro One has connected more than 5,500 MW of new generation to its distribution system since 2004, the overwhelming response to the FIT program has gone beyond current system capacity. Province-wide there is only existing transmission capacity of 2,500-4,000 MW to meet the almost 10,000 MW of FIT applications submitted. A significant amount of the available transmission capacity was set aside for projects developed by Samsung in a much publicized deal the Korean conglomerate struck with the Ontario government. 

The Grid Bottlenecks

The primary challenges identified by Hydro One are feeder distance limitations, short circuits and transformer station capacity. All of these are factors in evaluating the grid’s capacity for FIT projects; however, feeder limitation is the issue most likely to be felt in the project development marketplace.

Unlike urban LDCs such as Toronto Hydro, Hydro One typically transmits and distributes electricity over vast distances, in many cases over lower voltage or lightly loaded feeders. As the distance of the generator’s connection point from a station increases, the stability of the grid becomes more sensitive to variations in voltage. Unless nearby electricity loads can utilize the electricity produced by intermittent wind and solar generators, power delivered to the grid can produce voltage variations that adversely affect the grid and other customers and trigger costly grid upgrades. 

Market Impact

The feeder distance issues will impact project proponents in two ways. First, distance limitations will be added to a proponent’s FIT assessment process following the Transmission and Distribution Availability Tests. If feeder distance proves to be a challenge prior to the issuance of a FIT contract, the proponent could still receive a contract, but will be notified by the OPA that feeder distance is a live issue. At the Connection Impact Assessment stage, the details of any required alterations to the project will be provided to the proponent. Some required alterations may be conducted post in-service date. Assuming the proponent addresses the OPA’s concerns, its project can proceed to grid connection. If it does not address OPA’s concerns by then, the project will move into the FIT reserve pool and await an Economic Connection Test (ECT).

It is the second impact of the Ontario’s grid limitations that has a more significant effect on the marketplace. Despite establishing the FIT program without an official cap, the number of utility-scale (500kW +) projects that may now connect to the grid has arguably reached a de facto cap for the immediate future. Allotted capacity for the first set of projects is bumping up against transmission system constraints. Moreover, capacity limitations for renewable generation may be stricter than advertised because, as Hydro One pointed out, the published available capacity was based on generalized assumptions rather than location and generator specific analysis.

This de facto cap is an important concern for technology providers looking to make decisions to invest in manufacturing in Ontario because it makes it very difficult to understand the market potential for domestically manufactured content beyond the announced projects. 

Looking Forward: The Economic Connection Test

Project proponents who were not awarded FIT contracts or have not yet submitted applications should understand that the lack of transmission capacity will see their application being placed in the “FIT reserve” pool. Projects in the FIT reserve undergo the next ECT, which will run every six months for each provincial region. The ECT assesses whether the costs of required grid upgrades are justifiable considering:
  • the best available information about confirmed transmission upgrades;
  • other proposed generating facilities; and
  • distribution system expansion plans.

If the required system expansions are deemed to be economical and included in transmission and distribution expansion plans, then the project proceeds to the FIT production line. It will be awarded a contract if the applicable system expansions are approved and will be constructed in time to allow the project to connect by its milestone date for commercial operation. However, there is still a chance that the required expansion will be deemed uneconomical leaving the project in the FIT reserve to wait for the another round of ECT to take place. It is our understanding that the first upcoming ECT round will take place in August. 

Market Opportunities for Ontario Developers

A short to mid-term limitation on grid capacity for connecting FIT projects, effectively reduces the type of projects that proponents should engage in. For those developers that are flexible in their approach, opportunities can be found where projects are:
  1. capacity allocation-exempt;
  2. microFIT; or
  3. in close proximity to planned transmission expansion.

Capacity allocation-exempt projects are relatively small projects that connect to the distribution system.  The Ontario Energy Board defines these projects as:
  • a generator less than or equal to 250 kW where it is connected to a line less than 15 kilovolts; or
  • a generator less than or equal to 500 kW where it is connected to a line greater than or equal to 15 kilovolts.

A potential proponent will need to engage with its LDC to determine the voltage of lines in its desired location to determine whether its project would qualify. If a project does qualify, a complete project application will allow the proponent to proceed directly to a FIT contract without transmission, distribution or economic connection tests. Location and generator specific studies will still need to be conducted by the LDC as part of a Connection Impact Assessment prior to connection. Connection costs will vary depending on the location of the project and other factors, but upstream enabling improvements necessary to connect these projects will see costs of up to $90/kW covered by the local LDC. Time delays are still a risk for those projects that are not able to connect without enabling improvements.

MicroFIT projects can be lucrative for project developers that can scale their marketing effectively. microFIT projects are 10 kW or less and are typically solar PV installations on residential, small commercial and institutional properties. Nevertheless, it is possible they could include biogas, biomass, landfill gas, waterpower (e.g. run-of-river) and small wind projects.

Finally, the more savvy proponents could examine anticipated grid expansion and attempt to secure locations for their potential projects that would benefit from proximity to these grid developments. For instance, Hydro One has announced its first such expansion, which will be a new 430 km, single circuit 230 kV transmission line in northwestern Ontario from Nipigon to the Pickle Lake area. Putting in the time and effort now to determine the next path of expansion would position developers to reap the benefit of prudent planning. One variation on this approach would be to work together with other project proponents to form project clusters. This might improve the economics of establishing enabling improvements, increase chances of passing the ECT and in turn encourage speedier construction by the LDC.

The challenges identified by Hydro One in connecting FIT projects to the grid are unlikely to be the only bumps faced by LDCs as they work to begin transforming Ontario’s power sector. But Hydro One has at least demonstrated that LDCs are working in tandem with the OPA to address concerns as they arise and to inform proponents of the approach being taken to resolve those issues. It is incumbent on proponents to stay abreast of these developments by opening up lines of communication with either their LDC or the OPA. This will help to avoid unpleasant surprises and perhaps encourage proponents to anticipate how best to fit their project on the grid.

The author would like to thank Jon Worren of ClearSky Advisors and Stephen Sottile, Fellow – Queen’s Institute for Energy and Environmental Policy, for their input.

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