FERC Proposes Major Changes to Generator Interconnection Process

FERC Proposes Major Changes to Generator Interconnection Process

August 5, 2022, Covington Alert

The Federal Energy Regulatory Commission (FERC) recently issued a Notice of Proposed Rulemaking (NOPR) to reform its generator interconnection process. The proposed rules are intended to expedite the connection of new generator and storage facilities to the grid, and to clear out a burgeoning interconnection backlog, predominantly of renewable and storage resources.

This alert highlights the major proposed reforms to the pro forma Large Generator Interconnection Procedures (LGIP) included in the NOPR, and discusses the proposed transition process for interconnection customers with active interconnection requests. Initial comments on the NOPR are due by October 13, 2022, and reply comments are due by November 14, 2022. Given the importance of interconnection for every utility-scale generation and storage project, FERC will likely receive comments from a diverse group of stakeholders across the industry.

The growth of competitive wind and solar project development, as well as utility-scale energy storage, has left many transmission providers grappling with interconnection queues far in excess of what FERC contemplated when it adopted the current interconnection rules. The NOPR highlights that, as of the end of 2021, there were over 8,100 active interconnection requests nationwide, representing over 1,000 gigawatts (GW) of generation and an estimated 420 GW of storage, more than triple the total volume of generation and storage in interconnection queues five years earlier. With that volume, FERC added that almost 1,900 interconnection requests were awaiting interconnection studies that had not been performed as of the transmission provider’s tariff-defined deadline.

The NOPR acknowledges that many interconnection requests represent speculative projects that will not ultimately be built. Yet the interconnection queue backlogs and study delays create uncertainty and inhibit the development of even the strongest projects, thereby stifling competition in the wholesale electric markets, undermining a hallmark FERC policy goal. FERC added, however, that certain transmission providers, including the Midcontinent Independent System Operator, Southwest Power Pool, PacifiCorp, Public Service Company of Colorado and others, have proposed revisions to the generator interconnection procedures included in their respective tariffs to address queue backlogs and study delays, which FERC has approved. In the NOPR, FERC relies heavily on those procedures in proposing reforms to the LGIP.

This client alert provides an overview of the key aspects of the proposed reforms in the NOPR, which can be categorized into two areas: (1) interconnection information access for customers, particularly prior to submitting a new interconnection request, and (2) a new first-ready, first-served cluster study process. Along with the cluster study process, FERC proposes reforms to requirements that interconnection customers must meet to enter and remain in an interconnection queue, as well as to how costs of network upgrades would be allocated to customers.

In the NOPR, the Commission recognizes that the impetus for developers to submit multiple interconnection requests for speculative projects under the current pro forma LGIP arises in part because of the developers’ lack of access to, prior to submitting an interconnection request, pertinent information regarding interconnection capacity in most regions of the country. To remedy this lack of information, the Commission put forth two proposals: (1) an informational interconnection study, and (2) a requirement that transmission providers post pertinent interconnection information.

A. Informational Interconnection Study

FERC proposes to revise the pro forma LGIP to require transmission providers to offer an informational interconnection study to prospective interconnection customers to assist in deciding whether to submit an interconnection request. The study would provide cost estimates for the projected interconnection facilities and network upgrades required by the interconnection scenario detailed in the study agreement. Prospective interconnection customers would be limited to no more than five separate informational interconnection study requests pending at once, to limit the burden on transmission providers and other prospective customers waiting for informational studies. The informational interconnection study would be at the interconnection customer's expense, and each study would require a $10,000 deposit, subject to a true-up based on actual study costs. The transmission provider would have 45 days from the execution of the study agreement to complete the study.

B. Public Interconnection Information

In addition to the optional informational interconnection study, FERC also proposes to set minimum requirements for transmission providers to publicly post information pertaining to generator interconnection. FERC proposes to require transmission providers to maintain and make publicly available an interactive visual representation of available interconnection capacity, as well as a table of relevant interconnection metrics that allow prospective interconnection customers to see certain estimates of a potential generating facility's effect on the transmission system. Transmission providers would be required to update this information within 30 days after the completion of each cluster study and re-study.

FERC noted that under the current pro forma LGIP serial study process, interconnection requests are typically studied individually, and, given the hundreds of interconnection requests that may be pending in a transmission provider’s interconnection queue, explained that the inefficiency of such a process underpins the frequent delays in completing interconnection studies. Therefore, recognizing that the current serial study process has inadequately provided project developers with the requisite certainty in interconnection timing and network upgrade costs, FERC proposes to require transmission providers to implement a first-ready, first-served cluster study process.

A. Study Process

The current serial process in the pro forma LGIP consists of three studies: (1) a feasibility study, (2) a system impact study, (3) and a facilities study. Interconnection customers may submit an interconnection request to a transmission provider at any time. Pursuant to the NOPR, the proposed cluster study process would consist of: (1) an interconnection request window; (2) a customer engagement window; (3) cluster studies, including (a) a power-flow and voltage study (similar to a feasibility study), and (b) a stability and short circuit study (akin to the system impact study); (4) a facilities study; (5) re-study, if needed; and (6) LGIA execution or filing of an unexecuted LGIA. The transmission provider would be required to complete the cluster study within 150 days of the closing of the customer engagement window, and be subject to a penalty of $500 per day that a study is late.

In addition, interconnection customers must submit an interconnection request during the interconnection request window, which would be an annual 45-day period with the start date to be determined by each transmission provider. The transmission provider would then consider all interconnection requests accepted within this period to have equal queue priority for purposes of the cluster study process. FERC proposes to allocate 90% of the applicable study costs to interconnection customers on a pro rata basis based on requested MWs included in the applicable cluster, and 10% of the applicable study costs to interconnection customers on a per capita basis based on the number of interconnection requests included in the applicable cluster. Penalties assessed to the transmission provider for late studies as discussed above would be distributed to the delayed interconnection customers on a pro rata basis to offset their study costs.

B. Customer Requirements

The NOPR also adds requirements intended to discourage the most speculative interconnection requests. Under the NOPR, projects must meet new requirements related to: (1) study deposits, (2) site control, (3) commercial readiness, and (4) withdrawal penalties.

1. Study Deposits

Under the current serial study process, an interconnection customer must submit a total of $160,000 in study deposits (a $10,000 deposit with its interconnection request, which is used for the feasibility study, a $50,000 deposit when executing the system impact study agreement, and a $100,000 deposit when executing the facilities study agreement). In the NOPR, FERC proposes a revised deposit structure such that the deposit required to initiate the interconnection process will be based on the size of the customer’s proposed facility. Before each cluster study, facilities study and re-study, if the proposed facility is greater than 20 MW and less than 80 MW in nameplate capacity, the customer would pay a deposit of $35,000 plus $1,000 per MW. If the facility is greater than 80 MW but less than 200 MW, the customer would pay a deposit of $150,000. If the facility is larger than 200 MW, the customer would pay a deposit of $250,000.

Study deposits would be refundable, and the transmission provider would refund any portion of the study deposits above the applicable study costs once the interconnection customer executes the LGIA, requests the filing of an unexecuted LGIA and submits the corresponding payment discussed below, or withdraws from the queue (subject to the application of any withdrawal penalty, as discussed further below). In addition, FERC also proposes to require an interconnection customer to submit a deposit equal to nine times the amount of its study deposit when executing the LGIA or requesting the filing of an unexecuted LGIA. This deposit would be fully refunded once the generating facility achieves commercial operation, but if the interconnection customer withdraws after executing the LGIA or after requesting the filing of an unexecuted LGIA, this deposit would be refunded subject to the withdrawal penalty.

2. Site Control

Under the current pro forma LGIP, interconnection customers, when submitting an interconnection request, are required to submit a demonstration of site control, which amounts to the right or option to develop the proposed facility on a given site, or submit a $10,000 deposit in lieu of such a demonstration. In addition, at the end of the study process, within 15 days after receipt of the draft LGIA, the interconnection customer must provide evidence of continued site control or post $250,000 of non-refundable security that will be applied toward interconnection facility or network upgrade costs.

To further discourage speculative projects from entering an interconnection queue, FERC proposes to require interconnection customers to demonstrate the exclusive right to develop, construct, operate, and maintain the proposed facility, or, where facilities are co-located, a shared right to develop, construct, operate, and maintain co-located facilities. In addition, the option to submit a deposit in lieu of such demonstration would be limited to circumstances in which regulatory limitations prohibit the interconnection customer from obtaining site control. In such instances, the interconnection customer would submit an initial deposit in lieu of site control of $10,000 per MW, subject to a floor of $500,000 and a ceiling of $2,000,000, which would be applied toward any interconnection studies or withdrawal penalty. Such an interconnection customer must thereafter demonstrate 100% site control prior to the facilities study.

3. Commercial Readiness

The current pro forma LGIP does not require interconnection customers to demonstrate progress towards achieving commercial readiness throughout the interconnection study process, only requiring a demonstration of commercial progress within 15 days after receipt of the final LGIA. Again citing the tendency for non-viable projects to linger in interconnection queues, in the NOPR, the Commission proposes that interconnection customers be required to demonstrate commercial readiness prior to entering a cluster study or re-study. The following options would be available for making such demonstration:

• Executed term sheet (or comparable evidence) related to a binding contract for sale of (a) the constructed generating facility, (b) the generating facility's energy or capacity, or (c) the generating facility's ancillary services;
• Reasonable evidence that the project has been selected in a resource plan or resource solicitation process by or for a load serving entity (LSE), is being developed by a LSE, or is being developed for purposes of a sale to a commercial, industrial, or other large end-use customer; and
• A provisional LGIA that has been filed at FERC, which is not suspended and includes a commitment to construct the generating facility.

Prior to entering a facilities study, the interconnection customer must show an executed contract, rather than a term sheet, if it previously demonstrated commercial readiness with option (1) above. FERC also proposes to give customers the option to provide the following commercial readiness deposits in lieu of making a demonstration: (a) two times the study deposit amount to enter the initial cluster study phase; (b) five times the study deposit amount after the initial cluster study phase and before the system impact re-study phase; and (c) Seven times the study deposit after receipt of the facilities study agreement.

4. Withdrawal Penalty

Under the pro forma LGIP, when an interconnection customer withdraws an interconnection request, the customer is only required to pay the actual study costs that the transmission provider incurred. To account for the harms that can occur when interconnection customers withdraw from the interconnection queue, in the NOPR, FERC proposes to require transmission providers to assess withdrawal penalties to interconnection customers that choose to withdraw at any point in the interconnection study process, or do not otherwise reach commercial operation. For interconnection customers that demonstrated commercial readiness prior to withdrawal, the penalty would be one times the customer’s cumulative study costs prior to withdrawal, and the penalty would nine times the customer’s cumulative study deposit after the signing or filing of an LGIA.

For an interconnection customer that provides a commercial readiness deposit in lieu of a demonstration of commercial readiness, FERC proposes a withdrawal penalty of the greater of the study deposit or:

• Two times the study cost if the customer withdraws during the cluster study or after receipt of a cluster study report, capped at $1,000,000;
• Three times the study cost if the customer withdraws during the cluster re-study or after receipt of any applicable re-study reports, capped at $1,500,000;
• Five times the study cost if the customer withdraws during the facilities study, after receipt of the individual facilities study report, or after receipt of the draft LGIA, capped at $2,000,000; or
• Nine times the study costs if the customer withdraws before achieving commercial operation and after executing the LGIA or filing an unexecuted LGIA. We also propose that the withdrawal penalty revenues be used to fund studies conducted under the cluster study process.

However, under FERC’s proposal, interconnection customers would be exempt from a withdrawal penalty if the withdrawal does not delay the timing of studies or increase network upgrade costs for other interconnection customers, or if the withdrawal follows a significant, unanticipated increase in network upgrade cost estimates (i.e., more than 25% in a cluster re-study or 100% in a facilities study).

Under the current LGIP, if a study identifies a need for network upgrades in response to an individual interconnection customer request, the transmission provider allocates the initial cost of those network upgrades to the individual interconnection customer. In the NOPR, FERC noted that, as a result, individual interconnection customers may be reluctant to move forward with the development of an interconnection request if there is no opportunity to recover some of the costs associated with the construction of significant network upgrades that are likely to benefit other interconnection customers. Therefore, alongside the new cluster study process, FERC proposes to require transmission providers to allocate network upgrade costs to interconnection customers within a cluster using a proportional impact method.

FERC also proposes to require transmission providers to allocate network upgrade costs between interconnection customers in an earlier cluster study and interconnection customers in a subsequent cluster study that benefit from the same network upgrade (if it remains less than five years old) in a manner that is roughly commensurate with the benefits received. The interconnection customer in the later cluster study would be required to contribute a pro rata portion of the shared network upgrade's remaining undepreciated capital cost based on the impact the interconnection customer in the later cluster study has on the network upgrade as measured using the same method the transmission provider used to determine the impact of the interconnection customer(s) in the earlier cluster study.

FERC proposes to require each transmission provider to submit a compliance filing adopting the revised interconnection procedures within 180 days of the effective date of the final rule. In addition, FERC included a proposed transition process for interconnection customers with active interconnection requests at the time that a transmission provider’s revised interconnection procedures take effect. Under this proposal, a transmission provider would be required to offer existing interconnection customers the options, for each project in the queue, to either (a) enter a transitional serial interconnection facilities study, (b) enter a transitional cluster study, or (c) permit them to withdraw from the interconnection queue without penalty.

To proceed to the transitional serial study, an interconnection customer must have a final system impact study report issued by the transmission provider, and would be required to execute a transitional serial interconnection facilities study agreement. At the time of execution of such agreement, the interconnection customer would be required to provide a deposit equal to 100% of the interconnection facility and network upgrade costs allocated to the interconnection customer in the system impact study report. If the customer reaches commercial operation, the deposit would be used towards construction costs of the same facilities. In addition, customers would be required to provide evidence of exclusive site control for the entire generating facility and demonstrate commercial readiness with one of the options outline in the earlier section of this alert within 60 days of the effective date of the transmission provider’s compliance filing. If the customer withdraws, the deposit would be refunded after the final invoice for study costs and the withdrawal penalty are settled. The transitional serial study withdrawal penalty would equal nine times the study cost.

Interconnection customers that choose the transitional cluster study would have to execute a transitional cluster study agreement, and similar to the transitional serial study, would also have 60 days to provide evidence of exclusive site control for the entire generating facility and demonstrate commercial readiness. The costs of the transition cluster study and the identified facilities would be allocated as the costs are allocated for future clusters as set forth in the final rule in this proceeding. The transitional cluster would also be subject to an expedited combined system impact and interconnection facilities study. To ensure that interconnection customers are ready to move forward, FERC proposes that interconnection customers opting for a transitional cluster study be required to make a $5 million deposit, which would be applied to the cost of constructing interconnection facilities and network upgrades if the customer reaches commercial operation. As with the transitional serial study, the transitional cluster study withdrawal penalty would equal nine times the study cost.

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