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Electricity transmission infrastructure market drivers and barriers

A Pike Research report

The electric transmission grid is a crucial component of modern society. Much like the cornerstone of a building, transmission is the foundation that supports activity in virtually all areas of the energy sector.

To reap the full benefits of renewable energy and smart grid technologies, the capacity and information-carrying ability of transmission systems must be increased substantially.

Indeed, the global economy will be inhibited if the grid cannot keep pace with technology advances, changing demographics and the competitive energy markets.

In the U.S., there is consensus that increasing investment in the transmission infrastructure is a critical priority. After decades of neglect, the electric power industry started addressing the country's transmission issues in the late 1990s.

As directed by the Energy Policy Act of 2005, the Federal Energy Regulatory Commission has been taking steps to create incentive-based rates of return for transmission projects. Both national political parties support the development of the grid, and a recent focus on developing smart grid capabilities will add momentum to this trend.

Considering that support for transmission development has spanned 20 years and four presidential administrations, it seems likely that this policy trend will continue.

Many forces are influencing investments in the transmission market. Pike Research's analysis finds that four market drivers have the most impact on the development of transmission projects:

Reliability/capacity enhancements — This is the constant driver of the transmission market. Reliability projects are ongoing at many U.S. utilities and, as assets strain to accommodate increasing competition, new transmission is needed to ensure reliability.

Renewable portfolio standards (RPS) — State RPS mandates have resulted in a dramatic increase in renewable generation (predominantly wind power). The inability of the current transmission infrastructure to handle this new and frequently distant generation is the biggest factor driving the development of the grid.

Economic projects — Transmission congestion and the development of competitive energy markets are increasing the economic justifications for new transmission systems.

Replacement of infrastructure — By some estimates, one-third of the U.S. grid is at or near the end of its projected lifespan. As the nation builds new capacity, it must also replace a considerable amount of its existing transmission capacity.

However, opposition to new transmission projects is common. The biggest obstacles are issues related to siting new lines and the allocation of project costs. The FERC is unlikely to use its "backstop" siting authority and this issue will continue to be problematic.

With regard to cost allocation, some progress has been made in developing models that do a better job at calculating the benefits of transmission projects.

Pike Research believes that the FERC will replace its current case-by-case cost allocation approach with a more consistent formula by the end of 2011.

The same forces that are stimulating overall investment in the electric power industry have fueled technological innovation in the transmission sector.

These innovations have resulted in the increased use of several key transmission technologies:

* Extra high-voltage and ultra high-voltage lines

* High-voltage direct current

* High-temperature superconducting cable and electronic components

* Fault current limiters

* Power electronics

* Wide area monitoring systems and phasor measurement units

Public policy, market forces, and technological innovation have all impacted the transmission sector. Transmission has become more competitive and more adaptable. Moreover, there is a greater emphasis on specialized applications of technology.

The electric power industry in every part of the world is trying to become more efficient, reliable, and (in most areas) cleaner. The transmission market varies significantly by region.

In some areas, huge amounts of capital are being spent to modernize and expand transmission infrastructure. Some of the largest and fastest-growing countries (e.g., China, India, and Brazil) are building national transmission systems for the first time.

It is not unusual for the dominant country in a region to invest as much as all of the other countries in the region combined. This uneven distribution of expenditures is an example of the competing infrastructure needs in many countries.

Pike Research forecasts that the worldwide transmission market will grow by a compound annual growth rate of 1.5 percent during the forecast period (2010-2020). The majority of this growth will occur during the first half of the period, leading to modest or even declining growth rates for some regions in the second half of the period.

In the U.S., the electric power industry has committed substantial resources to expand and modernize its grid. Pike Research forecasts an overall growth rate for transmission expenditures of 1.3 percent for the period from 2010 to 2020.

The CAGR for the first half of the forecast period is expected to be 3.5 percent, reflecting the nation's commitment to renewable energy and competitive wholesale energy markets.

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Scott's Contracting
scottscontracting@gmail.com
http://www.stlouisrenewableenergy.blogspot.com
http://www.stlouisrenewableenergy.com
scotty@stlouisrenewableenergy.com