FERC Moves to Break the Interconnection Logjam
The Federal Energy Regulatory Commission has issued new interconnection rules that will apply to nearly every transmitting utility outside of ERCOT. The reforms are intended to speed interconnection of new facilities and alleviate massive interconnection queue backlogs, mostly involving renewable power and battery storage projects. However, implementing these reforms may delay completion of interconnection studies in the near term.
Under the new rules, many existing interconnection customers will need to demonstrate exclusive land rights for their project sites and provide "readiness deposits" to remain in the queue.
There may also be a rush to enter interconnection queues over the next several months, as projects not in the queue by the relevant deadline could potentially face years-long delays in having their requests studied as they await completion of studies of existing customers in the queue.
Utilities' and regional transmission organizations', or "RTOs," compliance filings were originally due by December 5, 2023, but FERC extended the deadline to April 3, 2024. FERC needs to approve each compliance filing before the new interconnection procedures and form contracts (study agreements, interconnection agreements, facilities construction agreements) become effective. Many parties have sought rehearing of the FERC order. FERC has yet to take substantive action on the rehearing requests, other than extending the compliance filing deadline. In addition, many parties have already appealed FERC’s order to the courts.
The key reform is a change from serial, first-come-first-served studies in which the system impacts of individual projects are studied sequentially, to "cluster" studies in which the system impacts of an entire group, or "cluster," of projects is evaluated in a single study and network upgrade costs are allocated only among projects in each cluster. Under the new cluster study process, each customer must provide a study deposit, initial readiness deposit and proof of exclusive site control for most of their project site to enter the queue. At each successive stage of the study process, they must post additional readiness deposits, if their previous readiness deposits are insufficient to meet the increased readiness deposit amount, and reestablish proof of exclusive site control. Any customer withdrawing from the queue after executing a cluster study agreement may need to pay withdrawal penalties.
Utilities are free to propose variances from FERC's new tariff language and standard form contracts in their compliance filings. Utilities must justify any proposed variance. Non-RTOs would need to show their proposed alternatives are "consistent with or superior to" FERC's adopted provisions. RTOs would be subject to the more permissive "independent entity variation" standard, under which FERC grants greater flexibility to customize rules to fit regional needs. Hence, customers should pay careful attention to the specific compliance filings of utilities with which they are seeking interconnection
Many utilities have, on their own initiative, adopted the cluster study approach in recent years. For those that have not, a key element of the reform is a transition study process for existing customers in the interconnection queue. Most existing customers will need to enter a transition process, or have their requests withdrawn from the queue. These customers will need to put up additional deposits and demonstrate exclusive site control for their proposed projects to enter the transition study process. The deadline for meeting these requirements will vary by utility.
Customers not yet in the queue still have time to qualify for the transition process, and there are timing benefits to doing so. To qualify for the transition process, they must have an assigned a queue position within 30 days after the relevant utility makes its initial compliance filing. Otherwise, their project will not be studied until after the transition process is completed. Given the size of certain transition clusters, the complexities of and likelihood for disputes concerning implementation of the reforms, and the lack of penalties for delays in completing the transition studies, it could take well beyond the one-year time period allotted by FERC for utilities to complete the transition process.
Not every utility needs to comply with the rule.
Transmission providers who are not "public utilities," such as federal power marketers, municipalities and certain rural electric cooperatives, are exempt from the compliance filing requirement. However, many of these utilities will voluntarily comply with the new rules by updating their so-called "reciprocity" tariffs filed at FERC to enable them to have continued non-discriminatory access to the transmission systems of FERC-jurisdictional public utilities.
FERC states that utilities that have already adopted a cluster study process, or are currently undergoing a transition to a cluster study process, will not be required to implement a transition process. But it is unclear how this will work in practice. Key elements of many utilities' existing cluster study processes (e.g., readiness requirements, withdrawal penalties, network upgrade cost allocation rules) differ significantly from FERC's new rules.
Transition Process for Existing Customers
A Customer with a completed system impact study, or "SIS", that has been sent a facilities study report before transition studies start will be tendered an interconnection agreement based on the findings in such report and will not be required to enter the transition study process.
All other existing customers will have the option to enter the transition study process or withdraw from the queue, penalty free.
A Customer with a completed SIS that has been sent a facilities study agreement within 30 days after the relevant utility files its compliance filing, but who has not received a facilities study report before transition studies start, will have two options for participating in the transition process. First, it may elect an individual facilities study, with no redo of its previously completed SIS. Alternatively, it can opt to enter the transition cluster study, which will include a clustered SIS followed by an individual facilities study. All other customers assigned a queue position within 30 days after the relevant utility files its compliance filing but are lacking a facility study agreement will only have the option enter the transitional cluster study process. Customers not assigned a queue position by this deadline will have to wait until the transition studies are completed to have their projects studied on a cluster study basis.
FERC allotted utilities approximately one year to complete the transition studies. However, depending on the utility or RTO, if nearly every queued project is put in a single cluster study, the study process could be significantly delayed.
Customers entering the transition study process will need to provide a readiness deposit and proof of "exclusive" site control (discussed below) within 60 days after the utility's compliance filing becomes effective. Failure to timely satisfy these requirements will result in withdrawal from the queue. For customers entering a transition individual facilities study, the readiness deposit is the entire cost of network upgrade and transmission provider interconnection facilities assigned to the customer in its system impact study. For customers entering a transition cluster study, the readiness deposit is US$5 million.
Customers entering the transition cluster study process will have a one-time option to change their election of "energy resource interconnection service" or "network resource interconnection service" and may extend their proposed commercial operation date, up to December 31, 2027. All customers in the transition cluster study process will be assigned an equal queue position. Costs of network upgrades triggered by the members of the transition cluster will be assigned only within the transition cluster, in accordance with FERC's newly-adopted cost allocation rules for cluster studies.
Any customer that enters a transition study process and subsequently withdraws from the queue or fails to achieve commercial operation of its project after entering into an interconnection agreement must pay a withdrawal penalty equal to nine times its actual study costs, in addition to paying the actual study costs.
Cluster Study Process
All utilities subject to the rule must now employ a cluster study when performing system impact studies for new service requests. The only exceptions granted in the final rule were for requests for surplus interconnection service, i.e., using an existing customer's excess interconnection capacity, and for optional interconnection studies. Facilities studies, which are conducted after the cluster study, will remain individual studies.
The process starts with an annual a 45-day "cluster request window" within which customers can apply to join that year's cluster study group. Utilities may elect to study subgroups within each cluster, as long as they specify relevant criteria in their tariffs and allocate network upgrade costs throughout the entire cluster (and not only within subgroups) in accordance with FERC's new cost allocation rules. All customers within a cluster will have equal queue priority.
Following the cluster request window, there will be a 60-day "customer engagement window" before customers are required to finalize their point of interconnection and execute a cluster study agreement.
Utilities will have 150 days from the end of the customer engagement window to complete a cluster system impact study.
If a cluster restudy is required because a customer in the cluster, or in a previously studied cluster (including the transition cluster), withdraws from the queue, terminates its interconnection agreement or otherwise modifies its request in a manner necessitating a restudy, the utility will have up to 150 days in which to complete the restudy. Not all withdrawals or terminations of interconnection agreements will lead to a restudy. Whether a restudy is required is left to the utility's judgment. There is no limit on the number of restudies a utility may perform. There are no additional deposit requirements for a restudy.
Following the cluster study or cluster restudy, as applicable, each customer will have approximately one month to determine whether to proceed with a facilities study. The utility will have up to 90 days to complete each facilities study. The utility will then tender the customer an interconnection agreement and the parties will negotiate for up to 60 days.
Exclusive Site Control
Customers must demonstrate exclusive site control for 90% of their proposed generating facility site when submitting their interconnection request and when entering the cluster study and any cluster restudy. They must later demonstrate exclusive site control for 100% of their proposed generating facility site when executing their facilities study agreement and interconnection agreement. There is no site control requirement for interconnection facilities at any stage of the interconnection process.
"Exclusive" site control means the customer is the only entity with the right to develop a generating facility on the land. Where more than one facility will be co-located on the same site under a single interconnection request (typically, if not always, where one of the facilities is a storage facility), the customer(s) must provide evidence of a contract that allows for shared exclusive land use for all such facilities and the site must be sufficiently sized for the facilities. Utilities must establish minimum, technology-specific acreage requirements for the site control requirement.
Customers can demonstrate control of a site through ownership, a lease, a lease or purchase option, or other documentation clearly demonstrating the customer's exclusive right to construct and operate a generating facility on the site. Evidence of active negotiations for a lease is not sufficient. Utilities may evaluate the content of leases and lease options to assess whether they confer adequate control. In its rule, FERC provides further guidance regarding adequate evidence of site control for certain specific types of projects (e.g., offshore wind, hydroelectric, pumped storage, projects on federal or Tribal lands).
Customers are only allowed to provide refundable security in lieu of site control if they demonstrate a regulatory limitation prevents them from obtaining site control. The regulatory limitation must make it "practically infeasible" to obtain site control within the study process' standard timeframe. Utilities will have discretion to determine the scope of qualifying regulatory limitations relevant to their service territory and must publicly post that information. The security amount is US$10,000 per MW, subject to a floor of US$500,000 and a ceiling of US$2 million. It is refundable but may not be applied towards interconnection studies or withdrawal penalties, if applicable. In any event, 100% site control with respect to projects with regulatory limitations must be demonstrated no later than 180 days from the interconnection agreement effective date. Failure to do so may result in withdrawal penalties.
Study Deposits and Readiness Deposits
Customers will be required to post higher study deposits and, for the first time (as with transition study customers), commercial readiness deposits. These deposits are at-risk if the customer withdraws or if its facility does not achieve commercial operation after the customer enters into an interconnection agreement.
The study deposit is due with the interconnection requests. The deposit amount will depend on the size of the facility. For facilities 20 MW to less than 80 MW the amount is US$35,000 plus US$1,000/MW. For facilities 80 MW to less than 200 MW the amount is US$150,000, and for facilities over 200 MW the amount is US$250,000.
Customers must submit four commercial readiness deposits over the course of the study process, unless earlier commercial readiness deposits are sufficient to meet the amounts due for later deposits. The readiness deposits are due before entering the cluster study, cluster restudy, facilities study phases and when executing the interconnection agreement.
The first commercial readiness deposit is two times the study deposit paid to enter the queue. The second, third and fourth deposits are five percent of the network upgrade costs assigned to the customer in the cluster study, 10 percent of the network upgrade costs assigned to the customer in the cluster restudy, and 20 percent of the network upgrade costs assigned to the customer in the facilities study, respectively.
Upon entering an interconnection agreement, the readiness deposits will be used as part of the customer's security for construction of network upgrades and transmission provider interconnection facilities.
FERC signaled it may be open to allowing transmission providers who have already adopted their own readiness milestones to keep those milestones.
A customer will only need to pay a withdrawal penalty if its withdrawal from the queue, or termination of its interconnection agreement before commercial operation, has a material impact on the cost or timing of any interconnection requests with an equal (i.e., same cluster) or lower queued (i.e., subsequent cluster) position. A customer will also be exempt from paying a withdrawal penalty if it timely withdraws from the queue after receiving notice of either a 25% or greater increase in assigned network upgrade costs between cluster study reports, or a 100% or greater increase in assigned network upgrade costs between its cluster study report and its facilities study report.
Withdrawal penalties increase as the customer proceeds through the interconnection process, and generally coincide with the readiness deposit amounts required.
The minimum withdrawal penalty is the customer's study deposit amount. If higher, the withdrawal penalty amount will be two times the customer's actual study costs if it withdraws during the cluster study phase, 5 percent of the customer's assigned network upgrade costs if it withdraws during cluster restudy phase, 10 percent of the customer's assigned network upgrade costs if it withdraws during the facilities study phase, or 20 percent if it terminates its interconnection agreement before any portion of its facility achieves commercial operation.
Withdrawal penalties are in addition to, and do not mitigate, the customer's liability for actual study costs.
It is unclear if withdrawal penalties will apply to customers with existing interconnection agreements who fail to place any portion of their facility into commercial operation. In the rule, FERC eliminated language in its standard tariff provisions that "grandfathered" customers with existing interconnection agreements from compliance with new rules, but failed to explain this deletion or affirmatively state that customers with existing interconnection agreements could be subject to withdrawal penalties. FERC's intent will presumably be clarified on rehearing or when FERC rules on utility's compliance filings.
Transmission Provider Delay Penalties
For the first time, FERC adopted penalties for utilities that fail to timely complete interconnection studies. However, these penalties will not be assessed until the utility's third cluster study cycle (including the transition cluster study cycle, where applicable) and thus will not provide any real incentive to meet study deadlines in the near term.
Even after the penalties take effect, they are unlikely to incentivize timely completion of studies for several reasons. First, the penalty amounts are not particularly significant. Penalty amounts for delays in completing cluster studies, cluster restudies, facilities studies, and affected system studies are US$1,000, US$2,000, US$2,500 and US$2,000 per business day, respectively. For example, for a cluster study delay, the penalty would be only approximately US$20,000 per month. Second, the penalty amounts are in any event capped at the total of all study deposits received from the customer(s) whose request(s) are being studied. Finally, utilities may petition FERC for leniency from penalty liability for "good cause" and will receive a 10-business day grace period after the applicable study deadline before incurring penalty liability.
For the first time, public utility transmission providers will be required to adopt standard tariff language and standard forms of interconnection study agreements and facilities construction agreements applicable to their actions as an "affected system" impacted by interconnection of a project to a neighboring, or "host", transmission system. This reform has the potential to bring uniformity and order to a process that has previously been unwieldy and, in many cases, a source of significant delay in projects achieving full commercial operation.
Affected system operators are now subject to deadlines for notifying customers if an affected system study is required. If the study covers multiple requests, it must be conducted as a cluster study. Study results must be provided within 150 days of the affected system operator receiving all relevant study agreements, study deposits and technical data.
Customers may now elect to defer executing an interconnection agreement with their host utility, and providing their final readiness deposit, until up to 30 days after they've received their affected system study report, as long as such delay will not have a material impact equal- or lower-queued customers.
FERC adopted several additional noteworthy reforms.
Utilities that study battery storage resource charging through their interconnection study process must now assume in their interconnection studies that battery storage facilities will only charge during off-peak hours, if so requested by the customer in its initial interconnection request. The customer will be bound to its election, this charging restriction will be included in the customer's interconnection agreement and the utility may require the customer to install control equipment to ensure this restriction is followed.
Customers will be permitted to submit a single interconnection request for co-located generating facilities (such as a solar and battery storage facility) behind a single point of interconnection. To do so, the co-located facilities must be located on the same site and be at a single terminal voltage. The facilities may be owned by different entities if the entities have an agreement that provides for shared land use. This reform will reduce the number of deposits required to enter the queue when seeking to co-locate facilities.
Utilities can no longer categorically deny proposals to add an additional generating facility at the same point of interconnection to an existing interconnection request, if the originally requested level of interconnection service is retained and the request is submitted before the customer returns its facilities study agreement. The customer will need to provide proof of exclusive site control when submitting the modification request. The request to add another generating facility will be granted if such addition will not have a material impact on an equal- or lower-queued project.
FERC also adopted two final sets of reforms that apply to both large and small (20 megawatts or under) generating facilities.
First, utilities must evaluate use of specified alternative transmission technologies in lieu of traditional network upgrades when conducting interconnection studies. They must explain their findings with respect to feasibility and cost and time savings in their study reports. However, this reform imposes only a procedural requirement and may not result in significant cost or time savings for interconnection customers. Whether to actually adopt alternative transmission technologies in lieu of traditional network upgrades is left to the utility's discretion, subject only to the requirement to adhere to good utility practice. FERC signaled it does not intend to entertain challenges to the utility's decision as long as the study report adequately covers the required information.
Second, customers proposing to interconnect non-synchronous generators (e.g., solar, wind, battery storage) to the grid will now need to provide three specified technical models when submitting their interconnection requests. In addition, the standard form of interconnection agreement will now require all generating facilities to meet certain frequency and voltage "ride through" requirements within the physical limitations of their facilities. This requirement applies to any customer that has not executed an interconnection agreement by the utility's compliance filing effective date.
It is possible FERC will amend the final rules when it takes substantive action on rehearing requests. Whatever the rules may be, they are likely to remain effective through the appeals period.