Hurry Up and Wait? IRA Puts Transmission, Other Woes in Spotlight

If transmission, permitting and access to private capital were not already generating angst as renewables companies ramp-up, unexpected snags resulting from the Inflation Reduction Act (IRA) are almost certain to do the job.

While the IRA ushered in billions of dollars in clean energy incentives including production and investment tax credits for wind and solar projects, industry players and watchers are becoming increasingly concerned about the health of U.S. electric grids—and lengthy interconnect times coupled with a slow-moving permitting process.

Concerns surfaced during a conference hosted by Renewable Energy Alliance Houston as temperatures inched back up to the triple digits amid more voluntary conservation requests from the Electric Reliability Council of Texas (ERCOT) and, overall, higher electrical demand and the potential for lower reserves.

Such discussions are also taking place as the U.S. targets lower emissions by using more renewable energy.

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The IRA has exacerbated the problem and highlighted the need for meaningful reform, said Omar Aboudaher, senior vice president of development for Dallas-based Leeward Renewable Energy, which owns and operates about 25 wind, solar and energy storage facilities in the U.S.

“Permitting in some parts of the country, it could take six to 10 years to permit a project. ... It basically keeps you from really realizing the benefits that the IRA was intended to do,” Aboudaher said.

He then turned to the interconnection process, which involves connecting a distributed generation system to energy sources—including those produced by renewables—to an electric grid.

“In some areas, PJM [Pennsylvania-New Jersey-Maryland Interconnection], for example, and MISO [Midcontinent Independent System Operator] from date of application, it’s taking about five years to be tendered an interconnection. That’s when you start construction on a project. It could be a seven-year process.”

Efforts are underway to improve the situation as companies and advocates work with regulators to move from a siloed to a more coordinated approach.

“We need coordination between state and federal jurisdictions, debottlenecking transmission projects to unlock areas,” Aboudaher said. With “transmission, for example, you can do everything right on the project.

But “if you can’t interconnect, you can’t get the energy out, clearly you haven’t done anything.”

Federal officials say they are taking steps to address delays.

Electric backlog

The transmission challenge is one the Federal Energy Regulatory Commission (FERC) is working to help solve by streamlining the interconnection process. With a new rule announced in late July, FERC said it aims to provide greater timing and cost certainty to interconnection customers and prevent “undue discrimination against new sources of power generation.”

At year-end 2022, more than 2,000 gigawatts of generation and storage were awaiting interconnection across the U.S., according to FERC. That is almost double the amount of today’s generation capacity, which is mainly sourced by natural gas—though solar developers are leading in new utility-scale capacity additions.

The backlog comes as more wind and solar resources are being developed. The IRA, which marked its one-year anniversary Aug. 16, could lead to more activity.

FERC’s final rule shifts from a first-come, first-served method to a “first-ready, first-served” approach, which means projects with permits and site control can enter and remain in the interconnection queue. The rule also sets deadlines and penalties for transmission providers that fail to timely complete interconnection studies.

Plus, the reform aims to streamline the process by requiring transmission providers to allow more than one generating facility to co-locate on a shared site behind a single point of interconnection and share a single interconnection request among other requirements.

“Our transmission policies must keep pace with the rapid changes in the makeup of our nation’s power generation resource mix,” FERC Chairman Willie Phillips said in a news release, calling the rule an important milestone. “But there is so much more to do. The Commission is working diligently on how to address the key issues of regional transmission planning and cost allocation. We need to take a longer-term, forward-looking approach to planning for essential transmission facilities and to allocate the costs of those facilities in a just and reasonable manner while enhancing the reliability and resilience of the grid.”

Others are also working to improve interconnection procedures. These include the Interstate Renewable Energy Council, which released an updated edition of its model interconnection procedures on Aug. 24.

Financing impact

Without solutions to the transmission and permitting dilemma, renewable energy project developers could miss out on private capital, even if the IRR is attractive.

Permitting was one of the concerns that Fred Day, managing director of investments for Brookfield Asset Management, also said he had with the Bipartisan Infrastructure Law.

“You’re getting a lot of … grants and loans, but it didn’t really solve one of the key issues, which is how to get more private capital into the space,” he said. “We’re just not going to … take that risk from a permitting and interconnection standpoint.”

Existing borrowers are also requesting funds.

Day mentioned that in the past few weeks, existing borrowers have said they need equipment, leaving the firm to figure out ways to be flexible for worthy companies while still maintaining discipline in investing.

Doug Moorehead, COO of Broad Reach Power, added that a few years ago he considered a 1 megawatt-hour [MWh] a big battery.

“Those were small projects [that] the financial world wasn't very interested in,” he said, adding now 100 MWh to 400 MWh is considered a small project. “The projects are big and the money is big, accelerated by the IRA,” and generating interest from the financial world.

But “Every time you go for financing, it’s painful. … It costs 20 million bucks to raise [$400 million]. It’s expensive, right? But you got to raise a lot of money to do that [scale].”

Tax equity and the transferability provisions in the IRA add another level of complexity.

Transferability—as explained by the Internal Revenue Service—allows entities that qualify for a tax credit to transfer all or some of the credit to a third-party buyer for cash.

“You actually have to become an owner of the project in order to utilize the credits,” said session moderator Jessica Adkins, a partner at Sidley Austin LLP. “These deals are set up such that your financing partner actually becomes an owner of your projects, so that they can allocate the tax credits to the financing party.

“You could think of it like repaying your loan in the form of tax credits instead of cash.”

If a financial player comes in as a partial owner, there are probably lots of strings attached, she added.

“I think that’s the headache that everyone has been has been talking about,” Adkins said. But it’s also a way that smaller players “can potentially unlock that market.”