I touched on this the other day... merchant transmission is now looking for a handout of public money to finance their speculative transmission projects.
According to this old article, merchant transmission is an offshoot from traditional transmission projects built by utilities and approved by regulators on a cost-plus, rate-of-return basis. Not all transmission projects are the same.
"Traditional" transmission is planned by independent grid operators and assigned to incumbent public utilities. The grid operator plans transmission for a reason, whether to keep the grid reliable, to avoid costly transmission congestion in order to lower prices for electric consumers, or in some instances for "public policy" reasons to meet state or local energy goals. The reason is never overtly just for the transmission owner to make a profit. Once the need for a new transmission project is determined by the grid operator, different proposals are evaluated using a number of factors, chiefly price. Does the transmission project provide more benefits for electric consumers than costs? Because captive electric consumers must pay for the project they need, this is designed to prevent building transmission that costs more to build than it provides in consumer benefits. Hence, the "cost-plus, rate-of-return basis" in the description. Electric consumers pay the cost of building the project, and the transmission owner collects its costs plus a regulated rate of return on their investment. Because transmission is a utility monopoly (it's more efficient to build one line to serve many than it is to build multiple, competing lines to serve the same population) the amount of profit it can collect from captive consumers, who have no other options for service, must be held to a reasonable level. Regulators determine the amount of profit to be fair to both the consumers who must pay it, and the utilities who invest their money in the project.
"Merchant" transmission is different. It's strictly a money-making proposition whose profit is held in check by market conditions, not artificially set by regulators. A merchant project gambles that its cost to build the project will be less than it can charge for service in a free, unregulated market. Therefore, merchant projects do not need to go through rigorous vetting processes run by grid operators. Because there are no captive customers who are required to pay the cost, no entity must determine a merchant project is needed, or that it is cost effective. All the risk is on the merchant transmission developer. A merchant developer pays all its own costs to develop and build its project. In order to recoup its costs, plus profit, a merchant transmission project sells capacity (essentially a roadway to move electricity from one place to another) on its project to voluntary customers on a negotiated basis. A merchant announces it is building a project, and opens a bidding window for willing customers to negotiate a price for service. No one is required to take service, it's completely voluntary. A customer will only sign up if the service is economic for the customer's purposes. How much profit a merchant makes on its project is dependent upon the value of its service to potential customers. If the cost to build the project is less than the rates a project can negotiate with its customers, then the merchant project is viable and successful. Regulators consider this free market setting of rates to provide the mechanism to keep rates in check. If a merchant charges too much for service in order to make a larger profit, then it won't have customers. A merchant tries to hit that sweet spot between cost and rates where its project is attractive, but still provides a profit for the company. Therefore, merchant projects are not regulated beyond some generalized review of the open season offering to customers and negotiations to ensure the merchant fairly evaluates bids and does not give undue preference to certain customers. When a merchant project is owned by an entity with interests in generation or load-serving utilities, it is especially important to make sure the merchant does not give preference and lower prices to its own affiliates. The amount a merchant can charge and the profit it can make are not regulated in any way.
This works on paper, but has been generally unsuccessful in real life. I've concluded that the main reason for merchant transmission failure is that it cannot attract enough customers to hit that sweet spot for success. A merchant relies on load-serving utilities to purchase its capacity (or contracts with generators to purchase power that includes merchant transmission capacity). Many load-serving entities are affiliates of huge investor-owned utility conglomerates that also own generation and transmission of their own. The transmission these companies own is the "traditional" variety, where the utility collects its transmission investment from captive customers. Traditional transmission is a cash cow for these utility conglomerates because it supplies a slow and steady, regulated profit. Utilities build transmission because it provides around a 10% return on their investment. Do you get that kind of return on your investments? Probably not. This is why owning transmission is lucrative.
Merchant transmission asks the utility to purchase capacity from another company, and let that company earn a return. The utility in this situation is only reimbursed on a dollar-for-dollar basis for the transmission capacity it purchases. There is no profit in purchasing transmission from others. So, why would a utility want to purchase transmission from a merchant when it could, instead, build and own the transmission project itself and realize a guaranteed profit? To make it simpler, why buy the milk when you can own the cow?
Now that you know all there is to know about merchant transmission, let's go back to that "shovel-ready" transmission project proposal that was released with such fanfare last week. The vast majority of the projects on the list are merchant transmission projects. They've been ineffectively spinning their wheels for years trying to find enough customers to become commercially viable. If a merchant does not have enough contracted customers, it does not have a sufficient revenue stream to be successful. Utilities are generally eschewing merchant projects in favor of building their own transmission. This situation is unlikely to change. But merchant transmission really, really, really wants to be successful, and renewable energy companies want it to be successful so they don't end up paying any of the costs of new transmission planned by regional grid operators. Renewable energy companies want to build profitable wind and solar farms in remote locations, but they don't want to pay the cost of getting their newly created product to market. They want to rely on merchant transmission to do it for them, but merchant transmission can't attract customers. This is the problem they're all trying to solve.
They're trying to solve it using YOUR money, and not their own. They do stuff like release lists of merchant transmission they pretend is "shovel-ready" to try to interest a sadly uninformed federal government into showering them with taxpayer cash in the name of "infrastructure." It's your money, little taxpayer, not the government's. The schemers behind the 22-project "list" include merchant transmission companies and renewable energy generators. These are the companies who will make a whole bunch of money if they can only get merchant transmission off the ground. It includes Michael Skelly, famous for losing $200M of private investor cash on a failed merchant transmission scheme.
The schemers want the federal government to help them out. If that happens, merchant transmission is no longer merchant. It's dependent upon taxpayer money to succeed, and if it fails again it's only taxpayer money that is lost. Private investors won't be risking anything if the government backs up the scheme with loan guarantees, tax credits, and customer mandates. The schemers propose that the federal government power marketers be required to sign up as customers of merchant transmission and become resellers of the transmission capacity that the merchants are unable to sell to utilities. This does not require utilities to become customers, and they won't. It merely leaves the federal power marketer holding the bag on transmission capacity no one wants. They don't consider that the federal power marketers are essentially running a utility. They are a zero-sum game. Their customers pay all their costs to operate, but because they are a government entity, they aren't trying to make a profit. Their captive customers depend on the power marketer (such as TVA) to supply power. All the costs of the power marketer are paid for by their captive customers. If TVA gets left paying for transmission capacity that it cannot sell to investor-owned utilities, the cost falls to TVA customers, not the federal government. If the merchant is guaranteed to collect its costs from the TVA, then it can no longer negotiate prices in a free market that provides the necessary cap on profit. If TVA is required to purchase capacity from merchants, the merchant can charge whatever it wants. Where's the necessary regulation? It does not exist!
There are also problems with federal loan guarantees. When Michael Skelly spent $200M on his failed merchant projects, the only ones who lost money were the investors. If the federal government now guarantees a loan for a merchant project will be repaid, then the U.S. taxpayers are the investors who will be left with nothing but debt. The merchant has absolutely no risk and will still be whole after failure. This is NOT a merchant construct!
And let's talk about those tax credits... where does the money for those come from? Taxpayers. If a merchant transmission company pays less taxes, that means you have to pay more to maintain the same amount of government. What's more, the proposed tax credits are supposed to be convertible to cash. If a company eligible for the tax credit cannot use the credit to reduce its tax burden because it pays little to no tax, the government will PAY them the amount of the tax credit as a refund. Outrageous! The schemers say tax credits are necessary for merchant projects because:
According to this old article, merchant transmission is an offshoot from traditional transmission projects built by utilities and approved by regulators on a cost-plus, rate-of-return basis. Not all transmission projects are the same.
"Traditional" transmission is planned by independent grid operators and assigned to incumbent public utilities. The grid operator plans transmission for a reason, whether to keep the grid reliable, to avoid costly transmission congestion in order to lower prices for electric consumers, or in some instances for "public policy" reasons to meet state or local energy goals. The reason is never overtly just for the transmission owner to make a profit. Once the need for a new transmission project is determined by the grid operator, different proposals are evaluated using a number of factors, chiefly price. Does the transmission project provide more benefits for electric consumers than costs? Because captive electric consumers must pay for the project they need, this is designed to prevent building transmission that costs more to build than it provides in consumer benefits. Hence, the "cost-plus, rate-of-return basis" in the description. Electric consumers pay the cost of building the project, and the transmission owner collects its costs plus a regulated rate of return on their investment. Because transmission is a utility monopoly (it's more efficient to build one line to serve many than it is to build multiple, competing lines to serve the same population) the amount of profit it can collect from captive consumers, who have no other options for service, must be held to a reasonable level. Regulators determine the amount of profit to be fair to both the consumers who must pay it, and the utilities who invest their money in the project.
"Merchant" transmission is different. It's strictly a money-making proposition whose profit is held in check by market conditions, not artificially set by regulators. A merchant project gambles that its cost to build the project will be less than it can charge for service in a free, unregulated market. Therefore, merchant projects do not need to go through rigorous vetting processes run by grid operators. Because there are no captive customers who are required to pay the cost, no entity must determine a merchant project is needed, or that it is cost effective. All the risk is on the merchant transmission developer. A merchant developer pays all its own costs to develop and build its project. In order to recoup its costs, plus profit, a merchant transmission project sells capacity (essentially a roadway to move electricity from one place to another) on its project to voluntary customers on a negotiated basis. A merchant announces it is building a project, and opens a bidding window for willing customers to negotiate a price for service. No one is required to take service, it's completely voluntary. A customer will only sign up if the service is economic for the customer's purposes. How much profit a merchant makes on its project is dependent upon the value of its service to potential customers. If the cost to build the project is less than the rates a project can negotiate with its customers, then the merchant project is viable and successful. Regulators consider this free market setting of rates to provide the mechanism to keep rates in check. If a merchant charges too much for service in order to make a larger profit, then it won't have customers. A merchant tries to hit that sweet spot between cost and rates where its project is attractive, but still provides a profit for the company. Therefore, merchant projects are not regulated beyond some generalized review of the open season offering to customers and negotiations to ensure the merchant fairly evaluates bids and does not give undue preference to certain customers. When a merchant project is owned by an entity with interests in generation or load-serving utilities, it is especially important to make sure the merchant does not give preference and lower prices to its own affiliates. The amount a merchant can charge and the profit it can make are not regulated in any way.
This works on paper, but has been generally unsuccessful in real life. I've concluded that the main reason for merchant transmission failure is that it cannot attract enough customers to hit that sweet spot for success. A merchant relies on load-serving utilities to purchase its capacity (or contracts with generators to purchase power that includes merchant transmission capacity). Many load-serving entities are affiliates of huge investor-owned utility conglomerates that also own generation and transmission of their own. The transmission these companies own is the "traditional" variety, where the utility collects its transmission investment from captive customers. Traditional transmission is a cash cow for these utility conglomerates because it supplies a slow and steady, regulated profit. Utilities build transmission because it provides around a 10% return on their investment. Do you get that kind of return on your investments? Probably not. This is why owning transmission is lucrative.
Merchant transmission asks the utility to purchase capacity from another company, and let that company earn a return. The utility in this situation is only reimbursed on a dollar-for-dollar basis for the transmission capacity it purchases. There is no profit in purchasing transmission from others. So, why would a utility want to purchase transmission from a merchant when it could, instead, build and own the transmission project itself and realize a guaranteed profit? To make it simpler, why buy the milk when you can own the cow?
Now that you know all there is to know about merchant transmission, let's go back to that "shovel-ready" transmission project proposal that was released with such fanfare last week. The vast majority of the projects on the list are merchant transmission projects. They've been ineffectively spinning their wheels for years trying to find enough customers to become commercially viable. If a merchant does not have enough contracted customers, it does not have a sufficient revenue stream to be successful. Utilities are generally eschewing merchant projects in favor of building their own transmission. This situation is unlikely to change. But merchant transmission really, really, really wants to be successful, and renewable energy companies want it to be successful so they don't end up paying any of the costs of new transmission planned by regional grid operators. Renewable energy companies want to build profitable wind and solar farms in remote locations, but they don't want to pay the cost of getting their newly created product to market. They want to rely on merchant transmission to do it for them, but merchant transmission can't attract customers. This is the problem they're all trying to solve.
They're trying to solve it using YOUR money, and not their own. They do stuff like release lists of merchant transmission they pretend is "shovel-ready" to try to interest a sadly uninformed federal government into showering them with taxpayer cash in the name of "infrastructure." It's your money, little taxpayer, not the government's. The schemers behind the 22-project "list" include merchant transmission companies and renewable energy generators. These are the companies who will make a whole bunch of money if they can only get merchant transmission off the ground. It includes Michael Skelly, famous for losing $200M of private investor cash on a failed merchant transmission scheme.
The schemers want the federal government to help them out. If that happens, merchant transmission is no longer merchant. It's dependent upon taxpayer money to succeed, and if it fails again it's only taxpayer money that is lost. Private investors won't be risking anything if the government backs up the scheme with loan guarantees, tax credits, and customer mandates. The schemers propose that the federal government power marketers be required to sign up as customers of merchant transmission and become resellers of the transmission capacity that the merchants are unable to sell to utilities. This does not require utilities to become customers, and they won't. It merely leaves the federal power marketer holding the bag on transmission capacity no one wants. They don't consider that the federal power marketers are essentially running a utility. They are a zero-sum game. Their customers pay all their costs to operate, but because they are a government entity, they aren't trying to make a profit. Their captive customers depend on the power marketer (such as TVA) to supply power. All the costs of the power marketer are paid for by their captive customers. If TVA gets left paying for transmission capacity that it cannot sell to investor-owned utilities, the cost falls to TVA customers, not the federal government. If the merchant is guaranteed to collect its costs from the TVA, then it can no longer negotiate prices in a free market that provides the necessary cap on profit. If TVA is required to purchase capacity from merchants, the merchant can charge whatever it wants. Where's the necessary regulation? It does not exist!
There are also problems with federal loan guarantees. When Michael Skelly spent $200M on his failed merchant projects, the only ones who lost money were the investors. If the federal government now guarantees a loan for a merchant project will be repaid, then the U.S. taxpayers are the investors who will be left with nothing but debt. The merchant has absolutely no risk and will still be whole after failure. This is NOT a merchant construct!
And let's talk about those tax credits... where does the money for those come from? Taxpayers. If a merchant transmission company pays less taxes, that means you have to pay more to maintain the same amount of government. What's more, the proposed tax credits are supposed to be convertible to cash. If a company eligible for the tax credit cannot use the credit to reduce its tax burden because it pays little to no tax, the government will PAY them the amount of the tax credit as a refund. Outrageous! The schemers say tax credits are necessary for merchant projects because:
One of the most urgently needed policy changes, several clean energy experts and transmission developers argue, is an investment tax credit specifically for transmission projects, which would allow developers to deduct a certain percentage of their costs from their federal taxes. A bill establishing a tax credit for transmission lines has already been introduced by Senator Martin Heinrich, a Democrat from New Mexico, and the concept also appears in Biden’s major infrastructure proposal, the American Jobs Plan.
Whereas utilities know they can recover the cost of new transmission lines from the ratepayers they already serve, private developers need to confirm that at least a portion of the energy they transport will be purchased, whether it’s by utilities themselves or large corporate energy users like data companies. Many developers, Gramlich said, are ready to begin building, but don’t have quite enough customers to comfortably pull the trigger on construction. A tax credit would help the “project economics pencil out,” he explained, boosting transmission projects over the hump toward completion.
So tax credits are to be used to reduce the cost of merchant transmission so they don't have to find as many customers in order to make their projects profitable? Again, providing a risk-free environment for a market based project obliterates its "merchant" construct.
Merchant transmission assumes all financial risk for its project. In exchange for little to no regulation on its profits, a merchant assumes all financial risk of its project's viability. Handing a merchant taxpayer cash shifts risk to taxpayers. If we're going to make taxpayers captive investors in merchant projects, then they are no longer merchants and must be regulated like "traditional" transmission. There must be a need for the project, it must be cost effective as determined by an independent grid operator, and its profits must be kept in check by regulators.
Instead, these greedy schemers are asking for you to become a captive investor in their project without earning any return at all for your risk.
The schemers might be able to pull the wool over the media's eyes, and also those of government bureaucrats that don't know the difference between merchant and traditional transmission, but they'll never succeed at pulling the wool over the eyes of experienced regulators. Maybe when merchant negotiated rate authority begins being vacated and denied, people will get wise. Until then, it's a merchant transmission feeding frenzy on taxpayer funds, even though these projects are no longer actually merchants.
Merchant transmission assumes all financial risk for its project. In exchange for little to no regulation on its profits, a merchant assumes all financial risk of its project's viability. Handing a merchant taxpayer cash shifts risk to taxpayers. If we're going to make taxpayers captive investors in merchant projects, then they are no longer merchants and must be regulated like "traditional" transmission. There must be a need for the project, it must be cost effective as determined by an independent grid operator, and its profits must be kept in check by regulators.
Instead, these greedy schemers are asking for you to become a captive investor in their project without earning any return at all for your risk.
The schemers might be able to pull the wool over the media's eyes, and also those of government bureaucrats that don't know the difference between merchant and traditional transmission, but they'll never succeed at pulling the wool over the eyes of experienced regulators. Maybe when merchant negotiated rate authority begins being vacated and denied, people will get wise. Until then, it's a merchant transmission feeding frenzy on taxpayer funds, even though these projects are no longer actually merchants.
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