FERC’s Generator Interconnection Reform Order No. 2023

The Federal Energy Regulatory Commission (“FERC” or “Commission”) unanimously issued its highly anticipated Order No. 2023, which requires many reforms to pro forma interconnection agreements and procedures under Open Access Transmission Tariffs in an attempt to decrease the time in which it takes to move electric generation projects through interconnection queues and bring electric generating facilities online. The backlog associated with interconnection queues across the country is perceived as a root cause of stymieing the country’s transition to a less carbon-focused electric grid, and is believed to be jeopardizing the reliability of our nation’s electrical grids. Currently, the average time it takes a project to move through the interconnection process is approximately five years, which is an approximate 40% increase from only a few years ago.  Order No. 2023’s changes will impact developer’s at every stage of the interconnection process.

We expect large number of requests for rehearing will be submitted, and would not be surprised if FERC issues an order on rehearing altering and/or clarifying some of the findings discussed here.  Nonetheless, Order 2023 will lead to significant changes in interconnection processes in many regions.

Highlights of Order 2023:

• All Transmission Providers to use cluster studies;
• All Transmission Providers to post heat maps or similar information displaying the results of each cluster study to provide a clearer sense of the potential impact of new interconnection requests at specific interconnection points;
• Increased deposit costs for cluster studies (but fewer of them)
• Evidence of executed PPAs no longer required to demonstrate commercial readiness;
• 20% of Network Upgrade costs must be deposited in conjunction with LGIA execution, with clear penalties assessed against such deposits for projects which later withdraw;
• Use of withdrawal penalty proceeds for upgrade costs in the relevant cluster;
• Site Control definitions
• Financial Penalties on Transmission Providers for missed deadlines for studies
• New processes and pro forma agreements for Affected Systems
• Transition
  • Projects currently pending in the queue in an affected region will face hard decisions under Order 2023’s three transition options.
  • Keeping such a pending project alive in the transitional study process will require a significant new financial commitment and assuming the risk of a significant potential withdrawal penalty.

Order No. 2023 requires Independent System Operators and Regional Transmission Organizations (“ISOs/RTOs”) to submit revisions to their pro forma interconnection procedures 90 days after the rule is published in the Federal Register. FERC will still need to review and accept the ISOs/RTOs’ tariff revisions before they become effective.

A central theme of Order No. 2023 is to require all Transmission Providers to use the cluster study approach.  Cluster studies are currently used by several ISOs/RTOs and Transmission Providers, including the California Independent System Operator, the Midcontinent Independent System Operator, the New York Independent System Operator, PJM Interconnection, L.L.C., the Southwest Power Pool, NV Energy, PacifiCorp, and Public Service Company of Colorado. Cluster studies will now be required in all regions.

Another theme of Order No. 2023 is to provide interconnection customers with greater amounts of information about potential interconnection costs at a specific location or point of interconnection prior to customers submitting an interconnection request. The Commission found that its current pro forma procedures and agreements fail to adequately provide interconnection customers with cost information that is vital to their businesses and decision-making process about whether a project they proposed to interconnect is commercially viable. This lack of information has resulted in customers submitting (and subsequently withdrawing) multiple interconnection requests at various points of interconnection, knowing that not all projects will be constructed. These superfluous requests helped create the backlog ISOs/RTOs are struggling to manage. By providing interconnection customers with valuable information and implementing more stringent readiness and site control requirements, Order No. 2023 intends to reduce the time it takes to interconnect generators to the electric grid.

Background

On July 15, 2021, FERC issued an Advanced Notice of Proposed Rulemaking (“ANOPR”) requesting comments on proposed generator interconnection reforms and long-term transmission planning reforms. Deciding that a single rulemaking to accomplish both reforms was too aggressive, the Commission issued separate proposed rulemaking on April 21, 2022 (“Long-Term Transmission Planning Proposal) and on June 16, 2022 (“Generator Interconnection Reform Proposal”). Order No. 2023 finalizes and adopts many of the proposed reforms outlined in the Commission’s Generator Interconnection Reform Proposal. FERC has yet to finalize its Long-Term Transmission Planning Proposal; however, a final rule may be published by the end of the year. Both proposals aim to accelerate generator interconnections and re-prioritize the investment in transmission projects needed to incorporate the new generation projects into the grid.

Through the Inflation Reduction Act and other legislative initiatives, the United States continued investment in renewable generation projects, including wind, solar, and integrated battery storage systems, has resulted in a proliferation of such projects trying to interconnect to the electric grid. ISOs/RTOs have struggled to keep up with the increased number of interconnection requests. Project developers face years of interconnection studies, uncertainty surrounding interconnection costs, and severe time delays, which makes developing and financing new generator projects exceedingly difficult. Order No. 2023 aims to focus on interconnecting projects that have the greatest chance of achieving commercial operation in a more timely and cost-efficient manner.

Generator Interconnection Reform Proposals

Cluster Approach

Overview of Cluster Study Approach

To the extent they have not already done so, ISOs/RTOs will now be required to adopt a cluster interconnection study method when evaluating generator interconnection requests. Under this approach, individual interconnection requests are grouped into clusters based on the time in which the requests are submitted and will be studied in those clusters. Developers submitting interconnection requests will be subject to more stringent readiness requirements (including demonstrating a certain amount of site control to construct their project) and financial commitments as their requests proceed through the interconnection queue. FERC anticipates that the cluster approach will help to diminish queue backlog in part by reducing the number of re-studies required if a project drops out of the queue. Under the serial approach currently used in many regions, a higher-queued project that modifies or withdraws its request often triggers a domino-effect of re-studies that increase the time and costs associated with interconnection.

Cost Allocation of Interconnection Upgrades

To facilitate accelerating the interconnection process under a cluster-study approach, Order No. 2023 adopts the Generator Interconnection Reform Proposal’s to allocate network upgrade costs based on a proportional impact methodology:  generators in a cluster are assigned costs needed for a targeted system network upgrade, rather than project-specific network upgrades. ISOs/RTOs must update their procedures to establish a methodology for assigning costs towards these upgrades for each customer. Also, they will need to adopt certain terminology designed to avoid disputes between customers over who has the right to construct interconnection facilities.

The order does not, however, adopt the Generator Interconnection Reform Proposal’s to require later-positioned clusters to contribute to funding network upgrades in early clusters that they might benefit from. Instead, the Commission states that its revisions to its proportional impact funding mechanism, which creates an exception for the ISOs/RTOs to allocate costs for substation network upgrades that are only needed by specific generators (and not by all generators in the cluster) to those generators only, will ease such concerns. The Commission also explains that its existing crediting policy will alleviate later-in-time customers from benefitting from upgrades built by earlier-in-time customers. For system network upgrades, costs will be allocated based on each generating facility’s proportional impact on the upgrades identified in the respective cluster study. And the costs associated with any needed transmission provider’s interconnection facilities or interconnection customer’s interconnection facilities will be assigned directly to the customer(s) using those facilities. Order No. 2023 further contemplates situations where interconnection customers in a cluster agree to share interconnection facilities, and the costs associated with these facilities will be allocated on a per capita basis, based on the number of generating facilities that will use the shared interconnection facilities, unless the customers mutually agree to an alternative cost sharing mechanism.

More Stringent Financial Commitments, Withdrawal Penalties, and Readiness Requirements to Disincentivize Speculative Projects       

To decrease the number of speculative projects in the interconnection queues, the Commission will require more stringent financial commitments, withdrawal penalties, and readiness requirements.

Study Deposits. Order No. 2023 requires interconnection customers to provide increased study deposits in a tiered approach based on the proposed size (measured in MW) of the generating facility, as demonstrated in the following diagram:

These deposit amounts apply to large generating interconnection facilities, which are facilities that are larger than 20 MW. Unlike the Generator Interconnection Reform Proposal, the Commission will not require a phased study deposit approach that would have included multiple study deposits. Rather, the Commission states that it will require only a single initial study deposit to cut down on the administrative burden on the ISOs/RTOs to collect multiple deposits.

Demonstration of Site Control. The Order largely adopts more stringent site control demonstrations proposed in the Generator Interconnection Reform Proposal. Initially, at the time the interconnection request is submitted, the Interconnection Customer will be required to demonstrate exclusive rights to develop, construct, operate, and maintain the proposed project. The Commission did not, however, provide technology-specific land requirements. Additionally, at the time the Interconnection Customer executes the facilities study agreement and when executing or requesting the Large Generator Interconnection Agreement (“LGIA”) be filed unexecuted, it will be required to provide evidence of exclusive land rights necessary to develop their project.

The final rule adopts a definition of “reasonable evidence of site control” to mean providing documentation establishing: “(1) ownership of, a leasehold interest in, or a right to develop a site of sufficient size to construct and operate the Generating Facility; (2) an option to purchase or acquire a leasehold site of sufficient size to construct and operate the Generating Facility; or (3) any other documentation that clearly demonstrates the right of Interconnection Customer to exclusively occupy a site of sufficient size to construct and operate the Generating Facility.” Importantly, the Commission further clarified that the right to “exclusively” occupy the site means both that the right belongs only to the Interconnection Customer and that the right is “solely for purposes of a single interconnection request.” The Commission also clarified that Interconnection Customers are prohibited from submitting evidence of site control over the same parcels of land for multiple interconnection requests unless the parcel is large enough to support the construction and operation of multiple facilities. However, co-location of projects where more than one project will be located at the same site behind a single point of interconnection is allowed, but Interconnection Customers must be able to demonstrate site control and shared land use via an agreement between the parties.

According to the final rule, demonstrations of site control also include:

• Lease options, instead of executed leases, as long as the Interconnection Customer is the exclusive holder of the lease option(s); however, active negotiations of lease options are not sufficient;
• Lease agreements with the Bureau of Ocean Management (“BOEM”) for developing offshore wind projects;
• Lease agreements with Tribal-owners; and
• FERC licenses to develop generating facilities at non-powered dams; however, evidence of negotiating permits or licenses is not sufficient.

Interconnection Customers will be allowed to use a deposit instead of site control demonstrations in limited circumstances where regulatory limitations may prohibit customers from obtaining site control, e.g., when they are developing a project owned or controlled by a governmental entity. Interconnection Customers that face regulatory limitations that may prohibit them from obtaining the requisite site control may submit a deposit of $10,000/MW subject to a $500,000 floor and a cap of $2 million. The deposit will be returned once the customer can demonstrate 90% site control prior to the facility study agreement’s execution or 100% site control at or after the execution of the facilities study agreement.

Demonstration of Commercial Readiness. In a decision supported by merchant developers, the Commission will not require Interconnection Customers to provide power purchase agreements or executed term sheets as evidence of commercial readiness. Rather, the Commission adopted the Generator Interconnection Reform Proposal requiring Interconnection Customers to demonstrate commercial readiness via financial deposits that correlate to the size of the proposed project. The deposits must be made at the beginning of each phase of the cluster study process: the initial cluster study, the cluster restudy, and the facilities study. The initial commercial readiness deposit will be an amount that is two times the study deposit amount to enter the cluster study that is outlined above, while the second and third commercial readiness deposits will be based on percentages of the Interconnection Customer’s identified network upgrades. The Commission hopes that tying the second and third deposits to the size of identified network upgrades will encourage customers with large network upgrade cost estimates that makes their projects unviable, to withdraw earlier in the cluster study process to reduce any need for restudies.

LGIA Deposit. Order No. 2023 adopts the Generator Interconnection Reform Proposal to require a deposit at the time an interconnection customer executes its LGIA (or requests that the LGIA be filed unexecuted). The LGIA deposit is equal to 20% of the estimated network upgrade costs identified in the LGIA. This deposit will be subject to withdrawal penalties if the project is withdrawn after the LGIA is executed or is filed unexecuted.

Withdrawal Penalties. In an effort to further disincentivize speculative projects, Order No. 2023 subjects Interconnection Customers to withdrawal penalties that will impact any study deposit refunds they may be eligible for, in the event they withdraw their project prior to execution of the LGIA. Specifically, withdrawal penalties may apply to projects where “(1) the interconnection customer withdraws its interconnection request at any point in the interconnection process; (2) the interconnection customer’s interconnection request has been deemed withdrawn by the Transmission Provider at any point in the interconnection process; or (3) the interconnection customer’s generating facility does not reach commercial operation (such as when an interconnection customer’s LGIA is terminated prior to reaching commercial operation).”

The amount of the withdrawal penalties ranges from twice the amount of study costs up to 20% of the network upgrade costs, and the penalty amounts increase as the Interconnection Customer proceeds through the interconnection process.

Any collected withdrawal penalty funds will be used to fund studies conducted under the cluster study process in the same cluster as the withdrawn project. The remaining withdrawal penalty funds will be used to offset net increases to required network upgrades for other customers that remain in the cluster that are directly affected by the withdrawn project. If there are any penalty funds remaining after being applied to study costs or increased network upgrades for non-withdrawn projects, the penalty funds are to be refunded to the withdrawn Interconnection Customer.

Order No. 2023 states that Transmission Providers may only impose penalties where the withdrawal has a “material impact on the cost or timing of any interconnection requests with an equal or lower queue position.” Further, the final rule exempts customers from paying a withdrawal penalty if (1) the interconnection customer withdraws its interconnection request after receiving the most recent cluster study report and the network upgrade costs assigned to the interconnection customer’s request have increased by 25% compared to the previous cluster study report, or (2) the interconnection customer withdraws its interconnection request after receiving the individual facilities study report and the network upgrade costs assigned to the interconnection customer’s request have increased by more than 100% compared to costs identified in the cluster study report.”

Transition Period Process

For Interconnection Customers whose projects have pending interconnection requests being evaluated under a serial study process, Order No. 2023 identifies three options to transition to the new interconnection rules.   Note these transition processes do not apply to projects in regions where the Transmission Provider has already adopted or is currently transitioning to a cluster study process.  Transmission Providers will be required to offer existing interconnection customers the following options:

• Option 1 – Projects can proceed under a transitional serial study process that will result in a serial interconnection facilities study;
  • Customers must provide a deposit equal to 100% of the interconnection facility and network upgrade costs allocated to the interconnection customer in the system impact study.
• Option 2 – Projects can proceed under a transitional cluster study process that will be composed of a clustered system impact study and individual facilities study; or
  • Customers must provide a deposit equal to $5 million.
• Option 3 – Projects can be withdrawn from the queue without penalty (and perhaps reapply before the next cluster deadline).

Withdrawal of a project that has opted to enter a transitional study will be subject to a withdrawal penalty equal to nine times the customer’s study deposit.

The options to be offered each Interconnection Customer will depend in part on a project’s current interconnection phase.  Option 1 must be offered to all Interconnection Customers with a tendered facilities study agreement (whether executed or not) as of 30 days after the Transmission Provider’s Order No. 2023 initial compliance filing. Option 2 must be offered to Interconnection Customers with an assigned queue position as of 30 days after the Transmission Provider’s Order No. 2023 initial compliance filing. Either of these groups of Interconnection Customers can also avail themselves on Option 3 and withdraw their requests without penalty prior to the commencement of the transition period process.

As previously noted, Transmission Providers will have 90 days to submit revisions to their pro forma interconnection procedures after Order 2023 is published in the Federal Register.  Those submissions will incorporate the transition options.  Interconnection Customers will have 60 calendar days after the Commission-approved effective date of the Transmission Provider’s filing to choose a transition option and, depending on the option chosen, demonstrate site control and provide the required deposit.

Reforms to Increase the Speed of Interconnection Queue Processing

Order No. 2023 Eliminates the “Reasonable Efforts” Standard

The time in which Transmission Providers are expected to review interconnection requests and perform various interconnection studies is currently guided by a “reasonable efforts” standard, which many argue has contributed to the queue backlog developers are experiencing today. Order No. 2023 eliminates this standard and will require the pro-forma Large Generator Interconnection Procedures (“LGIP”) to include penalty provisions for delayed/late studies assessed against Transmission Providers:

The final rule does include certain exemptions for study delay penalties and places a cap on penalties of 100% of the initial study deposit received for all interconnection requests in the cluster for cluster studies and restudies, 100% of the initial study deposit received for the single interconnection request in the study for facilities studies, and 100% of the study deposits that the Transmission Provider acting as an affected system operator collects for conducing the affected system study. Transmission Providers will also have the ability to appeal these penalties to the Commission.

Incorporation of Storage Resources Operating Assumptions

Order No. 2023 directs Transmission Providers to incorporate an Interconnection Customer’s planned operating assumptions for the proposed charging of a battery energy storage resource, including standalone facilities, co-located facilities, or hybrid generating/storage facilities, which may be included as an operating condition in the resource’s interconnection agreement. The order does provide an exemption to this general rule where the Transmission Provider finds the customer’s proposed operating assumptions conflict with reliability standards or good utility practices.

Affected Systems Reforms

Recognizing that the affected system study process is contributing to the interconnection queue backlog, Order No. 2023 adopts certain reforms to improve the process of assessing a generator’s impact on neighboring systems, aka “affected systems.” These reforms include the adoption of new terms, notification processes, study and cost allocation procedures, and financial penalty assessments against the affected system provider for causing certain delays in studies or restudies.

The final rule also requires Transmission Providers to study affected system interconnection requests in clusters and adopt a pro forma Affected System Study Agreement and pro forma Affected System Facilities Construction Agreement.

Under the new rule, affected system transmission providers are instructed to perform affected system studies under the Energy Resource Interconnection Service (“ERIS”) standard instead of the higher Network Resource Interconnection Service (“NRIS”) standard, which transmission providers currently have the discretion to choose, regardless of what type of service the Interconnection Customer requests on its host system. NRIS provides a higher level of interconnection service than ERIS and is often associated with higher network upgrade costs and restudies. To support this decision, the Commission stated that studying under the ERIS modeling standard “should reduce the number and total cost of affected system network upgrades assigned to affected system interconnection customers, which will reduce instances of ‘sticker shock’ from affected system network upgrades.”

Compliance Timelines and Next Steps

Transmission Providers have 90 calendar days from the date Order No. 2023 is published in the Federal Register to revise their LGIP, LGIA, Small Generator Interconnection Procedures, and Small Generator Interconnection Agreements in their Tariffs. Once FERC approves the Transmission Providers’ Order No. 2023 compliance filings by issuing an order setting forth the Tariff effective date, the Transmission Provider will begin the transition study process. Once the transition study process is complete, Transmission Providers not currently utilizing a cluster study approach, will move on to the first cluster study process.

Whether or not Order No. 2023 succeeds in speeding up the time required to bring new generation facilities onto the grid remains to be seen.  Equally critical to reaching that goal will be parallel efforts to adopt and implement major transmission reforms across the country, such as those included in the Commission’s Long-Term Transmission Planning Proposal.

Under the current system, transmission planning and upgrades have often been spurred by and paid for pursuant to requests submitted by individual generation projects.  This contrasts with the approach taken under the Competitive Renewable Energy Zone (“CREZ”) program in the Electric Reliability Council of Texas (“ERCOT”), where major new transmission infrastructure was planned and constructed even before generator interconnection requests drove the planning.  It would not be easy to design and implement a more holistic transmission planning and generator interconnection process nationwide.  But such a process could lead to significant improvements in the timing and cost of needed improvements to our nation’s electric infrastructure.