It’s Time to Improve Generator Replacement Procedures and Rules

More countries, businesses, municipalities, and people are prioritizing decarbonization in the energy sector, and legislation such as the Inflation Reduction Act has accelerated this energy transition. To that end, retiring an older, higher emitting facility and replacing it with modern lower or zero-emission generation is a highly efficient way to reduce greenhouse gas emissions.

But confusing, lengthy, sometimes duplicative procedures for existing generator retirement and new generator interconnection in the organized wholesale electricity markets present unnecessary barriers.

Some ISOs have specialized generator replacement procedures for this purpose, but most don’t. Further, some existing generator replacement procedures suffer from imperfections. As such, process inefficiencies, unnecessary hurdles, and lack of regulatory clarity remain, threatening to delay these important decarbonization efforts.

Stakeholders must push ISOs to adopt and refine generator replacement procedures—separate from their standard new service interconnection queues—to expedite the replacement of older generating facilities.

Hole in the Market

In the ISO markets, many interconnection queues are lengthy and interconnection procedures are byzantine. Generally, an owner of existing generation that wishes to redevelop its facility must undergo a defined “retirement” process, may have to relinquish the interconnection rights associated with the existing generator, and must separately submit an interconnection request for a proposed new generating facility. The proposal must then be studied and proceed through a standard multi-year interconnection queue, which, depending on the ISO, could take between two and four-plus years. These processes typically weren’t designed to coordinate with each other.

Generator replacements, in addition to being an efficient route to decarbonization, are distinguishable from new greenfield projects in several important ways. Generator owners in ISO markets are typically subject to ongoing credit and financial health requirements under the applicable ISO tariff, making it likely that such entities can complete the proposed project. Existing generator owners already have site control and often own significant assets at the site, such as interconnection facilities, land, and support buildings and equipment, all of which can potentially be reused for the proposed redevelopment.

For these reasons, the Federal Energy Regulatory Commission has determined that owners of existing generating facilities aren’t similarly situated to developers of new resources for the purpose of obtaining interconnection service. The commission has also recognized the value of “certainty regarding the procedure and timeline to retire a generating facility and bring a new generating facility online in its stead.” The path to approving tariff provisions that establish these procedures is clear.

Yet most ISOs don’t currently have dedicated generator replacement procedures. While some of the ISOs have frameworks that could offer a faster or more streamlined interconnection process than their standard new interconnection queue, the availability of these procedures isn’t always clear. A well-tailored generator replacement procedure can provide a level of certainty and clarity that more convoluted or onerous procedures don’t.

Work in Progress

MISO filed tariff revisions to establish a generator replacement procedure in 2019. Southwest Power Pool followed suit with a similar proposal in 2020. Existing generating facility owners in these regions can use these procedures for generator replacements if the proposed facility doesn’t materially harm the transmission system.

However, the original tariff provisions suffer from a fairly significant shortfall. They contain a restriction prohibiting sale or transfer of the generating facility or interconnection agreement beginning one year before the replacement request is submitted, up through the commercial operation date of the replacement generating facility.

These restrictions were included to limit the replacement procedures’ use to true generator replacements and to prevent potential abuse. But they prevent legitimate redevelopment projects and neglected to account for common renewable project deal structures that involve such transfers, though the ultimate beneficial owner of the project remains the same throughout the development. MISO corrected this issue with a tariff filing in 2021, but SPP’s similar restriction continues to limit its usefulness in many instances.

PJM has procedures for the transfer of capacity interconnection rights from a deactivating generator to a replacement generating facility. But PJM has stated that a change in fuel type will require the interconnection customer to proceed through its standard new services queue. As such, while there is value in preserving the system capability associated with the existing generator—e.g. minimizing potential network upgrade costs—there is no associated timing or procedural benefit. This is particularly disappointing in light of PJM’s ongoing multi-year pause on processing new interconnection requests.

The Iron Is Hot

Trends in resource economics, policy initiatives such as the Inflation Reduction Act and state renewable portfolio standards, and evolving consumer preferences are pushing the development of cleaner, more efficient generation. Having a separate generator replacement interconnection procedure eliminates regulatory inefficiencies and provides additional clarity that will facilitate the energy transition. FERC’s approvals of MISO’s and SPP’s generator replacement procedures demonstrate a clear path for other ISOs to implement similar frameworks.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Maxwell K. Multer is counsel with Bryan Cave Leighton Paisner, representing energy and financial clients in regulatory and enforcement matters before the Federal Energy Regulatory Commission, state utility commissions, and other authorities.