Large-scale transmission expansion: what’s the prognosis? (Pt. 1)

In this post, let’s explore renewables and large-scale transmission expansion. In Australia, significant large-scale, inter-state transmission expansion is underway to support renewables. But the question remains: is it cost-effective? In this first of two posts, I will focus on Australia. The second post will focus on the US.

I invited Professor Bruce Mountain, PhD, Director of the Victoria Energy Policy Centre at Victoria University in Melbourne, Australia, to help answer the question. First, I will explain the background on transmission expansion to support renewables, then bring Dr. Mountain into the conversation, and finally discuss transmission buildouts to support large-scale decarbonization.

The Electric Reliability Council of Texas (ERCOT) was perhaps the first jurisdiction to augment its grid at large-scale to allow for increased integration of multiple large-scale renewable generators across renewable zones. This “Competitive Renewable Energy Zone” (CREZ) transmission expansion, largely completed in 2014, cost around US$6.9 billion and intended to allow for the integration of approximately 11 GW of additional wind generation from West Texas for delivery to the main Texas demand centers of Dallas, Fort Worth, Austin, San Antonio, and Houston, with a typical distance from CREZ wind farm locations to the demand centers of very roughly 500 km.

Much of the CREZ transmission was built on new corridors. The landowners in West Texas were relatively sanguine about transmission construction. There were likely several reasons for this, including the level of compensation for accepting transmission easements and the understanding by the landowners that remuneration from additional wind farm leases could only occur if there was transmission to move wind power from West Texas.

We can do a simple (and simplistic) calculation to evaluate the cost-per-unit of incremental transmission capacity. In particular, dividing the incremental capacity into the cost yields a capital cost of around US$600/kW for delivering power across roughly 500 km. This is not the same as the cost of individual lines, which would be lower on average, but is instead an effective cost of what was required to uprate the transfer capacity. However, it should also be acknowledged that various issues have limited the transfer capacity increase to below the intended 11 GW, so the actual capital cost per unit capacity is, practically speaking, somewhat higher than US$600/kW.

Although CREZ was a big investment, it is likely one of the lowest cost per unit capacity transmission expansions in modern times anywhere in the world. (Click here for a fuller discussion of these costs and various transmission cost components.) Subsequent to the CREZ expansion, inflation in materials costs and increases in land costs point toward increases in new transmission construction costs both in real and nominal cost terms. That is, we should view US$600/kW as being below current and future costs of transmission.

In contrast to transmission, the real and nominal cost of building both wind and solar has decreased in the last decade. The US Energy Information Administration (EIA) provides historical data on renewable construction costs. EIA data reports that construction costs for large-scale solar fell from more than US$3,500/kW in 2013 to US$1,800/kW in 2019. Large-scale wind fell from around US$2,000/kW in 2013 to around US$1,400/kW in 2019. Although the construction costs of large-scale renewables have apparently risen in nominal terms during and post-COVID, the implications are clear: over the last decade, transmission costs are assuming a much larger fraction of the cost of renewable integration as transmission costs have increased somewhat while renewables costs have decreased markedly.

Recently, and partly inspired by the ERCOT CREZ, Australia has been developing transmission expansion to support renewable energy zones. One element of this expansion has involved a planned strengthening of the interconnections between the states of Victoria and New South Wales. This “VNI-West” Project is a double-circuit line spanning about 800 km, roughly 300km longer than the distance spanned by the ERCOT CREZ. It is justified in part on the basis of the benefits of diversity of renewable supply (see page 46 in the Transgrid Transmission Annual Planning Report 2023), although there are other stated benefits.

Professor Mountain has co-authored a report, “No Longer Lost in Transmission,” which proposes an alternative “Plan B” to VNI-West. He concluded that VNI-West should not be built because it is not cost-effective. I do not intend to cover the whole of Professor Mountain’s report, nor the reports that originally proposed and recommend VNI-West, nor evaluate the other benefits of VNI-West.

Instead, I will focus on how the relative change in costs of transmission and renewables has affected the cost-effectiveness. To do so, we need to consider the value of diversity of renewable supply, renewable cost trajectories, and transmission cost trajectories. I will argue that these issues are generically changing the relative costs and benefits of building a line such as VNI-West that spans large distances. (In the next post, I will argue that the impact on cost-effectiveness is also relevant to the US.)

First, what is the value of renewable diversity? In the context of ERCOT, wind across the whole of the West Texas region is highly correlated. To have significant diversity among wind production requires spanning different wind regimes, such as inland (West Texas) and coastal (Texas gulf coast) wind. For solar, spanning East-West distances on the order of 1000 km or more is necessary to diversify the effect of sundown on production. That is, diversifying wind production or diversifying solar production may require even longer distances of transmission than the 500 km of CREZ. Of course, locating wind and solar together can result in diversification, as in Texas where inland wind production is typically highest at night while solar peaks around solar noon. Statistical analysis of wind production in Victoria and New South Wales by Professor Mountain also suggests that there is limited value in diversity among inland wind production in these states.

Second, how do renewable and transmission cost trajectories interact with the issue of diversity? Professor Mountain’s report concluded that the trends of reduced renewable costs and increased transmission costs would together reduce the value of diversity of production that is provided by connecting the states of Victoria and New South Wales as compared to historical projections of the value of diversity. That is, the value of having transmission available to bring power from NSW to Victoria when it is cloudy and not windy in Victoria has decreased, because the cost of building solar and wind generation is now lower, while the cost of building transmission is now higher. The same applies for when it is cloudy and not windy in New South Wales. This reduces the benefits of building transmission between regions. It makes more sense according to Professor Mountain to build transmission and more renewables within each region.

Professor Mountain suggests that it will be more economical to build more solar and wind in both Victoria and New South Wales as compared to trying to take advantage of the (relatively low) diversity between Victoria and NSW by building VNI-West and transferring power between the states. His “Plan B,” in contrast to VNI-West, is aimed at strengthening connections within Victoria from renewable energy zones to load centers, which, he argues, involves much less transmission cost and has a much easier regulatory/social acceptance path, in part because of the use of existing transmission corridors. VNI-West, in contrast, mostly involves new transmission corridors and spans a state boundary.

I was intrigued by Professor Mountain’s recommendations and wanted to learn more.  He graciously agreed to an email interview.

Question: Does the argument about diversity also suggest that we should be building more solar on rooftops and over parking lots — sites that are inherently closer to demand?  While this might include residential solar, Australia already has a large amount of residential rooftop solar. So I am specifically including rooftops on big box retail and on other commercial and civic structures that have large expanses of flat rooftop. This is perhaps an extreme version of trading off transmission costs against diversity and access to the best solar resources.

Mountain: In short, in the Australian context, I think the unequivocal answer is yes. In Australia, the levelized cost of production from rooftop solar, particularly large scale rooftop solar, is not terribly much higher than large scale grid-connected ground-mounted solar. This is because Australia has a competitive and innovative rooftop solar industry, and one that is quite effectively regulated in respect of product standards, installation, and the administration of subsidies. Rooftop solar does not attract many of the additional costs that purpose-built ground mounted solar attracts. And now, large scale remote solar farms in most parts of Australia are struggling with grid access. It should be understood that transmission development in Australia is very much more expensive than we see in the US. I attribute this mainly to regulatory arrangements in Australia that tolerate extraordinarily profitable transmission monopolies.

So, in many ways the debate in Australia has not got stuck on somewhat academic arguments about the average cost of rooftop versus ground-mounted solar, which we see in some parts of the U.S., particularly in California. Solar adds great value to Australian customers, noting that Australia’s grid-supplied electricity is very expensive for retail customers, and so they are attracted to their own cheaper supplies. That is where the buck stops (or should I say starts?)

There are often concerns that rooftop solar will impose costs on local grids, but these concerns do not seem to persist under closer scrutiny in Australia. In many cases network providers will specify zero export limits and in some cases this might stifle rooftop solar uptake. But customers are responding with the installation of batteries and many are proceeding anyway, even if zero export is allowed.

Professor Mountain’s observations suggest that the relative cost of transmission in Australia is even higher as a fraction of renewable cost than implied by the ERCOT CREZ costs. The high retail prices in Australia have already resulted in a very large take-up of residential rooftop renewables. As mentioned before, the CREZ was uniquely low in cost per unit capacity even in the US context. Although I do not have detailed information about the capacity provided by VNI-West, it would not be surprising if the 800 km long VNI-West is several times more expensive in $/kW terms than the CREZ capacity, making it comparable in cost to, or even more expensive than, the capital cost of renewables.

However, the capital cost of a transmission line is not necessarily the biggest cost to society. Apart from West Texas, there is typically considerable opposition to building transmission in regions that do not already have existing transmission corridors. This suggests that there is actually a large, hidden social cost in building overhead transmission. That is, the opposition to new transmission construction is a flag that neighbors of proposed transmission are anticipating significant reduction in amenity and property values due to the construction of lines. There are several reasons for this including the effect on viewsheds of the lines themselves and the effect of required easements and access roads on rural land. I have often observed that this means that the capital costs we usually consider for transmission—easement and corridor acquisition and construction costs—neglect other externality costs that may indeed exceed the land and construction costs.

Undergrounding transmission is sometimes proposed as an alternative to mitigate the externality costs. However, unless the cost of excavating for the underground line can be shared with other infrastructure, the cost of undergrounding is itself significantly more than overhead transmission. Furthermore, undergrounding long lengths of conventional AC transmission presents technical challenges related to reactive power. In short, undergrounding does not generally solve the problem of high costs because it only swaps the avoidance of externality costs with increased construction costs.

So I asked Professor Mountain about these overhead transmission externality costs.

Question: Should we be considering those externalities and compensate landowners more fully for them? In other words, is transmission actually far more expensive than just the direct land and construction costs?  Would paying additional compensation to landowners help us to get needed transmission built by aligning their incentives with the social need for transmission (as might have occurred with West Texas farmers who wanted to lease to wind farms), or would it just shut down all new construction?

Mountain: I agree with you that the costs that electricity production and distribution imposes on others have been greatly under-estimated. This seems to now be well understood in respect of greenhouse gases, but local environmental impacts have been greatly under-estimated in Australia, particularly in electricity transmission. In Australia the great transmission expansions occurred in most states from the 1940s to the 1970s. It was a much poorer and less developed country then, and communities had a different understanding of their rights and less ability to exercise them. That has changed now, but it seems to me that many in Australia’s electricity industry have not appreciated this fully yet.

Would paying landholders improve the prospect of transmission development? Perhaps, certainly in wind development this has been important. For solar, there is limited ability to also use the land for agricultural purposes and so outright purchase is the dominant model there. Transmission seems to extract a particular anger from the community as it can have quite a severe effect on farming – on agricultural operations and also fire control. Huge towers are also unsightly and so they impact the community more generally, not just directly affected landholders.

In Australia, governments have announced higher compensation to landholders affected by transmission. It has got to the point where this cost is now meaningful as a proportion of projects’ total costs, but I doubt it will kill transmission projects from developers’ perspectives. As I said, Australia’s regulatory arrangements easily accommodate high costs. Will it nonetheless make projects acceptable to the affected communities? We will have to see. I am not convinced that in many cases it will make a great deal of difference.

Regarding transmission, if we do recognize the cost of externalities, then the transmission costs would be a greater proportion of the renewable integration pricetag. If that is so, the changes in relative costs of transmission and renewables will significantly affect the overall desirability of the VNI-West development. In Professor Mountain’s opinion, VNI-West is not warranted.

Next time: we will explore these ideas in the context of proposals for greatly increased transmission expansion in the US.