Increased Demand Is Fueling Interconnection Process Changes

Electrical system operators are seeing an increase in potential projects seeking to connect to the power grid. Ideally, this growth in application activity means that energy systems and networks will become more reliable while also generating electricity from a more diverse set of inputs. In the short term, however, the high number of applications has adversely impacted the ability of energy companies and grid operators to plan efficiently and effectively.

COMMENTARY

To address these challenges, several operators—including, for example, the Midcontinent Independent System Operator (MISO)—are reforming the interconnection application process. These changes will significantly impact companies in the early planning phases of a project and attempting to determine when to commence the interconnection application process.

Too Much of a Good Thing?

As interest in energy derived from renewable sources has increased, so too has the number of projects requesting connection to the grid. However, whether a project has all the elements in place or is merely a pie-in-the-sky idea, the interconnection application must be examined seriously, which takes time and resources on the part of grid operators.

Data provided by MISO offers a window into this situation. In 2022, MISO received 956 generator interconnection queue submissions for projects expected to deliver more than 170 GW. The majority of these applications involved solar, wind, and hybrid projects, with natural gas and storage projects accounting for the bulk of the remaining submissions. Looking ahead, MISO believes it will soon begin receiving even more applications, covering more than 200 GW of generation capability.

Further complicating the situation, MISO notes that the majority (between 70% and 80%) of projects in its interconnection application queue do not get built. This is partly a result of current tariffs that incentivize speculative projects to enter the queue and allow withdrawn requests to receive a return of most of the money invested due to penalty-free withdrawal provisions.

From MISO’s perspective, each submission must be fully and carefully studied. From the developer’s perspective, if the time required for MISO to approve interconnection is ever-increasing, it is best to submit applications early and often.

Implementing Changes to Streamline the System

In response to this challenge (the growing deluge of applications), on June 20, 2023, MISO announced that it plans to implement a number of changes in connection with its interconnection application process. The ultimate goal of these changes is, frankly, to weed out speculative projects. More specifically, and in MISO’s words, “queue reforms are needed to reduce the volume of future queue cycles to enable faster and more certain study results earlier. … Without reform to the rules governing entry and exit of the queue, the next cycle will continue this trend and will contribute to further delays in queue processing.”

After dozens of interviews with stakeholders from multiple sectors, MISO presented a package of queue reforms needed to improve the rules governing entry into and exit from the generator interconnection queue. These reform proposals include an increase in M2, M3, and M4 milestone payments; improved site control requirements for the point of interconnection; reduced availability of withdrawal, as well as changes to withdrawal provisions (including an escalating, automatic penalty); and automatic caps on queue size and the number of megawatts that any one developer can submit in future cycles.

MISO cited a number of expected benefits that would result from the implementation of these changes, including fewer requests in a queue cycle (leading to faster results), better alignment between the study assumptions in current requests and an actual future dispatch, a reduction in withdrawals, and the use of withdrawal penalties to lower the costs of projects that will be built. Further, since study results are often based on assumptions of the projects in the queue that may or may not go forward, having fewer variables adds reliability to the evaluation process.

The proposed changes are not without some risk. MISO has recognized that increasing the requirements to enter and exit the queue could impede future generation development. Likewise, if milestone payments and penalties for withdrawal are too high, this might negatively impact the ability of developers to get funding to pursue viable projects and/or result in the loss of investment dollars on projects they believed were viable.

So, what does all this mean for developers and investors today? For projects in the planning stages, MISO’s proposed changes push back the 2023 application deadline. At the same time, the new rules will impose additional hurdles in terms of technical requirements, site control, and costs (among other issues).

Projects will likely need to be further along prior to applying for interconnection, which may be challenging from a financing and planning perspective, but if a later submission date leads to shorter review and approval times by MISO once received, then a win-win is possible. In any case, it is MISO’s hope—and that of the developers and operators—that these reforms will ultimately streamline and make this very important process more predictable.

—Lauren Mastio is a partner in Jones Walker’s Litigation Practice Group and a member of the board of directors. Stephen Miller is a partner in Jones Walker’s Corporate Practice Group, focused on the development and financing of energy infrastructure projects.