A Look Ahead: Capacity Contracts under the U.S. Department of Energy’s Transmission Facilitation Program

Among the panoply of clean energy-related programs currently being implemented under the 2021 Infrastructure Investment and Jobs Act (“IIJA”), one in particular – for which a solicitation is set to issue soon – will infuse significant capital into the country’s bulk transmission system. In May 2022, the U.S. Department of Energy (“DOE”) issued a Notice of Intent (“NOI”) regarding the new Transmission Facilitation Program (“TFP”), authorized under the IIJA, which will facilitate the development of transmission projects through financial and other support. In particular, the law allows DOE to borrow up to $2.5 billion at any one time from the U.S. Treasury to support selected projects through contracts to purchase capacity, loans, and public-private partnerships. DOE has made clear that it will move swiftly toward the selection of projects from which to purchase capacity, and will continue to consider the loan and public-private partnership program options.

When will the first TFP capacity contract solicitation be issued?

DOE aims to issue its first solicitation for capacity contracts in September 2022, with subsequent solicitations proposed to occur annually. The solicitation announcement will provide an application deadline and an expected timeline for project selection.

Which projects will be eligible?

Applicants and projects must meet the following threshold requirements to be eligible:

  • Scope: Projects must (a) build a new line or replace an existing line; (b) increase the capacity of an existing line; or (c) connect an isolated microgrid in Alaska, Hawaii, or a U.S. territory to an infrastructure corridor.
  • Capacity: Projects must have at least 1,000 megawatt (MW) of capacity, or at least 500 MW of capacity where the project will either (a) upgrade an existing line or (b) occupy an existing corridor.
  • Maturity: DOE will require that projects be positioned to achieve commercial operation by December 31, 2027.
  • Location: Projects will not be deemed ineligible based on location, but DOE’s solicitation announcement may identify preferred paths or regions within which projects will better promote TFP goals.
  • Need: DOE must certify that a selected project would be unlikely to be constructed as quickly, or with as much capacity, absent TFP support. DOE has proposed that applicants make this showing by providing (1) information about how TFP support would help mitigate project roadblocks and (2) evidence that the project has a “realistic chance” of going into commercial operation if selected.
  • Revenue and DOE cost recovery: DOE must certify that it is reasonable to expect that proceeds from a selected project will be sufficient for DOE to recover its costs. Applicants will be able to demonstrate compliance by providing (1) evidence that the project is not duplicative and (2) data regarding demand for the proposed transmission capacity.

How will projects be evaluated for selection?

DOE will use the following criteria to evaluate projects (though it has not yet indicated, and may not indicate in the solicitation, how much weight it will give each criterion):

  • System Benefits: How much a project enhances the capacity, efficiency, resiliency, and reliability of the transmission grid, including by using advanced technologies specified in the NOI.
  • Interregional Transfer Capacity: How much a project enhances interregional (i.e., spanning multiple states and/or transmission system operators) transfer capacity to foster “strong and equitable” economic growth.
  • GHG Reduction: How much a project contributes to national or subnational greenhouse gas emissions reduction goals.
  • Environmental Justice: How much a project contributes to equity, environmental and energy justice principles and priorities, such as making strong community engagement efforts, using union labor, and creating benefits for disadvantaged communities.
  • Regional Needs: DOE will consult with each project’s transmission planning region to avoid conflicting with its needs determinations.

What will the capacity contracts awarded look like?

DOE will award capacity contracts under the 2022 TFP solicitation and subsequent solicitations with the following characteristics:

  • Tenor: Contract tenors may reach (but not exceed) 40 years—although DOE officials have made clear that they intend to recycle the capital obligated as quickly as possible, perhaps even through mechanisms to be taken out of a project contract prior to commercial operation.
  • Amount of Capacity: DOE may contract for the right to up to 50% of the proposed project capacity.
  • Consideration: DOE will pay the project owner fair market value for capacity (in installments), to better facilitate construction according to standard industry practices and the financial model of the developer.
  • Cost Recovery: DOE will recover costs either (a) directly from the entity receiving DOE funds via the capacity contract, according to a schedule set by DOE, or (b) by charging transmission customers for the use of transmission capacity owned by DOE.
  • Transfer of Capacity: DOE may sell its capacity rights to the project owner or to third parties at a price sufficient to recover remaining costs incurred by DOE.
  • Termination: DOE is required by the IIJA to terminate capacity contracts should it determine that sufficient capacity in the project has been secured by other entities to ensure the project’s long-term financial viability.
  • Marketing of Capacity: DOE can contract with third parties to market transmission capacity owned by DOE, but permissible arrangements with third-party marketers may vary by project stage.

What do we still not know?

Though DOE has now shared substantial details of its plans for capacity contract solicitations under the TFP, some questions remain. For instance, DOE has not yet explained (and may not explain): how it will weight each of its evaluative criteria in making project selections; whether DOE, if serving as an “anchor subscriber” for a project, will seek more favorable rates for its commitment to a project than other subscribers; how the contracts will be structured to preserve commercial feasibility and investability but also adhere to federal statutory and procurement rules and requirements; when the contracts are expected to be awarded and finalized; or what sort of provisions DOE might incorporate for being taken out of projects even before they achieve commercial operation.

Investors and developers should continue to monitor DOE proceedings related to the TFP in order to be well-positioned to submit proposals in response to the first solicitation, which is likely to be issued in two months’ time.

Leave a Reply

Your email address will not be published. Required fields are marked *