Transmission Developer Holding Breath That Undersea Cable Will Meet Market Needs

Independent transmission owners are known for buying well-established networks from utilities, until now. For the first time, a third party grid operator is purchasing the rights to build such a system on spec – and one would traverse from Canada into the United States. 

Michigan-based ITC Holdings Corp. is in the throes of exploring the development of an undersea cable that would run 60 miles through Lake Erie, connecting the Canadian Province of Ontario to Erie, Pa. It would have 1,000 megawatt capacity that ITC says would alleviate congestion, reduce shipping cost for generators and increase reliability, all while using hydroelectric, nuclear and combined-cycle gas. 

If the potential shippers express an interest, that will cement the project’s economic viability – an undersea cable that does not have a ready-made customer base but one that would fall subject to the laws of supply and demand. Returns on those so-called merchant facilities are thus contingent on what markets bear. 

“I’ve spent a lot of my time evaluating projects and from a merchant’s perspective, the filter’s are fairly rigorous,” says Terry Harvill, vice president of ITC Grid Development, in an interview. “For any merchant facility to interest us, it would have to be competitive for a long time. The internal modeling shows us that this project is viable for a number of years.” 

ITC has purchased land-based transmission networks in 7 states. And because the company is familiar with both Ontario and the PJM Interconnection that schedules and delivers electricity in a 13-state area of the eastern United States, it says that it understands the risks and dynamics. To succeed, it must win market acceptance from potential shippers. The result of that will then help federal regulators decide if the deal is financially doable. 

For its part, the Federal Energy Regulatory Commission prefers project developers to have done all preparatory work before they would ask it for formal permission. That means, the developer must be able to show that the line would be financed through binding customer agreements. The company must also demonstrate that it has faithfully reached out to all stakeholders, which would include members of the environmental community who assuredly would have concerns. Likewise, the builder must also request approval from the U.S. Department of Energy and the Army Corps of Engineers as well as Canada’s National Energy Board.

ITC is expressing hope that if its open solicitation this spring bears fruit, then regulators would approve the deal by 2016 and that the line would be operational by 2018, which it acknowledges is an “aggressive time line.” It all got started when it purchased the rights to build the Lake Erie Connector from Lake Erie Power Corp. in June 2014. 

“There are generators on the northern side of the line that are interested in moving power from points in Canada into PJM,” says Vice President Harvill. “But it is a bidirectional line,” which means U.S. generators may want to send power to Canada. “Right now, it is fairly inefficient to move energy from Ontario to PJM.” 

Harvill explains that, at present, any such power exports to PJM must circle around to connect through New York or through “tie lines” in the Midwest. The power is thus inefficiently wheeled to its final destination. Because the regional transmission organizations, or RTOs, that police the grid charge utilities to move that power through their systems, there are costs to using those wires. Congestion also occurs, which can lead to brownouts, which hikes rates. 

“If I am a generator in Ontario and I want to move power to PJM, I do so through New York,” says Harvill. “I can create congestion, which raises the prices for those in New York. This project would alleviate that.” 

But does Ontario have surplus power that it could export? Did it not just shut down the last of its coal-fired power generators this year, so that every last megawatt-hour generated in the province must serve local population? Harvill says that the province has ample hydro electricity for export.  

Are the Canadian shippers willing to pay for the capacity on this line? Once ITC gets an indication of how much interest is out there, it will analyze the expected cost of construction and operation with what those northern electric generators will anticipate paying. If those customers are able to cover costs and enable the independent operator to make a reasonable profit, then the deal could proceed. 

“If we get indications from shippers that they are unwilling to pay a sufficient amount, then we would shut it down and move on,” says Harvill. “We know today the expected costs. And then you have to factor in congestion. Given that, shippers may be willing to pay a premium. Shippers will want the lowest prices. But if their offers are so low that we cannot service the line, then that would not serve their purposes either.” 

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