Cost allocation

The process of determining who pays for the costs of transmission upgrades and expansions is called “cost allocation.”

How to allocate costs between parties using the transmission is a critical decision made by grid operators and regulators after the most appropriate transmission solution is identified in a planning process. 

Order 1000: FERC requires regions to develop cost allocation methodology

Previously, the determination of transmission cost allocation was up to individual transmission providers. Many providers adopted participant funding principles, under which the costs of new facilities are borne by entities that agree to pay for them. 

In 2011, in a landmark rule on cost allocation (among other things), called Order 1000, the Federal Energy Regulatory Commission (FERC) expressed concern that this approach has prevented the development of necessary new transmission facilities, especially those integrating renewable generation that is distant from load centers.  For example, if the costs of transmission upgrades or expansions are only borne by a single generation plant, such as a wind farm, then the burden will likely be too much to bear and the transmission improvements will not get done and, in turn, the generation resource  might never get built. 

With Order 1000, FERC does not oblige all regions to adopt the same cost allocation methodology. Rather, each region must develop its own method according to a list of six mandatory principles about allocating costs.  In short, these principles state that a region should transparently allocate costs for transmission improvements according to the benefit bestowed on each of the regional parties. AWEA and the wind industry have long supported such a “beneficiary pays” approach to transmission cost allocation.

Order 1000 to help renewable energy developers

Under  this approach to cost allocation, as established by FERC, and originally set forth in a key court decision, entities pay costs that are “roughly commensurate” with the benefits they receive, and entities that do not benefit are not assigned any costs.

This approach to cost allocation should help bring more certainty to renewable energy developers since transmission costs must be shared more broadly. 

In addition, this approach is fair as it accurately accounts for the various and extensive benefits of expanding and upgrading the transmission grid: improved reliability, increased competition leading to lower prices, access to lower cost generation, reduced congestion, and achieving public policy requirements (such as meeting renewable portfolio standards), etc. Perhaps most importantly, this approach has a proven track record in getting transmission built and generation projects online. 

More on Order 1000

Additional information on Order 1000 can be found on ferc.gov.

Get involved: Join the AWEA Transmission Committee

AWEA regularly files comments in dockets at FERC and around the country regarding cost allocation issues.  To participate in the drafting process, get involved in AWEA’s Transmission Committee.