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When T. Boone Pickens, the Texan oil tycoon, announced plans to build the largest wind farm in the country, he faced one big problem. There were no transmission lines connecting his site to the rest of the electricity grid. Pickens’ solution: He would build them himself.

This highlights the main issue facing the growth of centralized wind power. You can’t have power without the power lines.

According to Ed Legge, a spokesman for the Edison Electric Institute, an association of public electric companies, it’s the old question of whether the chicken or the egg comes first. “Do you build the bridge first or the source?” he said.

Wind is alluring because it’s the cheapest green energy to produce, and it is far less expensive thansolarpower, for example. The United States this year has overtaken Germany as the world’s No. 1 wind-power producer, according to the American Wind Energy Association, and the sector has the potential to grow far larger. The U.S. Department of Energy forecasts wind power could reach 20 percent of the nation’s power supply by 2030, up from about 1 percent today.

But wind developers – some not as well capitalized as Pickens – are wary of building wind farms where there are no transmission lines, even if that’s also where the most wind blows. They fear their investment will dry up with no lines to deliver the power. And make no mistake: Transmission lines are expensive.

The DOE estimates that reaching 20 percent wind power will cost $60 billion in new wind-power transmission by 2030. But that cost spells an attractive opportunity for deep-pocketed entrepreneurs like Pickens.

The need for new grid infrastructure is by no means a new discussion. For the last twenty years, the nationwide power grid has suffered from chronic underinvestment. A DOE study notes that the annual investment in transmission lines had fallen from $5.5 billion in the early 1970s to below $3 billion in the 1990s. In fact, in 1998, utilities spent less than half of what they did in 1975.

Over this same time period, the country’s generating capacity has steadily increased, adding to the distressed grid’s troubles.

Deregulation is partially to blame. In deregulated markets, utilities are required to share their transmission lines to promote competition. But in this system, they have little financial incentive to maintain and build more lines. Profits increase the longer the equipment is in use, discouraging updates and repairs. In particular, public utilities, who must answer to shareholders, have a difficult time justifying building new lines. After all, the utility is no longer the sole beneficiary of the investment.

These issues have created a grid system that is outdated and – in some cases – falling apart. Power outages have become commonplace, and they’re expensive. The largest blackout in North American history, in August 2003, affected some 50 million people in Canada and the United States and resulted in damages of about $6 billion.

Wanted: Total Grid Overhaul

It will take a building boom in new lines to add a significant amount of wind to the grid.

For one thing, with wind power, there’s the issue of distance. Developers like Pickens – who chose remote West Texas as his wind site – are looking at locations increasingly off the grid to harness the strongest wind.

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One of the windiest areas in the country, for example, is in the Dakotas. But getting electricity from the Dakotas to customers in major cities will take hundreds, even thousands, of miles of new or updated transmission lines.

The Midwestern Transmission System Operator estimates that transmission lines stretching from the Dakotas to New York City would cost $13 billion, but claims the cheaper wind power would save consumers $600 million per year in their electricity bills.

Long distance lines are only part of the overhaul.

Wind power also is more intermittent than coal- or natural-gas-fired power plants, and that makes delivery more of a challenge.

Rich Lordan, a director at the Electric Power Research Institute, notes that – because of wind’s fickleness – a high percentage of wind on the grid will need a better transmission system than the current one.

“The wind energy will need to be backed up by a number of sources to ensure it stays smooth,” he said. “It will need a very robust transmission system, more robust than the one today.”

After all, today’s grid is vulnerable to increases in the demand for electricity and to variations in the energy loaded onto it, he said. That’s because consumption drives the system, dictating when the grid must dole out electricity.

Lordan said the grid is likely shifting to a system where some consumers agree not to use electricity during times of peak demand, when the price becomes too high. Utilities would take them offline when the price reaches those levels, in effect managing demand spikes and avoiding outages.

Demand-response companies, such as EnerNOC (NSDQ: ENOC) and Comverge (NSDQ: COMV), are already moving down that route. They have a number of programs in place to sell utilities “negawatts,” or negative megawatts, by reducing customers’ power use on demand.

“It’s a smart grid,” says Lordan. “If the price gets too high, you can decide not to run the dishwasher.”

The smart grid will be able to detect where there are lulls in wind in advance and redirect the power from other sources.

Europe has taken efficiency a step further by building direct-current lines. Most of our power today is transported by alternating current, which is the type of electricity that runs household appliances. But some have argued that direct current, which loses less power when traveling longer distances, makes more sense for wind power than alternating current. Direct current lines can be placed under the ocean, opening up more possibilities for offshore wind farms.

Decades of Regulatory Delays

Despite the opportunity, nothing about building lines is easy. In fact, both proponents and skeptics of the idea of 20 percent wind point out that the lack of transmission represents the single-largest barrier.

Aside from the expense, transmission lines face a rigorous approval process. Because customers usually end up footing the bill in the form of electricity rate hikes, companies must convince public utility commissions that their project is in the public interest. Applicants must also obtain right-of-way permits to gain access to public land. With opposition from local communities who don’t want power lines in their backyards, these approvals can sometimes take years to get.

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Congress tried to ease this process by passing the Energy Policy Act of 2005, which gave the Federal Energy Regulatory Commission authority over the approval of transmission line locations. Approval previously fell under the state government’s jurisdiction, but now, if the state withholds approval for more than one year, applicants may appeal to the commission.

Still, approval times can be discouraging.

“Regulatory delays will be something that will affect anyone building transmission lines,” Legge said, adding that some power lines can take more than 10 years to build.

Could Texas Have the Answer?

Yet Texas, the state with the largest wind capacity, may have an answer.

The Texas Public Utility Commission earlier this month paved the way for $4.83 billion in new transmission lines when it approved a plan to carve out wind zones and designate transmission paths, then take applications from companies that want to build on those paths.

The idea is that predesignated paths will remove some of the uncertainty about how electricity will be transmitted, so that companies will be more likely to act.

“These designated zones will greatly encourage investors to build lines,” commission spokesman Terry Hadley said.

The plan, which aims to connect wind- and sun-rich West Texas with more populated areas to the North and East, already seems to be bearing fruit.

On Thursday, just a week after the vote, Austin, Texas-based Sharyland Utilities announced a proposal to build transmission facilities in the Texas Panhandle and South Plains. It filed the statement of interest with the commission in partnership with five other companies, according to the announcement.

Another longtime supporter of renewable energy, Sen. Harry Reid, D-Nev., recently introduced a new bill to designate zones where renewable resources can generate over 1 gigawatt of electricity. The bill calls for the federal government to then step in and provide financing for transmission line construction.

These early models could be just the beginning of the government’s efforts to jumpstart investment in transmission lines.

Pickens, who made his fortune as a maverick oil driller and has now become one of the most visible advocates of wind power, is also benefiting from legislation.

The reason he opted to build his own lines may stem from a right-of-way provision tied to a water pipeline he owns. Due to recent Texas legislation, a renewable-energy project may obtain a right of way if it coincides with water lines. (In this way, he is an exception. Not many developers can claim to own a fresh water supply.) The new power lines for the giant wind farm will likely run right over the water lines, saving time and money and avoiding a protracted approval process.

Still, Pickens’ willingness to invest some $2 billion in power lines for wind power sends a strong message.

Others are likely to follow in his footsteps.