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The 'Peaking Plant' Trade-Off: Cleaner Air vs. Lower Prices

Taking older, inefficient power stations out of service could help reduce smog, while increasing electricity rates.

At a time when the state worries about having enough capacity to keep the lights on, New Jersey could see the retirement of a group of generating units that provide electricity at times when it is most sorely needed -- hot, summer days when peak demand is at its highest.

The units, known as peaking plants, are generally older, inefficient, and high-cost stations that rarely run but are needed during periods of high demand. Many, however, do not comply with tougher state pollution standards aimed at reducing nitrogen oxide, a main ingredient in the smog that blankets much of New Jersey during summer months.

The issue, simmering in meetings between power generators and the state Department of Environmental Protection for months, is also important to consumers because a drop in generating capacity will likely drive energy prices up, which counters a main theme of the recently adopted Energy Master Plan.

Owners of the plants are seeking a two-year extension of a May 2015 deadline to comply with the tougher pollution standard, a proposition that is under consideration but viewed as unlikely by some industry observers given the Obama administration’s decision to punt on a new federal rule tightening smog regulations.

“That’s still on the plate,’’ said Larry Ragonese, a spokesman for the New Jersey DEP, referring to the extension request on the state compliance standard. “We’re aware of their needs and we’re going to make a decision early in 2012.’’

Although the compliance deadline is not until 2015, the power generators want a decision quickly because they have to decide whether to bid the older units in a capacity auction this May. The auction determines what plants will run in the regional power grid, the PJM Interconnection, three years from now, providing the electricity the grid needs to keep the lights on. That auction has garnered significant interest from Wall Street and the energy industry because it coincides with when power plants given ratepayer subsidies from New Jersey are scheduled to bid in that event. If they bid in too high a price, they run the risk of not getting the subsidies, a prospect that could make their projects economically infeasible.

“If there is less supply, the expectation is the price will clear higher,’’ said Paul Patterson, an energy analyst at Glenrock Associates. “The big focus on Wall Street is how it will affect capacity prices. It’s yet one more calculation in the upcoming auction.’’

What remains unsaid publicly is whether the Christie administration welcomes the retirement of the peaking units because it will make more likely the projects it is sponsoring will clear in the auction because of higher capacity prices, a suggestion whispered by some observers who refuse to say so because they do not want to be identified.

But granting the peaking units an extension will likely lead to harsh criticism from environmentalists. New Jersey has never met the federal air quality standard for ground-level ozone, despite some of the toughest air pollution rules in the country.

It is unclear to PJM Interconnection just how many of the peaking units will be retired, will be replaced, will be retrofitted to meet the tougher pollution standards, or will be supplanted by voluntary reductions in energy use, according to Ray Dotter, a spokesman for the operator of the regional grid.

In any case, the regional grid operator expects any reliability issues to be more transmission-based rather than revolving around available generating capacity. “There are probably enough resources. The bigger question is can the transmission deliver it,’’ he said.

Based on DEP’s projections, approximately 4,630 megawatts of generation do not comply with the tougher pollution standard, the great bulk of which is owned by PSEG Power, a subsidiary of Newark-based Public Service Enterprise Group. They own 2,900 megawatts of the so-called high energy demand day units (HEDD).

The issue is one that continues to arise during earnings calls among the power generators.

“Clearly keeping these peakers in would have the—a maximum benefit for customers in terms of keeping capacity prices down,’’ said Ralph Izzo, chairman and chief executive officer of PSEG, in a November earnings call when asked about the issue from an analyst. “However, they are not the finest units in the point of view of ground-level ozone and NOx [nitrogen oxide] emissions, and there and lies the trade-off that the state is grappling with.’’

None of the major power generators, PSEG Power, Calpine or Genon, affected by the rule responded to calls for comment.

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