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Trio of New Power Plants Cleared to Deliver Capacity

Tom Johnson | May 21, 2012

Controversial ratepayer-subsidized units should deliver 2,000 megawatts, still face legal challenges.

The Christie administration's effort to spur the development of new power plants in New Jersey apparently is working, perhaps beyond even its wildest expectations.

In an auction conducted by the regional operator of the nation's largest power grid, three separate natural gas-fired plants cleared, energy industry jargon meaning they will receive payments for providing capacity beginning in 2015, according to industry officials and others familiar with the results.

As a consequence, more than 2,000 megawatts of new generating capacity will be available in New Jersey, a step Christie administration officials believe will drive down electric bills for consumers and businesses. One megawatt is enough to power between 800 and 1,000 homes.

New Jersey officials, incumbent power generators, and Wall Street eagerly anticipated the auction because of a much-contested effort by the state to incent new power plant development through the use of ratepayer subsidies, a strategy the industry is challenging in court.

If the New Jersey plants had not cleared, it is unlikely some of them would be built -- even though two of the developers have won ratepayer-guaranteed subsidies to help make those projects economically viable under a controversial pilot program enacted by the Legislature and administration.

Competitive Power Venture's bid to build a 663-megawatt plant in Woodbridge and Hess Corp.'s proposed 625-megawatt plant in Newark both cleared the auction, although a third project developed by NRG Energy, which also won ratepayer subsidies' failed to clear, according to those familiar with the results.

In addition, LS Power, which is now building a 738-megawatt plant in West Deptford, also cleared, according to sources. LS Power had originally sought to garner the ratepayer subsidies, but dropped out of the bidding before the New Jersey Board of Public Utilities awarded the contracts last year.

Even though the NRG project failed to clear, the fact that LS Power secured capacity payments means that more than 2,000 new megawatts of generating capacity will be built, the target set by the governor's office and legislators when they passed the so-called Long Term Capacity Agreement Pilot program (LCAP).

New Jersey Division of Rate Counsel Stefanie Brand said she did not know where the new generating capacity is to be built, but the fact that 2,031 megawatts cleared is good news for consumers. "Certainly a lot more new units are being built," said Brand, who added it will bring relief to consumers, not just this year, but in future years as well.

The precise amount of ratepayer subsidies is still unknown at this juncture. It will depend on how much capacity prices rise or fall in the future and what price the developers bid for capacity payments in the auction. Those details are not yet available, but are expected to become public sometime this week.

The good news for ratepayers is they will only be subsidizing two power plants instead of three, but that begs the question of why the state is handing out guaranteed payments when LS Power managed to clear the auction without any subsidies. Clean energy advocates also question why the state is promoting the development of new fossil fuel plants when it has set aggressive targets for reducing greenhouse gas emissions.

In the past, administration officials defended the pilot program, saying whatever subsidies paid out by ratepayers will be more than offset by a drop in overall energy prices. A BPU-retained consultant said the new generating capacity could lower electricity prices by $1.8 billion over the 15 years of the contract.

Industry officials opposed the pilot, saying it would artificially depress power prices and disrupt a smoothly working market.

None of the winning bidders responded to requests for comments, nor did the BPU.

David Gaier, a spokesman for NRG Energy, said the company was disappointed it failed to clear, but added that it twill continue to develop the project on a sensible schedule.

It is unclear whether PSEG Power, which told analysts earlier this year it is considering building a new natural gas plant in Seawaren, sought to clear the plant in the auction. PSEG officials also had no comment on the auction.

Paul Patterson, an energy analyst at Glenrock Associates, described the results as a victory for the Christie administration. "It looks like New Jersey got its plants," said Patterson, who described the auction results as surprising, given the low price of capacity payments in the region and the fact that two of the three LCAP projects cleared.

The capacity price for the entire PJM region, which covers 13 states and the District of Columbia and serves 60 million people, rose to $136 per megawatt. PJM officials blamed the rise on the retirement of dozens of power plants, primarily coal-fired units, because of tougher environmental regulations.

"PJM is effectively, efficiently, and reliably handling a massive shift in generation from coal to natural gas," said Andy Ott, a senior vice president at PJM.

For the Mid-Atlantic region, including New Jersey, the capacity price was set at $167 per megawatt, higher than the overall market, but significantly lower than capacity payments in northern New Jersey the previous year, when the price was $225 per megawatt.

"It's fabulous," said Hal Bozarth, executive director of the Chemistry Industry Council of New Jersey, a strong proponent of the LCAP program. "It will keep my clients and members' electricity costs down," he said.

The precise impact on customers' bills is hard to gauge, in part, because capacity makes up a fairly small component of the overall retail bill, Ott said.

Overall, the auction secured a record 4,000 megawatts of new, mostly natural-gas-fired generation, according to PJM. In the region serving New Jersey, 2,313 megawatts of new generation cleared all but one plant in the state.

The auction, called the Reliability Pricing Model (RPM), is a source of much controversy in the region as officials in New Jersey and other states say it saddles customers with higher bills and discourages new power plants from being built. In New Jersey, customers pay $1 billion more for their electricity because of the RPM system.

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