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Steep Ratepayer Subsidies for New Plants Could Spike Power Prices

Tom Johnson | May 30, 2012

Contracts reveal subsidies for two plants will far exceed prices for capacity payments.

At least for the short term, consumers are going to pay big subsides for new power plants in New Jersey.

Two of the three plants awarded ratepayer subsidies cleared an auction held by the operator of the nation’s biggest electric power grid, a result that makes it more likely the power plants will be built.

The ratepayer payments have been eagerly awaited by consumers and business groups as a way of seeing whether the state’s much contested effort to spur new power plant development in New Jersey will lower bills for customers, or as some suspect increase the cost of energy in a state with some of the highest energy costs in the nation.

Probably more the latter, than the former.

In contracts released late last night, the state announced that subsidies for two new plants will far exceed the prices for capacity payments awarded to power suppliers in an auction held earlier this month by PJM Interconnection, the regional operator of the power grid.

In a surprise to many observers, both Hess Corp.’s plant in Newark and Competitive Power Venture’s unit in Woodbridge cleared the auction run by PJM Interconnection, meaning they will be eligible for ratepayer subsidies, but just how much is still being kept under wrap by state regulators.

The plants are designed to produce capacity aimed at driving down high electricity prices in New Jersey by producing additional generation that will reduce congestion on the grid that spikes energy prices.

How well they will achieve that objective is a source of much conjecture.

Both plants, according to filings with the New Jersey Board of Public Utilities, projected that they will receive payments to provide capacity -- the extra reserve needed to keep the lights on at times of peak demand -- far in excess of the price set by PJM in a recent auction to lock in capacity prices for power.

In the most recent capacity auction held by PJM, the price was set at $167.46, a figure far exceeded by the payment guaranteed to both CPS and Hess, which will receive $286.03 from ratepayers in the first year and $220 from Hess. CPV payments will escalate to $462.65 in the later years

Both Hess and CPV failed to return calls from NJ Spotlight to talk about the subsidies. However, CPV, in an interview with the Star-Ledger of Newark published Sunday said the customers will pay $30 million in the first year, although payment will escalate over the next 15 years of the contract.

How much it will cost ratepayers or the over the long term is uncertain.

“Nobody knows with any sense of certainty where there is coming out,’’ said one energy analyst, who said it involved a number of factors, including energy prices, power generation, and other issues.

Paul Patterson, an energy analyst with Glenrock Associates, said the changes roiling the sector may have an impact. “It has definitely the possibility of hurting the profitability of the merchant generator sector,’’ he said.

The issue of promoting new fossil fuel power plants has been a source of controversy between the Christie administration and environmental groups.

“They can’t complain about wind and solar programs when they are giving huge subsidies for fossil fuels,’’ said Jeff Tittel, director of the New Jersey Sierra Club.

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