Peak Demand Power, for a Price

Good news: The Garden State's power grid can stand up to peak demand. Bad news: Keeping the lights on will cost consumers $5 billion over the next five years

It is a question never far from the minds of the folks who oversee the region’s power grid: Is there enough juice in the system to keep the lights on for more than 50 million people at peak demand?

The answer–even in a market that has experienced remarkable volatility and change in the past decade–is reassuring. But the challenges are daunting given the growing demand for electricity and the fact existing power plants are being retired faster than new generating stations are coming on line.

More problematic, at least for New Jersey consumers, is the fact that the state is paying heavily by virtue of having the most congested portion of the regional power grid, a dubious distinction that will add $5 billion to their electric bills over the next five years.

Still, industry experts say in a region where many states have decided to break up electric monopolies and deregulate the industry, the resultant restructured power system is working and providing sufficient capacity to keep the electricity flowing.

Creating Sufficient Capacity

“There has been a major shift in how capacity has been provided,” noted Gene Meehan, senior vice president for NERA Economic Consulting, a consulting firm based in Boston. “The new paradigm is working well to produce sufficient capacity. There is less control over it, but there is also less risk [for ratepayers].”

The issue is important because New Jersey is a net importer of electricity, although in recent years demand has declined from 37 percent to 27 percent.

“We’ve had reasonable amount of generation built in the last 10 years , but also had a fair amount of generation retired,” said Steve Herling, vice president of PJM Interconnection, the independent operator of the power grid.

While industry officials say the new restructured energy system appears to be working, consumer advocates argue otherwise.

“If everything is so good, then why are we in the top 10 states nationwide in terms of electric prices?” asked Stefanie Brand, director of the New Jersey Division of Rate Counsel. “If they are defining not having the lights out, yes, we have reliability, but at what cost? We are paying too much.”

Reliability Pricing Model

The main culprit is a new pricing system enacted by PJM a few years ago designed to encourage suppliers to build new power plants and to keep older, less efficient plants in service to maintain the necessary reserves for power capacity. Called Reliability Pricing Model, it also boosts power prices on transmission lines that tend to be congested, as are the lines in northern New Jersey.

The New Jersey Board of Public Utilities challenged the new pricing system, but was unable to overturn it. That has been a source of frustration for commissioners ever since the system was put in place, as well as for commercial and industrial customers, who have been hard hit by the price increases.

Meehan conceded RPM drives prices high, but noted there has been 4,000 megawatts of new generation added in PJM. Brand, however, noted everything that has been put in place since 2007 when RPM was enacted was specifically dedicated to deliver power to New York, which fails to help lower New Jersey electricity prices.

Still, Brian Chin, director of equity research for electric utilities for Citi Investment Research, defended the new system. “Without RPM, northern New Jersey would be worse off today,” he said.

Others were not so certain. “From June 1 through May 2014, New Jersey customers are on the hook for $5 billion. That’s a very large number,” said Robert Weishaar of the PJM Industrial Customer Coalition. “Is it a cost-effective solution?”

Dave Brown, vice president of NUS Consulting, a utility consulting firm based in Park Ridge, said if you throw enough money at something, things tend to get done. “Certainly, there is not as much demand for power given where the economy is,” Brown said. “Talk to me when the economy is really buzzing. Let’s see how it works then.”

To Brand, the debate underscores the need to look at how the state procures electricity and to explore other options for lowering the price New Jersey consumers and businesses pay.