Bill Would Subsidize New Power Plants, Lock Ratepayers into Long-Term Contracts

Advocates argue proposed legislation would deliver much-needed incentives. Critics call it a sweetheart deal

Worried new power plants will not be built in New Jersey without some subsidy, a legislative committee yesterday approved a bill to promote new natural gas-fired plants by locking consumers into long-term contracts at prices probably above what ratepayers in other states are paying.

The legislation (S-2381) narrowly emerged from the Senate Environment and Energy Committee after a two-hour hearing where proponents and opponents disputed virtually every key aspect of the bill. Critics called it a sweetheart deal for one or two energy companies and a bad deal for everyone else.

But advocates argued the bill will create the necessary incentives to build desperately needed new generating capacity in New Jersey, a step that would lead to lower prices for all ratepayers and make the state more competitive in attracting and retaining businesses.

Disappointing Deregulation

Beyond those issues, the bill renewed focus on New Jersey’s decade-old experience with energy deregulation, which some say has failed to deliver on its promises of lower electric bills for residents and many businesses. It also spurred debate about how effective unfettered markets have proved to be in developing the supplies needed to keep the lights on for businesses and consumers.

In contrast to many projections, few new power plants have been built in New Jersey since the state broke up the electric monopolies more than a decade ago. Meanwhile, demand is climbing, increasing congestion on the regional power grid, particularly in northern New Jersey. In response, PJM Interconnection, the operator of the grid, adopted a new pricing system that boosted the amount plants were paid for providing additional capacity.

Power plant revenues stem from the sale of electricity the system generates, along with a separate capacity payment that helps ensure there will be enough power to ensure grid reliability. Increasing capacity payments would encourage suppliers to build new plants, PJM officials believed.

About the only thing proponents and advocates agreed on yesterday is that the pricing system hasn’t worked, at least not in encouraging the building of new capacity. On top of that, New Jersey consumers typically pay $1 billion to $1.9 billion a year more than their neighbors because of the pricing system.

“Every year, our ratepayers are paying for this,” said Sen. Bob Smith (D-Middlesex), the chairman of the committee. “The bottom line we need to get more generation built.”

Baseload Generation

The bill, sponsored by Smith, tries to lower costs by offering incentives to build so-called baseload generation plants, power stations that run virtually all the time. The incentive would lock utility customers into 15-year contracts, guaranteeing the builders a revenue stream for capacity payments. It also would make it easier to attract the financing they need to build new power plants.

If New Jersey were to build an additional 1,500 megawatts of new capacity, it would increase competition among power suppliers and save consumers up to $400 million annually, according to John Seker, a vice president of Competitive Power Ventures, an energy company based in Silver Spring, MD. His company wants to build a 700-megawatt power plant in northern New Jersey.

The other likely beneficiary of the bill would be LS Power Development LLC, an East Brunswick company that is seeking to build a 650-megawatt natural gas plant in West Deptford, the district represented by Senate President Stephen Sweeney (D-Gloucester). Tom Hoatson, director of regulatory affairs for LS Power, told the committee the bill would provide the necessary incentives to finance large-scale projects .

Opponents and Critics

That view was disputed by opponents, including other major power supplies, business interests and environmentalists. They noted the bill sets a floor price of $232 per megawatt-day for the capacity payments, which would lock consumers into $1.3 billion in payments over 15 years, payments that will have to be made even if the plant sits idle.

The generators will profit, no matter what happens with the capacity price set by the PJM, argued Glen Thomas, representing the PJM Power Providers Group, a trade association of energy suppliers. If the PJM price is $110 per megawatt day, as it was in 2008, then New Jersey customers will still be required to pay surcharges equaling $232.75, or $122.75 more for capacity than other customers in the region, Thomas said.

On the other hand, if the PJM capacity charge is higher than the guaranteed price set under the bill, for example $300 per megawatt day, then the generators still get to collect and keep the higher charge. In written testimony submitted to the committee, Thomas described the bill as “nothing more than a sweetheart deal to construct unneeded power plants which will wreak havoc on the energy markets and New Jersey families and businesses.”

To address those concerns, the committee amended the bill to require the developers to return a portion of the capacity payments to utility customers if they rise above $290 megawatt per day. The committee also reduced the amount of new capacity that could be built under the bill from 1,500 megawatts to 1,000 megawatts.

Those amendments failed to sway opponents.

“We were sold a bill of goods with energy deregulation” said Jeff Tittel of the New Jersey Sierra Club. “Now, you are going back and adding subsidies in an unregulated market. We see this as corporate welfare on the backs of consumers.”