Consumers Could Pay $400 Million to Keep Old Power Plant in Service

Reliability Must Run contracts keep aging, inefficient plants on the grid -- for a price

Over the next two years, New Jersey consumers could be on the hook for more than $400 million in additional costs to keep an old power plant in service to maintain reliability of the electricity grid.

The money would go to PSEG Power to maintain its Hudson I generating station under a provision that rewards suppliers for keeping older, inefficient plants in service. In 2012, the plant will receive $160 million, and may get $280 million in the following year, under so-called Reliability Must Run contracts approved by the operator of the regional power grid.

Surprisingly, the power supplier is not thrilled with the contract. “We’ve been trying to retire Hudson since I got here,” said Bill Levis, president and chief operating officer of PSEG Power, who joined the company in 2007. “Running those old, inefficient plants diverts capital away from other projects that could improve the bottom line,” he said.

Still with costs like these, it is no small wonder why the state is pushing so hard to develop new generating capacity and lobbying for changes in the way power suppliers are rewarded for providing the cushion needed to keep the lights on.

New Generating Capacity

In little more than week, the state will decide what developers will build three new power plants, a venture policymakers hope will drive down sky-high electric bills for consumers and businesses in New Jersey.

That decision, however, hinges on the state convincing the Federal Energy Regulatory Commission (FERC) that its pilot program to subsidize the power plants through ratepayer payments does not violate the complex rules governing the wholesale energy markets that supply electricity to more than 50 million people.

The pending case before the federal agency is likely to be the most crucial factor in whether the state’s efforts are successful. It is expected to be decided before April 13, long after the state is expected to select developers in the pilot program.

The issue pits New Jersey against several big power suppliers, as well as the independent operator of the regional power grid, PJM Interconnection, all of which oppose the state’s efforts to develop new generating capacity. They argue that the state’s efforts, if successful, will drive down capacity prices for power plants, a cost that is needed to maintain grid reliability.

To blunt the state’s efforts, PJM and the power suppliers, the PJM Power Providers Group (P3), are seeking to change the rules to make it more difficult for states like New Jersey to encourage new power plants to be built.

$1 Billion Annually

But proponents of the New Jersey effort say the power suppliers are trying to thwart the building of new capacity simply because it will drive down the capacity payments they are receiving under the current system, a process that costs consumers in the state at least $1 billion a year in added energy costs.

In a brief filed with the commission, the Board of Public Utilities (BPU) argues that the power suppliers are seeking to change the rules based on “pure economic concerns,” and estimates that capacity prices will fall by $2 billion if the new generation comes on line.

The state asked the commission dismiss the power suppliers’ request for changes in the rules, as well as PJM’s. The state argued that the past several years has shown the current model for encouraging new generation, known as the Reliability Pricing Model (RPM), is not working.

“Experience over the past several years has shown that changes are necessary to RPM,” according to the brief. “Reliability and capacity concerns continue to grow.”

To underscore that point, the state included letters from PJM backing a controversial transmission project through the heart of the New Jersey Highlands. The project, known as the Susquehanna-Roseland line, is needed to avoid violations of reliability standards, according to the PJM.

But the state also cited the cost associated with the Reliability Must Run contracts, such as the one involving Hudson I, in which ratepayers are asked to absorb “millions of dollars to keep old, inefficient plants running.”

“Within this context, the state had little choice except to be proactive to ensure the continued reliability of electric service for its citizens,” the brief said.