If you build it, prices will drop.
That is the message contained in a consultant’s report that suggests if New Jersey is successful in spurring the building of three new power plants, it could lower electricity prices for consumers and businesses by $1.8 billion over the next decade-and-a-half.
The agent’s final report, posted yesterday on its website at 5 p.m., said a pilot program it is overseeing to drive new generating capacity also offers significant environmental benefits to New Jerseyans by reducing a wide variety of pollutants, including those that contribute to global climate change, summertime smog and mercury deposition.
The pilot program, approved by the legislature earlier this year and signed into law by Gov. Chris Christie, is hugely controversial among the biggest players in the energy sector. This includes most of the large power suppliers in the region and the independent operator of the power grid, PJM Interconnection. The program is being managed by the state Board of Public Utilities (BPU).
Opponents argue that the pilot program will artificially depress electricity prices in the region, making it more difficult to build new generating capacity in the future, a prospect that would further increase steep energy bills for consumers and businesses. Both PJM and a coalition of power suppliers are challenging the program, the former before the Federal Energy Regulatory Commission (FERC) and the latter before FERC and federal court.
Covering Capacity Payments
The consultant, Levitan & Associates Inc., has tentatively recommended three developers build three new power plants with a combined capacity of 1,948 megawatts. The facilities will be backed by ratepayer subsidies to cover the cost of capacity payments, if necessary, a policy likely to ensure Wall Street backs the building of the plants.
Capacity payments, accounting for roughly 20 percent of an electricity bill, have become very expensive in New Jersey because of constraints on the power grid and a perceived lack of sufficient capacity to keep the lights on.
The power suppliers oppose the New Jersey effort because modeling projections show it could depress capacity prices, which have risen steeply in the past few years, a fact acknowledged by the consultant’s report.
“Wholesale energy prices in New Jersey are among the highest in the region,” the report said. It blamed the high prices on the state’s dependence on relatively inefficient gas turbines, which drive the price of energy in the region. Also, the state’s delivered gas rates are relatively higher than elsewhere, the consultant added.
The addition of new capacity to the mix on the grid can benefit New Jersey ratepayers over the long term, the consultant argued. But even BPU President Lee Solomon conceded at a recent board meeting it is unclear what benefits will accrue to ratepayers, although he made those comments before the release of the consultant’s report.
That view is disputed by power suppliers. Anne Hoskins, a senior vice president at Public Service Enterprise Group (PSEG), argued that the state was risking the same mistake it made more than three decades ago when it forced utilities to enter into long-term contracts with power suppliers under a federal law.
“Customers have been put through this before with disastrous results,” Hoskins warned. “In the 1970’s, government required New Jersey’s utilities to enter into long-term contracts with power generators and set prices and production targets for the energy industry. That resulted in billions of dollars in excess payments by consumers. Over the next six years, PSE&G customers alone will pay more than $1 billion for the remaining costs of these long-term contracts,” she said.
The state is expected to make a final decision on what developers will be given the approval to move forward with building the new power plants, two of which will be located on brownfields, which once were contaminated with pollutants. Those efforts, however, could be blunted by a decision by the FERC, which is expected to rule on the PJM and other applicants’ petition by April 13.