State Gives Three Developers the Go-Ahead to Build New Power Plants

Competitive Power Ventures, Hess and NRG Energy get the nod, but challenges in Federal court raise questions as to whether the plants will ever be built

The state yesterday selected three developers to build new power plants in New Jersey, a move policymakers hope will end up saving customers $1.8 billion on their electric bills over the next 15 years or so.

The plants, to be built in Newark, Woodbridge and Old Bridge, will be backed by still unknown payments from ratepayers — subsidies designed to convince Wall Street to finance the projects and make them economically viable.

The unanimous approval by the New Jersey Board of Public Utilities (BPU) at a meeting in the Statehouse Annex capped a hectic 60-day period in which nine developers vied to win the lucrative subsidies and be selected to build up to 2,000 megawatts of new generating capacity. The pilot program, bitterly opposed by energy suppliers, was mandated under a bill that had been rushed through the legislature.

Whether any of the projects will actually be built remains a subject of widespread conjecture. The power industry is challenging the program in federal court. Further, the power suppliers, as well as PJM Interconnection, the operator of the regional power grid, have filed petitions with the Federal Energy Regulatory Commission (FERC) that analysts predict could make it virtually impossible to proceed with the projects.

Number Unknown

The precise amount of ratepayer subsidies is unknown at this juncture. It will depend on how much capacity prices rise or fall in the next couple of years and how much the developers bid for capacity payments in annual auctions each May. If capacity prices rise above a certain threshold, it is possible ratepayers will not make any payments.

Most suppliers oppose the program because it is designed to drive down energy prices by increasing generating capacity in the state. That will ease congestion on the power grid, a problem that greatly increases consumer energy bills. One study projected the pilot program could decrease capacity payments by $2 billion, hurting the bottom line of power suppliers, such as PSEG Power, Calpine and Exelon.
The three winning projects are the Newark Energy Center, where a 625- megawatt project will be built by Hess; the Old Bridge Energy Center, where a 660-megawatt plant will be built by Princeton-based NRG Energy; and the Woodbridge Energy Center, where a 663-megawatt plant will be built by Competitive Power Ventures Suppliers LLC.

All three projects will use natural gas to power their plants, an approach that will yield environmental benefits by displacing older, more polluting generating units and reducing pollutants that cause smog and global climate change, according to the board’s consultant, Levitan & Associates. The Newark and Woodbridge projects are also located on brownfields, contaminated industrial properties that have been vacant.

Controversial Choices

It was a project that was not selected that generated the most controversy during the nearly three-hour hearing on the program. LS Power LLC, a developer that helped initiate the pilot program, was not considered a viable candidate by either the board or its consultant.

The initial recommendation to drop LS Power was surprising because the developer had the backing of Sen. Stephen Sweeney (D-Gloucester), in whose district the project would be built. But the consultant declared the project ineligible because it made “substantive and material” changes to the standard contract the consultant had told the developers to use.

“It was impossible for use to evaluate it in a fair manner,” said Richard Levitan, president and principal of the Boston-based consulting group. “The changes proffered by LS Power were substantive in nature and would have shifted the burden to ratepayers requiring ironclad payments,” he told the board.

BPU President Lee Solomon said he would never assent to such a burden. “To suggest somehow, we should allow an obligation on the part of the ratepayer irrespective of any benefit to them would have been unconscionable,” he said.

But Tom Hoatson, director of regulatory affairs for LS Power, said the company structured its contract the way it did because otherwise it is not “financeable.” Hoatson argued his company’s bid was the lowest among the eligible bidders and would have saved ratepayers an additional $400 million.

Levitan disputed LS Power’s assertion, saying the only reason it might be lower is because the developer failed to factor risk into its bid, unlike the winning developers.

The commissioners backed the consultant. “The recommendations are reasonable,” said Commissioner Jeanne Fox. “Hopefully, they are workable.”

Solomon said no one tried to influence the consultant’s tentative recommendation unveiled earlier this month that the winning developers be someone other than Hess, NRG Energy and Competitive Power Ventures.

And even with the process involving the pilot program essentially completed by the agency, Solomon hinted he may proceed with a board proceeding exploring how to lure new power suppliers to New Jersey. “It is likely to happen,” he said.