Industry Spotlight: PJM Interconnection

Congestion on the regional power grid, which PJM Interconnection owns and operates, costs New Jersey consumers more than $1 billion a year

How hot was it last summer? Warm enough to spike real-time energy prices by nearly 24 percent, although that was not the only factor in the big increase.

Another factor: congestion on the regional power grid, which is operated and maintained by the PJM Interconnection. According to state officials, congestion costs New Jersey consumers more than $1 billion a year.

The independent Market Monitoring Unit (MMU) puts those figures in perspective. It reports that congestion pricing on the power grid, which serves 54 million people, increased by $709.1 million, practically doubling from $719 million in 2009, to $1.43 billion last year.

That helps explain why the state is looking to incent energy providers to add much-needed capacity by building new power plants.

A Modest Drop in Price

Fortunately for New Jersey consumers, they didn’t have to absorb those increases because the state previously had locked into three-year contracts, which led to a modest drop of 1 percent for most customers of the four electric utilities.

But the spike in real-time prices reflects the volatility of the energy markets. It also is a sign of economic recovery from the deep recession that sent electricity prices plummeting in 2008 and 2009, according to analysts.

In its annual report for 2010, PJM Interconnection said the average real-time energy prices in the competitive market serving 13 states jumped to $48.34 per megawatt hour, a rise also attributed to heavy demand, increased fuel costs and congestion on the power grid.

PJM blamed the jump in real-time prices, which reflect the current cost of electricity generation as the day proceeds, on the unusually warm weather, which led to larger than normal demand for electricity, and increases in fuel costs, said Paula DuPont Kidd, a spokeswoman for the agency.

“Electricity prices rose, reflecting the high load and the increase in economic activity, stemming from the start of economic recovery from the recession,” wrote Terry Boston, president and chief executive officer of PJM.

In 2010, the grid operator said there were an unprecedented number of so-called high-load days (70), when system demand exceeded 100,000 megawatts, and consumers set a record for summer energy use. One megawatt is enough to power about 800 homes.

David Brown, vice president of NUS Consulting Group in Park Ridge, an energy management consultant, said prices did rise throughout the PJM last year, but noted they jumped after prices virtually collapsed in 2008 and 2009 because of the financial crisis and economic downturn.

“You’ve got to put it in perspective. It’s still down from when prices were high before the collapse in 2008,” Brown said.

In a state of the market report for PJM, the MMU said high loads and fuel costs contributed to upward pressure in 2010. Congestion on the grid also contributed to the increase, the report said.

Unhappy with those rising costs, the Christie administration and legislature developed regulations aimed at encouraging the development of new power plants in New Jersey. The pilot program will guarantee a stream of payments from ratepayers to three developers to build power plants in Old Bridge, Newark and Woodbridge. Close to 2,000 new megawatts of capacity could be developed under the pilot if it survives challenges from the PJM and a group of power suppliers.

In the last year, the PJM system added 1,507 megawatts of new generating capacity, including 1,032 megawatts of wind energy.

PJM: By the numbers

Founded: 1927 by three utilities

Members: 670, up from 390 five years ago

Based: Valley Forge, Pa.

Generating capacity: 167,362 megawatts

Peak demand: 144,644 megawatts (August 2006)

Peak demand last summer: 136,684 megawatts

Miles of transmission lines: 56,750

And it’s getting bigger: With the addition of FirstEnergy Corp.’s Ohio and Pennsylvania operations, it will grow to 178,00 megawatts of capacity and 64,000 miles of transmission lines

Substations: 6,038

Annual billings: $34.8 billion, a 31 percent increase over the prior year

High-load days: 70 (days in which the system needed more than 100,000 megawatts of generating capacity)

States served: Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia

Square miles: 168,500

Population: 54 million

Transmission projects approved last year: $3.9 billion