The High Cost and Headaches of Getting on the Power Grid

An arcane, uncertain approvals process is partly to blame for NJ's dearth of new power plants

The failure to build new power plants in New Jersey over the past decade is partly due to a complicated system developers must navigate to link into the regional power grid, industry experts said yesterday.

The process of obtaining approval from the PJM Interconnection, the operator of the nation’s largest regional power grid, is time-consuming, fraught with uncertainty, and adds significant costs to a project, according to developers and energy officials.

“It’s a great deterrent to the development of new generation,” said Dennis Sobieski, an executive at Hess, which has been in the PJM queue of generation projects since 2007 and has yet to win approval. “It’s impossible to finance.”

PJM, which many regard as the nation’s best-managed regional transmission organization, oversees a power grid serving more than 50 million people. In recent years, it has seen the number of power plant projects increase dramatically, but the process for winning approval to tie into the grid is so burdensome that at least 80 percent drop out of the process, according to industry officials.

PJM recognizes this and has set up various stakeholders groups to try and address the problem, according to Michael Kormos, senior vice presidents of operations at PJM. “It has caused what I think are unnecessary delays,” Kormos told the Assembly Telecommunications and Utilities Committee at a briefing on the issue in the Statehouse Annex.

Most of the problems occur when multiple developers seek to build capacity in areas where congestion on the grid is severe, a situation that leads to higher prices for consumers. Northern New Jersey is among the areas most congested, a fact that has led state officials to enact legislation trying to spur new power plants projects there.

Specifically, there are more difficulties in congested areas because more developers want to build there, taking advantage of higher prices. That causes gridlock at PJM, which reviews all applications and then reviews them again if one of the developers in the queue drops out.

In the course of reviewing interconnection requests, PJM groups applicants together in areas where upgrades to the transmission system need to be undertaken to maintain reliability in the grid and allocates the cost among the various parties. Sometimes that cost is significant, said Kormos, who noted in one case in northern New Jersey it amounted to $1 billion.

Adding to the problem is that the cost can vary over time as power plant projects drop out of the queue. In the Hess case, the cost of upgrades was initially set at $340 million, dropped to $120 million and then surged to $180 million as various developers dropped out, according to Sobieski.

“From the perspective of a company like Hess, it is impossible to go to a bank, expect good treatment and line up the financing,” he said.

The Hess project is one of three power suppliers that are part of a pilot program to build new generation capacity in New Jersey. It proposes to build a gas-fired power plant in Newark’s Ironbound section. The program aims to help suppliers line up financing for their projects by guaranteeing a stream of payments from ratepayers over 15 years.

Interconnection issues, however, are not limited to big projects like Hess. Solar installers, a recycling firm and others all said the system needs to be changed if new generation is going to be built here in New Jersey.

Beyond the interconnection issues, officials at the hearing said an even bigger issue facing states, PJM and the industry will be allocating the costs of upgrading the nation’s transmission system among utilities, power suppliers and electric customers. In the PJM alone, those costs are expected to run approximately $19 billion.

The Federal Energy Regulatory Commission (FERC) has directed PJM and the other operators of the regional power grids to try and reach a consensus on the issue, but if they don’t, then the federal agency will, according to FERC Commissioner John Norris. No matter what decision is make on cost allocation, Norris said, the cost of electricity is surely going to rise, not go down, in the future.