Regional Grid Operator Warns of Greater Risk of Brownouts Next Summer

Executives at PJM Interconnect see potential problems if power line in Delaware Water Gap remains unfinished

The risks of brownouts next summer are growing, because of delays in building a high-voltage power line in northern New Jersey. Still, they remain a “very low probability,” executives of the regional power grid told state officials last week.

“As we go into 2012, the risks are increasing,” Michael Kormos, senior vice president of operations for PJM Interconnection LLC, said at a hearing on reliability and electricity pricing held by the New Jersey Board of Public Utilities (BPU) on Friday in Trenton. “We are losing the margin we have to react to unforeseen events. We believe we will be able to manage it.”

The Missing Link

The delay in approval of four-mile link in the so-called Susquehanna-Roseland power line is emerging as a factor both in concerns over reliability of the grid and in the rise of electric bills for consumers in New Jersey, a fact the Christie administration has sought to address by awarding $1.6 billion in subsidies to three developers to build three natural gas-fired plants in the state.

PJM has projected reliability concerns would increase in the summer of 2012 in northern New Jersey, an issue that led both the grid operator and state regulatory agency to approve a $750 million project, a 45-mile line running through the heart of the New Jersey Highlands. The project has been delayed because the U.S. National Park Service has not approved a four-mile link through the Delaware River Gap National Recreation Area.

In addition to reliability concerns, the holdup will add to already high energy bills for consumers. According to PJM estimates, congestion in northern New Jersey will increase over the next two years, adding more than $400 million to electric bills.

The Friday hearing, the first of three scheduled by the agency, broke little new ground on issues dividing state officials and regional and federal energy regulators. PJM officials, joined by various industry executives, told the state its efforts to subsidize power plant construction by ratepayers would end up boosting prices in the long-term and make it difficult to attract future generation, unless, it too was subsidized.

The Next Megawatt

“Who builds the next megawatt in New Jersey?” asked Glen Thomas, head of the P3 Power Providers Group, a coalition of energy suppliers, in an exchange with BPU President Lee Solomon. Thomas questioned a state-hired consultant’s projection that subsidizing the three power plants will deliver $1.8 billion in benefits to consumers, saying it overstates how steep energy prices will run over the next 20 years.

Solomon and other commissioners gave little ground, however, arguing a tariff designed to incent new power plant construction is failing miserably, costing consumers more than $1 billion a year. Solomon once again raised the prospect of New Jersey creating a state power authority and pulling out of PJM, an option he previously had characterized as a “last resort.”

“New Jersey, in our opinion, is getting a raw deal. RPM has to be modified in some way,” added Commissioner Jeanne Fox, referring to the tariff dubbed the Reliability Pricing Model.

John Schultz, vice president of energy operations for Hess, agreed, noting the primary purpose of the RPM is to ensure reliability. “Unfortunately that reliability is achieved in large part through RPM’s funding of older, dirtier, inefficient generating stations and less through the development of new, cleaner, more efficient resources,” he said.

Hess is one of the three developers awarded contracts by New Jersey to build power plants, a prospect that has dimmed with the passage of new rules by the Federal Energy Regulatory Commission (FERC) governing how power plants bid in auctions designed to ensure there is enough power to meet demand.

BPU officials also complained about another mechanism adapted by the regional grid operator to ensure reliability. Some older, inefficient plants operate under a Reliability Must Run contract, which directs special payments, again funded by ratepayers, to keep the plants from being retired, even though they run only a limited amount of hours each year. PSEG Power’s Hudson I plant will receive $59 million in such payments this year.

The PJM also came under fire for delays in its process allowing new power plants to connect to the regional grid, a problem its officials recognize and are trying to address. Ninety percent of new projects in PJM’s interconnection system drop out of the queue, a fact that causes the cost of transmission upgrades by new entrants to fluctuate wildly. For Hess in a three-year period, the interconnect costs began at $340 million, dropped to $110 million and rebounded to $180 million, Shultz said.

As for reliability, Kormos said the regional grid operator has put in place contingency plans to prevent brownouts. Some retirement of old plants has been put off, such as the case with Hudson, and there will be increased use of demand response, a policy whereby big energy users voluntarily agree to reduce consumption at times of peak demand.

That response didn’t satisfy some. New Jersey Division of Rate Counsel Stefanie Brand noted, in her written testimony, “We are paying congestion charges and substantial capacity charges, and yet we still don’t know if the system will keep the lights on in coming years.”