All Good with the Grid? Conventional Power Suppliers Have Good Reason to Think So

The mechanism that ensures new capacity handsomely rewards operators of coal and gas-fired power plants

If you listen to the operator of the regional power grid and existing power suppliers, the mechanism they have put in place to guarantee new generation capacity is built to ensure reliability and is working just fine.

Since its inception in 2007, the mechanism, dubbed the Reliability Pricing Model (RPM), has made available 42,173 megawatts of new capacity in the region, according to PJM Interconnection, the operator of the nation’s biggest power grid.

But RPM rewards existing power suppliers, most especially those with coal and natural gas-fired power plants — handsomely, according to a study by Synapse Energy Economics Inc. Between 2007 and 2014, natural gas or coal plants have earned or will earn $13.7 billion or $12.3 billion in capacity payments, respectively.

That revenue dwarfs what solar and wind projects earned — $61 million, or less than 1 percent of the total money generated by capacity payments.

Power suppliers who deliver electricity to the grid are paid for both the energy they deliver and the reserve capacity they can muster to keep the lights on. Those latter costs, however, have risen dramatically in recent years. Prior to the introduction of RPM, those costs accounted for less than 1 percent of the wholesale cost of electricity, said the study, which was done for the American Public Power Supply Association.

According to the 2010 PJM Market Monitor, an independent agency that monitors the competitive electricity markets, capacity costs accounted for about 5.6 percent of total wholesale electricity price on an annual basis in 2007. In 2010, they made up 18.7 percent of the wholesale electricity price.

Despite those increases, power suppliers argue that the system is working. In recent testimony to the New Jersey Board of Public Utilities (BPU), Dan Dolan, vice president of the Electric Power Supply Association, noted that total wholesale power costs in PJM were lower in 2010 than they were in 2005.

But critics of the system argue those costs were driven down by the steep decline in natural gas prices, a drop driven by projections of vast untapped supplies made available by new techniques to drill for the fuel in shale deposits.

The same critics argue that the present system preserves the status quo, allowing older and inefficient plants to remain profitable while deterring newer and less polluting plants from being built. Much of the new generation, the Synapse study said, has actually come from increases in the capacity of existing generation or old generation being brought out of retirement.

That was a point underscored by Division of Rate Counsel Stefanie Brand in recent hearings before the BPU, noting that consumers are on the hook for $59 million in Reliability Must Run payments to keep an old, inefficient plant in Hudson County running for reliability purposes.

“While capacity payments were devised, ultimately, to benefit ratepayers, in practice they have turned out to be a bad deal for electricity consumers, the limited benefits of capacity markets have come at extraordinary costs,” the Synapse study stated.

“The result is a double penalty: more pollution from existing plants and higher prices for consumers,” the study said.

The steep increase in capacity prices is a prime reason why New Jersey officials are striving to build new power plants in the state, which has been particularly hit hard by the RPM system. It is estimated that consumers here pay more than $1 billion a year because of the system, while state officials have failed to incent suppliers to build new generation.

Trying to reduce those costs, the state has decided to award long-term contracts to three developers, using ratepayer subsidies in an effort to drive down energy bills for consumers. The effort has been undermined by new rules adopted by a federal agency at the urging of PJM and power suppliers.

The study concludes the pricing mechanism has failed to achieve its objective. “The complete picture shows that the real winners from the capacity market have been the incumbent generators and the losers are consumers,” it said.