LS Power to Build New Plant — Without Help from Ratepayer Subsidies

Ironically, West Deptford facility has better chance of being built than subsidized rivals

Gas powerplant
It turns out a subsidy from ratepayers is not needed to get a new power plant built in New Jersey–at least according to a company that had once pressed for such incentives.

LS Power Group yesterday announced it has lined up the financing to build a 738-megawatt natural gas-fired power plant in West Deptford, a project that some viewed as not economically feasible after it failed to secure a controversial subsidy from ratepayers to help develop the facility.

The decision to go ahead with the plant is another strange twist in what has been a tortuous journey by the Christie administration to encourage new generation to be developed in the state, a step it believes will reduce some of the highest electricity costs in the nation.

To achieve that goal, the state approved — over vigorous opposition from incumbent power generators — a pilot program to use ratepayer subsidies over a period of 15 years to cover part of the cost of building three new power plants. LS Power was among the dozen or so companies bidding to win the lucrative subsidies, but was not chosen among the winning recipients.

Since then, the state’s proposed financing arrangement has suffered setbacks both in federal court and before the Federal Energy Regulatory Commission (FERC), which make it unlikely any of the three subsidized projects will move forward, according to some Wall Street analysts.

It had been widely speculated in recent weeks that LS Power was moving ahead with the project, although company officials had declined to comment on the rumors. The fact that it is moving ahead without any support from the state or other branches of government is a bit of embarrassment to the Christie administration, which has faced widespread criticism over awarding subsidies to plants proposed to be built in Newark, Old Bridge, and Woodbridge.

“It shows that this was nothing but corporate welfare,” said Jeff Tittel, director of the New Jersey Sierra Club, a persistent critic of the pilot program. He and other environmentalists argued that any state subsidies that exist should be directed to cleaner energy sources, such as solar, or energy efficiency projects.

Paul Fremont, an energy analyst with Jefferies & Co., another outspoken critic of the New Jersey effort, argued the plan to subsidize power plant development would end up costing state ratepayers over the long run. “It basically, in my opinion, was misguided and stupid,” he said.

But Board of Public Utilities (BPU) President Lee Solomon, who shepherded the pilot program through the agency, defended the state’s aggressive efforts to attract new plants. According to Solomon, New Jersey’s persistence in pressing both FERC and PJM Interconnection, the operator of the regional power grid, sent the message that the state was serious about building new generation. “The developers realize the environment is favorable here,” he said, saying he expects others to follow LS Power’s suit.

Fremont noted that LS Power has some advantages over the plants that were selected to receive ratepayers’ subsidies, including lower costs to connect with the regional power grid. Indeed, that issue came up yesterday in a BPU meeting where the agency voted to intervene in a proceeding before FERC, involving interconnections with a project by Hess, one of the three winning bids in the pilot program. Hess is seeking to revise a complicated formula for assessing interconnection costs to make its project less expensive, a move being supported by the New Jersey board.

LS Power also has the advantage of being able to tie into two nearby gas lines, an option that could lower the cost of fuel being used to run the power plant. LS Power also has most major permits, including air permits, which are needed for the plant, according to Tom Hoatson, director of project development for LS Power. He notes the project only needs a few local building permits.

Hoatson said a number of factors contributed to the decision to go ahead with the project without any subsidies, including the continuing drop in natural gas prices that make electricity generation more competitive, as well as the scrapping of some nearby transmission projects. The original bill pushing for new natural gas plant construction was specifically designed to select the West Deptford project before undergoing amendments in the legislature.

Construction of the plant will begin in early 2012, with commercial operations targeted for 2014, Hoatson said. “It is the culmination of years of development effort, good commercial execution, and strong support from key stakeholders,” he said.

Most incumbent suppliers opposed the pilot 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 that the pilot program could decrease capacity payments by $2 billion, hurting the bottom line of power suppliers, such as PSEG Power, Calpine, and Exelon.

Whether LS Power’s decision to move forward with the project affects the other three projects remains to be seen. Meanwhile, New Jersey is continuing to press its fight to move the projects forward, filing an appeal in federal district court of a recent final decision by FERC governing how power plants bid into auctions to see which plants run.