In Search of New Generation, MD’s Struggles Mirror NJ’s

Tom Johnson | April 13, 2012 | Energy & Environment
Different state, familiar troubles -- including congestion on the power grid, not enough capacity, and steep prices for electricity

New Jersey is not the only state trying to promote the development of new power plants to bring down prices consumers and businesses pay for electricity.

The Maryland Public Service Commission yesterday determined there is a need for new generation in the state, ordering the three utilities there to negotiate a contract with CPV Maryland, LLC to build a 661-megawatt natural gas power plant in Waldorf in Charles County.

The order takes a different tack than New Jersey has followed in an effort to develop new generation, but the factors are the same — too much congestion on the power grid and not enough capacity, which lead to higher electricity prices for customers in both states.

The issue of building new generation has become increasingly divisive between states such as New Jersey and Maryland; the PJM Interconnection, the regional operator of the power grid; and the Federal Energy Regulatory Commission.

New Jersey’s efforts to create incentives for new power plants have been hampered by rules adopted by PJM. These make it difficult for the three power plants under contract to qualify for the ratepayer subsidies needed to help make the units profitable.

Three different companies have been awarded contracts to build new natural gas plants in the state, including an affiliate of CPV. The three plants are to be built in Newark by Hess, in Old Bridge by NRG Energy, and in Woodbridge by CPV.

The New Jersey effort has been bitterly contested by existing power suppliers who argue it will artificially depress power prices, as well as making it difficult to build new generation in the state without future subsidies.

It also is uncertain whether guaranteeing a stream of ratepayer subsidies to the developers will wind up driving up capacity prices, which have soared in recent years because of congestion on the power grid. An independent market monitor has projected they will drive down capacity prices by $2 billion.

That is far more than what customers would pay over the 15 years of the pilot program, according to advocates. It also explains why existing power suppliers, which stand to lose big bucks if capacity prices fall steeply, are challenging the program.

Whether either New Jersey’s or Maryland’s efforts to build new generation will be successful, however, is open to question.

“The PJM hasn’t outlawed new generation to be built,” noted Paul Patterson, an energy analyst at Glenrock Associates. “It just has to pass complicated screens.”

More will be known in early May when an annual capacity auction is held by PJM. If the New Jersey projects fail to clear — utility jargon for whether they will be paid for providing reserve power that may be needed — it could trigger additional action from the state.

Meanwhile, the New Jersey Board of Public Utilities moved to intervene in a case before FERC, hoping to overhaul the interconnection process for new power plants to hook up to the power grid. It has been heavily criticized by state officials and power developers for needlessly adding tens of millions of dollars in costs, and, in some cases, hundreds of millions of dollars to proposed generation units.

The interconnection costs reflect improvements that must be made to the power grid to maintain reliability after new generation units are added to the system.

“One of the major barriers to new entry [is] the existence of speculative projects that saturate the interconnection queue and prevent projects willing and able to start construction and commercialization from interconnection,’’ according to a filing by the state with FERC.

Even PJM concedes that 87 percent of the projects in the interconnection queue never get built, but the organization nevertheless still assumes all of the projects will be completed. “This practice artificially increases the cost of the interconnection for viable projects and unnecessarily delays the interconnection process,’’ according to the state brief.

While PJM has proposed changes to the interconnection process, the BPU argues the reforms do not go far enough.

“These are fine reforms,’’ said Michael Borgatti, who is with the agency. “The staff believes they nibble around the edges of the problem.’’

BPU President Bob Hanna agreed. He said it was important for both PJM and FERC to amend their policies so that shovel-ready power plant projects could get underway, especially in the wake of the expected retirement of many coal plants because of tougher air pollution requirements.