Can State-Subsidized Power Generation Succeed in New Jersey?

Tension mounts as auction looms, with no clear indicators how new power plants will fare

Within the next couple of weeks, New Jersey should know how its efforts to subsidize new power plant construction in the state have fared.

By May 18, the state will know if any of the three power plants awarded ratepayer subsidies to spur their construction have cleared — energy industry jargon for being granted significant payments to provide capacity to keep the lights on — in the most recent auction held by the operator of the regional power grid.

The auction is being closely monitored by incumbent power generators, Wall Street analysts, and others to see how the state’s pilot program to provide lucrative incentives to power suppliers to spur new construction in New Jersey will play out.

“All eyes are focused on it,’’ said Paul Patterson, an energy industry analyst who has closely followed the bitterly contested effort by New Jersey to promote new power generation.

The auction is being closely watched, in part, because the Federal Energy Regulatory Commission has changed the rules under which state-sponsored projects like these, can bid into the auction.

Previously, state-sponsored contracts could bid in zero for capacity prices, an option that would guarantee they clear and get to provide generating capacity. In response to the New Jersey initiative, however, the federal agency amended its rules to remove that option, making it more unlikely that state projects would clear in the auction.

Unless the state-sponsored projects clear in the auction, they will not be able to cash in on the ratepayer subsidies. That question is one of the big uncertainties about the auction, as well as what new power plants might seek to provide capacity.

It also will be a key test whether the Christie administration’s efforts to build new power plants will help squash high power prices, which it claims is one of the impediments to spurring economic growth in New Jersey.

Besides the three power plants awarded ratepayer subsidies, which some say could cost more than a billion dollars over the length of the contract, there are other new power plants that could bid in the auction.

They include a project in West Deptford in Gloucester County, which had sought the state subsidy before deciding to go ahead with the plant without any incentives from New Jersey and build a proposed new natural gas-fired plant on an existing site owned by PSEG Power in Seawaren.

Meanwhile, yesterday the state Board of Public Utilities said two of the three companies planning to build power plants under the state’s incentive program will have to try and bid into the capacity auction this month under the terms of the original contracts they signed last year.

NRG Energy and Competitive Power Ventures had sought to change contracts, which they had agreed to build new plants in Old Bridge and Woodbridge, respectively, under the pilot program. Both companies argued changes in the FERC rules hinder their efforts to clear in the May auction.

BPU commissioners disputed that argument.

“The deal was the deal as far as I am concerned,’’ said BPU President Bob Hanna, who added the agency could revisit the contract after the results of the auction are made public on May 18.

Commissioner Jeanne Fox backed up that argument. “FERC has put us in this position,’’ she said. “It makes no sense to allow these petitioners to get what they want.’’

The issue, however, could be decided in court. Several incumbent power generators have filed a lawsuit in federal courts challenging the New Jersey pilot program, which continues to move forward.