PSE&G Sits Out Auction To Build Power Plant

Analysts say decision not to bid in Seawaren reflects uncertainties in market

For the past few months, PSEG Power has been telling analysts it is considering building a new natural gas-fired plant in Seawaren, but apparently that decision is now on hold.

When PJM Interconnection last week held an annual auction to ensure there is enough capacity in the 13-state region to keep the lights on, the Newark-based subsidiary of Public Service Enterprise Group failed to bid the plant into the auction.

“We basically felt we couldn’t compete with subsidized power plants,” said Kathy Fitzgerald, vice president of communications for the energy company. “A major investment in a power plant became too risky in such an uncertain market.”

The market has been roiled by the results of the auction when two of three power plants won guaranteed ratepayers subsidies by the state of New Jersey in long-term contracts secured capacity payments over the next 15 years, according to people familiar with the results.

The decision by PSEG Power not to bid the proposed Seawaren plant into the auction reflects the uncertain nature of the competitive marketplace, according to industry officials, who have, by and large, vigorously opposed the state initiative to incent new power plants through ratepayer subsidies.

“It creates a very skewed marketplace,” said Glen Thomas, head of the P3 Providers Group, a coalition of energy suppliers. “This may be the day when it is the beginning of the end for a competitive marketplace in New Jersey.”

In results that surprised Wall Street analysts, the Hess Corp. and Competitive Power Ventures both cleared the annual auction, securing the right to payments to provide necessary capacity reserves when needed. A third developer, LS Power, also cleared the auction, an event that registered a record amount of new generation being developed within the PJM region, an area encompassing 13 states and the District of Columbia and serving 60 million people.

The results, however, were a victory for New Jersey officials, who have pressed for more aggressive efforts to develop new power generation in the state.

In a press release issued late in the afternoon, the Christie administration said it was happy to see that three natural gas-fired plants cleared the capacity auction. “This is fantastic news for ratepayers as it advances the Christie administration’s goals of increasing grid reliability, reducing energy costs, cleaning the environment and enhancing the economic competitiveness of New Jersey.”

Andy Ott, a senior vice president of PJM, told reporters yesterday in a morning conference call the surge of new generation is driven by the expected retirement of 14,000 megawatts of existing power plants, largely because of tougher environmental regulations.

In the call, Ott declined to comment on specific plants that cleared and failed to clear in the auction, even though some companies, such as FirstEnergy Corp., had announced in filings with the Securities and Exchange Commission on Friday that 400 megawatts of peaking plants — those that provide capacity at times of highest electricity demand — failed to clear the auction.

The secrecy reflects the opaque nature of the system designed to procure needed capacity to provide reliability, known as the Reliability Pricing Model auction. The process has come under intense criticism from state regulators in New Jersey and elsewhere for needlessly spiking consumers’ electric bills. In New Jersey, ratepayers absorb an extra $1 billion each year because of the system.

In New Jersey, companies clearing the auction remained for the most part, silent. LS Power and CPV have failed to return calls and e-mails seeking comment. A spokesperson for Hess confirmed, however, its Newark Energy Center, a proposed 625-megawatt plant, cleared the auction. One megawatt is enough to power between 800 and 1,000 homes.

All told, the three plants will provide more than 2,000 megawatts of new generating capacity, which Christie administration officials believe will drive down electricity prices in New Jersey.

Even though the plants cleared the auction, the two with state-sponsored subsidies still need to clear additional hurdles. The state’s pilot program to use ratepayer payments to make the projects viable is under challenge in the federal courts.

Thomas questioned what happens if the courts find the scheme is unconstitutional. “They are the hook for delivering the capacity but can they do it without subsidies?” he asked.