State-Subsidized Power Plants Draw Fire From New Coalition

Tom Johnson | July 10, 2012 | Energy & Environment
Organization wants to make certain that no other subsidized plants will be delivering power to customers

In May, three state-subsidized power plants cleared an auction overseen by the independent operator of the regional grid, guaranteeing the units will be called on to deliver electricity to homes and businesses in coming years.

A coalition representing power generators, transmission owners, and others is urging PJM Interconnection to make sure that never happens again.

In a letter to PJM Interconnection, COMPETE is asking the operator of the nation’s largest power grid to take steps to prevent subsidized generation from clearing –energy industry jargon for being called on to produce power to keep the lights on.

The letter marks the latest twist in a prolonged dispute over how to reduce electric bills, a problem New Jersey officials insist is caused by incumbent power producers failing to build new generation since the state broke up its electric monopolies and deregulated the energy industry.

The controversy also has big implications for ratepayers, who, depending on which side is talking, will see electric bills fall because of the new generation subsidized by consumers or will be saddled with more than $2 billion in additional payments to the two New Jersey plants. The other subsidized plant is in Maryland.

In its letter, the coalition argued that the state-subsidized resources distort market signals that generators and others rely on to evaluate future investments,

“This will chill future unsubsidized investment –neroding business opportunities for our members and other consumers to participate in demand-response and energy-efficiency programs,’’ the letter said. Demand response is an initiative designed to have big users of energy reduce their consumption at times of peak demand, a step that lowers electricity prices for all users.

“We’re very concerned,’’ said William Massey, counsel to COMPETE. “What we’re looking for is rational changes in the process so that subsidized resources don’t have an unfair advantage.’’

The coalition argues that the state subsidies, which in New Jersey translate into increases in ratepayers’ bills each month over 15 years, create a un-level playing field, allowing the favored plants to obtain lower capital costs from lenders because of the assured revenue payments.

“If you have a guaranteed revenue and are bidding into the market, you are indifferent to what the market price is,’’ Massey said. “Resources should face the same risk/reward profile when they bid into the market.’’

Critics of the New Jersey pilot program to encourage construction of new power plants stepped up questions about the initiative when it was revealed the amount of subsidies one plant would receive.

In the case of Competitive Power Venture’s proposed plant in Woodbridge, the company would receive more than $40 million in subsidies from ratepayers for capacity payments, a cost consumes bear to ensure there is enough power to keep the lights on. The company is guaranteed $286.03 per megawatt hour for providing capacity, well above the record $248 per megawatt hour power suppliers were paid a couple of years ago.

That view is disputed by proponents of the pilot program, who argue, in the end, ratepayers will save a lot more than they spend, because the increased capacity will drive down both energy prices and capacity prices consumers pay.

In recent years, congestion on the power grid and the lack of new generating units being developed, has caused the price of providing capacity to soar, costing consumers more than $1 billion a year in New Jersey. The pilot program handing out ratepayers’ subsidies was enacted to drive down those costs by building new capacity in the state.

Ray Dotter, a spokesman for PJM, said the grid operator is always welcome to improve the auction, which is held each May.

While saying he was constrained regarding the specifics of which plants cleared the auction, Dotter noted that other factors may have contributed to they event. They included a lower cost of capital due to the economic downturn, lower interest rates, and lower natural gas costs, which have increased profits for new natural gas power plants.