Payments Proposed at Power-Capacity Auction Impact NJ Ratepayers

Tom Johnson | October 4, 2012 | Energy & Environment
Cost to utility customers could total $3 billion over 15-year period

Perhaps it is a good thing that one of the three power plants awarded ratepayer subsidies failed to clear in an auction run by the regional operator of the power grid this past May.

In results released by the state Board of Public Utilities, NRG Energy proposed a capacity payment nearly double what was awarded in the last auction, a cost to utility customers that likely would amount to more than $800 million over the life of the 15-year contract if the Princeton company can clear upcoming auctions each May.

When combined with subsidies awarded to two other natural gas plant developers by the BPU, the total cost could exceed $3 billion over the 15 years of the contracts, all paid by ratepayers. Despite the high costs, state officials still say the subsidies will end up benefitting ratepayers in the long run, bringing down sky-high energy bills by increasing capacity in the region.

The release of the projected NRG capacity payments is likely to add fuel to what has become an increasingly bitter dispute among power suppliers and PJM Interconnection, the operator of the nation’s largest power grid, and states including New Jersey. The state aimed to reduce high electricity costs for consumers and businesses by encouraging new power plant development through ratepayer subsidies.

A factor in New Jersey’s high bills is the higher prices power suppliers receive for providing capacity, the extra reserve needed to keep the lights on. Those payments are in addition to what power plants receive for the actual electricity they produce.

To try to remedy that problem, the state guaranteed ratepayer subsidies to NRG, Hess Corp., and Competitive Power Ventures in a controversial initiative dubbed the Long-Term Capacity Agreement Pilot Program.

To qualify for the ratepayers’ subsidies, however, the new power plants had to clear the annual capacity auction run by PJM, a process achieved only by Hess and CPV.

NRG, which lost a court battle to keep its prices confidential, came in less than CPV, but higher than Hess in the guaranteed ratepayer subsidies.

In last May’s auction held by PJM, the capacity price was set at $167.46 per megawatt per day, a figure far exceeded by the payments guaranteed to both CPV and Hess. In the first year, CPV will receive $286.03 from ratepayers and Hess will get $220. CPV payments will escalate to $462.65 in the later years.

Unlike the other two developers, NRG’s payments start out steeply, drop for a number of years, and then, for the most part, steadily rise. In the first years ratepayers could be held liable, the company would receive a payment of $328.77; at the end of the contract, electricity customers would pay $259.22.

NRG representatives did not return repeated calls for comment.

Critics of the New Jersey program said NRG’s bid proposal highlights how consumers would be hurt by the subsidies.

‘We have always said LCAPP will lead to New Jersey’s consumers paying above market prices for electricity,’’ said Glen Thomas, president of the PJM Power Providers Group, a coalition of power suppliers. “At least in this particular case, in this particular year, it won’t. But consumers already are on the hook for $2 billion worth of projects that are not needed.’’

State officials had a different take.

New Jersey Division of Rate Counsel Director Stefanie Brand noted the price in last May’s capacity auction dropped from $225 per megawatt hour per day $167 in the previous auction, which she described as a significant reduction. A consultant retained by the board projected if only a $6 drop in capacity prices was attributed to the new capacity provided by ratepayers’ subsidies, they would break even, Brand said.

“You can’t say it’s not going to pay for itself,’’ Brand said. “It’s a drop in the bucket for what we’re paying for solar for much more megawatts.’’

Others disagreed. ”We continue to believe that competitive markets—without government subsidies—are the best way to assure customers lower energy prices over the long term,’’ said Michael Jennings, a spokesman for PSEG Power, one of the largest power suppliers in the region. “These contract details strengthen that belief.’’