Capacity Prices for PSE&G Spike in Annual PJM Auction

In three years, PSE&G will be paying be paying $100 more per megawatt-hour than state's three other electric utilities

Even as it was weaving its way through a highly contentious approval process, advocates of the Susquehanna-Roseland transmission line avowed that it would ease congestion on the grid, a step toward lowering consumer electric bills.

Well, it isn’t happening yet, at least not for customers of Public Service Electric & Gas — the utility building the 45-mile high-voltage line through 16 communities in New Jersey. (Environmentalists bitterly opposed the $750 million project, primarily because its cut through portions of three national parks in the northern region of the state.)

Meanwhile, part of the cost of providing enough electricity to keep the lights on will drop in three years for customers of the state’s three other public utilities.

In the annual auction conducted by the operator of the nation’s largest power grid, prices for so-called capacity — the extra reserve needed to meet customer demand — fell sharply for Atlantic City Electric, Jersey Central Power & Light, and Rockland Electric. Auction results were announced Friday by PJM Interconnection.

The three utilities will shell out $119.13 per megawatt-hour for capacity in 2016 and 2017.

PSE&G, the state’s largest utility with nearly 2 million customers, will pay significantly more: $219 per megawatt-hour. That’s up sharply from the $167.46 of last year’s auction.

Capacity payments for the entire PJM region — an area stretching from the Eastern Seaboard to Illinois and serving more than 50 million people — average out to just $59.37 per megawatt-hour.

PJM blamed continued transmission constraints and retirement of old power plants, many of which only run during times of high demand — typically, in the middle of a heat wave — for the spike in capacity prices in PSE&G’s territory, according to Ray Dotter, a spokesman for the organization.

In fact, according to the PJM report on this year’s capacity auction, more than half of the plants retired due to a variety of factors were in the Newark utility’s zone. They accounted for 1,408 megawatts of capacity. The report includes the gains achieved by having Susquehanna-Roseland transmission line operational, according to Dotter.

“It would have higher without it,’’ said Dotter, referring to the power line coming in service. “You are adding on one side and taking away from the other.’’

Still, the sting of the new increases remains for business interests, including Hal Bozarth, executive director of the Chemistry Industry Council, and a persistent critic of PSE&G.

“I supported the Susquehanna-Roseland line,’’ Bozarth said. “I am disappointed.’’

Michael Jennings, a spokesman for Public Service Enterprise Group, the parent company of PSE&G, defended the line. “The S-R line has provided benefits to the customers and has been modeled in RPM [the reliability pricing model] for each of the past two auctions,’’ he said. “There was no incremental effect from S-R in this auction, as it was there in last year’s auction.’’

Capacity payments are just one relatively small component of what customers pay on their electric bills, but the costs have risen in recent years, particularly in New Jersey. The state’s Energy Master Plan says customers in New Jersey pay more than $1 billion annually due to the payments.

Just how much the increased capacity costs will affect customers’ bills is unknown, primarily because the biggest portion of an electric bill stems from the cost of generating the electricity, which has been falling in recent years because of a decline in natural gas prices. Whether those prices will remain stable is uncertain.

Ralph Izzo, the chief executive officer of PSEG, said in a recent interview with NJ Spotlight, that he sees a multidecade-long era of low prices for the fuel.

The retirement of power plants in the regions is a result of several factors. Some coal plants are being deactivated because they cannot meet tougher federal environmental standards to reduce harmful emissions. Others are no longer running as frequently, because historically low natural gas prices make the coal units no longer economically competitive.

New Jersey also is forcing many older power plants to be mothballed, a factor analysts predicted would probably spike capacity prices when it was announced this past February by the New Jersey Department of Environmental Protection. The order affected up to nearly 5,000 megawatts of peaking plants, which faced the choice to either close down or make major upgrades to reduce air pollution.

At the time, DEP Commissioner Bob Martin downplayed the impact of closing the plants, which spew pollutants that contribute to smog, a persistent air quality problem in the state. “We don’t think it is going to push up the price, and, if so only minimally,’’ he told NJ Spotlight last year.

Paul Patterson, an energy analyst for Glenrock Associates in New York, predicted last year that retiring power plants could push up capacity prices. “The generators in PSE&G should consider themselves fortunate,’’ said Patterson, given their payments escalated as compared to the entire region.

The state Board of Public Utilities, which is trying to drive down energy prices by awarding ratepayer subsidies to new power plants fueled by natural gas, declined to comment on the auction results.

The effort to lower prices has led the agency award subsidies to help build the plants to two developers. State officials believe that additional capacity in the region could bring down electric bills in New Jersey, which are typically among the highest in the nation.

PJM officials attributed the sharp drop in capacity prices across its entire region — which went from $136 per megawatt-hour last year to $59.37 three years from now — to a record amount of new generation installed on the power grid, as well as an unprecedented amount of capacity imported from areas outside its territory.

“Prices were generally lower than last year’s auction due to competition from new, gas-fired generation, low growth in demand because of the slow economy, and increased imports from other regions, primarily to the west of PJM,’’ said Andrew Ott, senior vice president of markets for PJM.

“These factors also contributed to a reduction in commitment of demand resources,’’ he said. Demand resources are commitments by large industrial users to cut back their energy consumption in times of peak use.