Wintertime Worries About Power-Grid Reliability Could Mean Consumers Pay More

Tom Johnson | October 30, 2014 | Energy & Environment
Polar vortex and other frigid conditions early this year spiked gas and electricity prices, strained infrastructure, led to calls to conserve power

polar vortex
Winter typically is not a time when utilities worry about delivering power to customers, although last January was a notable exception. Fixing that problem could lead to higher bills for consumers.

An unusually frigid cold snap spiked electricity and natural gas prices, strained the reliability of the nation’s largest power grid, and led to calls to businesses and residents to conserve how much electricity they use — a plea usually reserved for summer heat waves when power demand skyrockets.

PJM Interconnection, the operator of the grid, which includes New Jersey and all or parts of 12 other states, including the District of Columbia, is trying to rectify that situation. It has proposed new rules ensuring that there is enough capacity to keep the lights on, even in extreme weather such as the so-called polar vortex that sent temperatures dropping well below normal throughout much of the region at the turn of the year.

To consumers, the proposed changes to improve reliability could lead to higher costs, a point even power generators concede. The costs of maintaining the reliability of the power grid already is a big issue in New Jersey, with consumers paying about $1 billion a year to keep the lights on because of payments to power generators to provide the needed capacity, if warranted.

Those costs could rise due to the PJM’s proposal and other actions, according to an analysis by an independent monitor for the organization. Capacity prices could rise from $8.7 billion to $15.1 billion over a four-year period across the entire power grid, according to the analysis.

The issue is especially critical in New Jersey, a state with some of the highest energy costs in the nation. Since the state deregulated the energy sector, the Board of Public Utilities only regulates the cost of electricity and gas delivered over wires to homes and businesses. It is a small fraction compared to the cost of producing the power to make sure the lights go on and provide heat to customers.

The PJM proposal is viewed as another case in which power generators and others are lobbying for changes in rules in what is supposed to be a free market system, where competition will drive prices down to the benefit of consumers and businesses, according to some.

The proposal has raised concerns among many states that are part of the PJM, including New Jersey. They urged PJM to hold off adopting any proposal to allow more discussion among stakeholders, in comments submitted to the organization.

“Market rule changes that impose large pricing burdens on end-users and the potential of unintended results and risks upon all market participants should not be adopted if more focused and limited actions will resolve reliability and operational concerns,’’ the states said in comments submitted to the PJM yesterday.

In its proposal, the PJM suggested a number of steps to increase reliability, including incentives for new development of power plants and better coordination between gas and electricity delivery systems. The more controversial aspect is stiff performance penalties if suppliers do not provide the promised capacity when it is needed.

The PJM proposal won the approval of a trio of big energy companies, including New Jersey-based Public Service Enterprise Group, Calpine, and Exelon.

“The events of January 2014 provided an invaluable warning that the PJM’S capacity market design in not adequately incentivizing appropriate actions to maintain winter preparedness,’’ the companies said in comments submitted to the
grid operator.

They noted that during the hours of peak stress on January 7, 2014, 40,000 megawatts of generation was offline for various reasons, including 25 percent of the outages due to interruptions in gas supply to generation facilities, a growing portion of which are providing power to the grid. The result: higher prices for consumers.

The proposal also drew criticism from a coalition of consumer advocates, including the New Jersey Division of Rate Counsel. In comments submitted to the PJM, it described the plan as a too far-reaching overhaul of the capacity market that is far too costly.