PSEG Eyes Connecticut City as Potential for Building New Power Plant

Part of lure of Nutmeg State is guaranteed capacity payments for seven years

Ralph Izzo, chairman, president and CEO of PSEG
Public Service Enterprise Group is considering building a new power plant in Bridgeport, CT, a move seen as a way to tap into the New England electricity market, where more generation is needed.

PSEG Power, a subsidiary of the Newark energy company, already owns a 400-megawatt plant capable of running on coal and oil at its Bridgeport Harbor facility, but one analysis by a think tank says the plant is no longer financially viable.

In a quarterly earnings call with analysts, PSEG executives said they may build a new 400-to 500-megawatt facility, costing up to $600 million, in Bridgeport, fired by natural gas and oil. The existing plant would remain open, according to a spokeswoman for the company.

The new plant, however, will only be built if it clears an energy auction in February that guarantees unit payments for the next seven years to provide the needed capacity in times of peak demand. In the past, that usually only applied during summer heat waves, but last winter also saw power generators struggling to keep the lights on during an unusually frigid January.

PSEG Power is by far the largest provider of electricity in New Jersey, with a fleet of 16 fossil power plants, a few of which are in Pennsylvania and New York, as well as three nuclear generating stations in the Garden State and part ownership of another nuclear unit in Pennsylvania.

What makes the proposed Connecticut plan attractive, is that it will guarantee capacity payments for seven years if the unit clears an auction in February, meaning it has been selected to provide power when needed in times of peak demand for that period.

That is far more attractive to power generators than what is offered in New Jersey, where capacity payments to plants are only guaranteed for one year, according to Ralph Izzo, chairman, president and chief executive officer.

“One year really increases the risks with the capacity streams,’’ Izzo said during a media conference following the analysts call. In Connecticut, capacity payments are also much higher than New Jersey, Izzo said.

High capacity payments in New Jersey, totaling more than $1 billion a year, spurred the Christie administration and legislators to provide subsidies from ratepayers to encourage new construction of natural gas power plants. The Federal government struck down the law, but some of the projects are moving forward without the subsidies.

Capacity payments have become an increasingly important part of making power plants profitable. They provide additional revenue on top of the money received for producing energy to power homes and businesses, ensuring enough power is in reserve if demand increases.

“Public Service is looking for opportunities that will give them a stable and consistent return,” said Paul Patterson, an analyst at Glenrock Associates LLC in New York City. “It demonstrates a preference in investments that have a stable, multiyear outlook.’’

In the past few years, PSEG has committed the bulk of investments to its electric and gas utility, which is expected to lead to double-digit growth in earnings, according to executives.

Izzo said the proposed investment in the new Bridgeport facility signals no shift in its commitment to direct capital spending toward its utility — Public Service Electric & Gas. The utility is now providing the bulk of the company’s profits because of those investments and the steep drop in power prices that have affected its fleet of power plants.