Power Grid Operator Argues for Controversial Proposal to Guarantee Capacity

Tom Johnson | April 13, 2015 | Energy & Environment
Critics argue that PJM plan could cost consumers billions -- in a state with some of the highest power prices in nation

transmission towers
The operator of the nation’s largest power grid is defending a proposal before a federal agency, saying it is needed to make sure that power suppliers are performing adequately in times of peak demand.

In a filing to the Federal Energy Regulatory Commission (FERC), PJM Interconnection said electricity generators have not performed as expected and changes are needed to ensure that they can supply the necessary capacity when needed.

The PJM proposal would change an arcane rule that governs how much power suppliers receive — and would be penalized if they don’t perform adequately — to make sure the lights stay on at times when power systems are strained.

Critics of the plan, which include utility regulators in New Jersey, worry it could cost consumers billions of dollars by creating new incentives to be able to deliver power when needed and imposing penalties if they fail to do so. The latter provision could lead to companies bidding up higher prices in an annual auction conducted by PJM to reduce their potential risks, opponents said.

The issue revolves around the so-called capacity market, which has become a big concern in New Jersey because utility customers pay a lot more to provide the necessary power compared to consumers and businesses in other states.

FERC put the proposal on hold, saying PJM’s submittal was deficient and required additional information. That action led the grid operator, which governs reliability issues for the Eastern Seaboard, including New Jersey, to possibly delay an auction next month for suppliers to provide needed capacity.

[related]It is a step the grid operator did not take lightly, PJM said in its letter. “Any delay in the auction causes market uncertainty,” it said. “PJM recognizes that any delay of the auction may affect financing decisions of potential new entrants as well as retirement and new investment decisions for existing resources.’’

Among its reasons for proposing the new rule, PJM noted that the power mix in the region is changing rapidly, raising new challenges to meet reliability. Tougher environmental rules could lead to the retirement of many older coal-fired plants in the region.

In response to high energy costs in New Jersey, the Christie administration and Democratic-controlled Legislature approved a program to incent new power plant development in the state, but the proposal, so far, has been struck down by the courts. Nevertheless, new power plants are being built in the state, in part because of historic low prices of natural gas to fuel them.

A coalition of power generators, with some reservations, has backed the PJM proposal, saying it will improve reliability and drive the energy sector to invest in the electric and gas infrastructure.

Others disagree. For consumers, the proposal to provide the needed capacity during peak periods could rise from $8.7 billion to as much as $15.1 billion over a four-year span, according to critics.

The PJM proposal was partly motivated by an unusually cold snap during the winter of 2014, when the power sector struggled to deliver the electricity needed by customers as plants unexpectedly shut down.