The PJM Tradeoff: Higher Power Prices for Greater Grid Reliability

Tom Johnson | September 2, 2015 | Energy & Environment
The operator of the regional power grid is paying more for power to ensure generating capacity is there when it’s needed most

natural gas power plant
Consumers and businesses will pay more in the future for the electricity they need, but the regional power grid should be more reliable — especially at times of peak demand or during extreme weather.

That is the takeaway from a meeting with power plant operators, consumer advocates, and PJM Interconnection executives to discuss a new system for ensuring that there’s enough electricity to keep the lights on.

By increasing financial incentives to power suppliers, PJM is looking to secure enough capacity to increase the reliability of the regional power grid, which serves 61 million people from the Eastern Seaboard to Illinois.

PJM had the opportunity to put its new system to the test with the beginning of new auctions to buy needed capacity. As expected, they resulted in higher prices, which attracted a great deal of interest from power suppliers — one of PJM’s goals.

“Two consecutive cold winters with natural gas interruptions and the rapid pace of coal retirements have put considerable pressure on the system,’’ said PJM CEO Terry Boston. PJM had to act decisively to ensure firmer fuel supplies and other improvements for continued reliability of the grid, according to Boston.

PJM held the first auction under the new system in August for supplies needed three years from now. The auction prices are in line with the costs of securing the necessary capacity, said Andy Ott, executive vice president of the PJM.

Others question whether the higher prices are justified. In filings with the Federal Energy Regulatory Commission, which originally approved the new system, both the New Jersey Board of Public Utilities and state Division of Rate Council worried that it would spike costs to consumers already saddled with high capacity prices.

“Our concerns seem to have been borne out,’’ said Rate Counsel Director Stefanie Brand, who projected that the higher capacity prices will lead to $2.3 billion in additional costs to customers in PJM’s territory. “We’re basically spending $2.3 billion for capacity we already have,’’ she said.

That is in line with an estimate made by the Norman Bay, chairman of the Federal Energy Regulatory Commission, which approved the new system in June. In a rare public dissent Bay, who voted against the proposal, said it could lead to billions in additional costs for consumers.

[related]In July, PJM projected the proposal will cost most customers only a few dollars more a month on their electric bills.

Paul Patterson, an energy analyst at Glenrock Associates, said it is no surprise capacity prices increased. “This is what PJM wanted,’’ he said. “They believe the higher price will lead to more reliability.’’

With more financial incentives and new penalties if generators fail to provide the committed capacity, PJM argued it would lead to new investment to make plants run better and generate more capacity.

In the August auction, 2,900 megawatts of capacity from generating units were acquired. Included in that is a new 540-megawatt natural gas plant PSEG Power is seeking to build in Seawaren, which would replace older units at the site in Woodbridge. The $600 million plant is expected to be operational by the summer of 2018, according to the company.

The proposed plant would join three other natural-gas plants expected to be operational in the next few years. The Christie administration believes the new power plants can help drive down high electricity prices in New Jersey.

“I’m glad to see new capacity, but I’m still concerned that capacity prices continue to rise, and I don’t see clearly what we’re getting for that,’’ Brand said.