The operator of the nation’s largest power grid is overcharging utility customers by buying more electricity than customers needed over the past decade, costing consumers up to $4 billion a year in unnecessary charges, according to a new study.
The analysis, commissioned by the Sierra Club and the Natural Resources Defense Council, concludes that PJM Interconnection has overestimated how much power it needs to keep the lights on for more than a decade.
The dispute concerns a long-lingering controversy over how PJM buys the capacity it needs to assure there is enough power when demand within the region — stretching from Illinois to North Carolina — spikes. PJM serves 65 million customers, including all of New Jersey.
The analysis by an economist, James F. Wilson, found that PJM consistently overestimated the amount of electricity needed to meet demand with an adequate supply margin. In the worst year (2020-2021), PJM acquired an extra 18,700 megawatts of power above its safety margin, enough to supply a mid-size state, according to Wilson.
The study blamed the problem on inaccurate peak load forecasts and a failure to manage overprocurement when projections are clearly headed in the wrong directions.
“Forecasting is hard, and we don’t expect PJM to get it right every time, but PJM could use any number of commonsense approaches rather than just buying more than it needs and billing ratepayers for it,’’ said Tom Rutigliano, a senior advocate at NRDC’s Sustainable FERC Project.
PJM says it keeps the system reliable
In response, PJM argued its capacity market has helped maintain a reliable system that has kept market-driven electricity costs flat for two decades, while incentivizing new technologies that have helped reduce emissions by 34% since 2005.
PJM is constantly refining and enhancing its forecasting and capacity procurement models, according to Jeff Shields, media relations manager with the organization. Changes made to forecasting models starting in 2016 — to account for energy efficiency, distributed solar generation and other factors — have greatly improved accuracy, according to Shields.
Others are not so enthusiastic. Asked about the issue by an energy analyst at last month’s quarterly earnings calls, Ralph Izzo, CEO, president and chairman of Public Service Enterprise Group, said, “I think that we all know that PJM right now has reserved margins that exceed its stated requirements.’’
New Jersey has been a long-standing critic of PJM’s capacity market, saying it unnecessarily boosts costs to utility customers. The state’s efforts to curb those costs, however, have been largely ignored by both PJM and the Federal Energy Regulatory Commission, leading to increasing tensions with both agencies.
The issue is even more contentious now with FERC proposing new rules that could exclude state-supported resources — such as solar and wind energy — from these same capacity markets.
Some energy analysts agree. “There is no question this is an oversupplied market by PJM’s own definition,’’ said Paul Patterson, an analyst with Glenrock Associates in New York. In the last capacity auction by PJM, it announced it procured 21.5% of capacity for 2021/2022 — 5.7% above its goal of 15.8 %.
“They have been appearing to be overpaying for some time,’’ Patterson said.
Environmentalists argue the distortions in the market keep uneconomic and dirty power plants running when the market should be moving to cleaner energy.
“Instead of encouraging competition that weeds out uneconomic, dirty generating sources, PJM chronically buys far more capacity than needed and foists these extra costs on consumers,’’ said Casey Roberts, a senior attorney at Sierra Club. “The role of the capacity market is to ensure reliability at the lowest possible cost — not to load up the system with unnecessary and uneconomic resources.’’