Nuclear

New Jersey Considers Nuclear Subsidies for PSEG Plants

New Jersey lawmakers are exploring whether to legislatively prop up future operation of two nuclear power plants in the state, holding a hearing on December 4 in which key stakeholders sounded off on how nuclear subsidies could affect the environment, the economy, and the power market.

The hearing, jointly held by the state Senate Environment and Energy Committee and the Assembly Telecommunications and Utilities Committee, focused “on strategies to prevent the premature retirement of existing, licensed, and operating nuclear power plants” and featured a number of big-name witnesses.

Among them was the head of Public Service Enterprise Group (PSEG), a company that operates the 2.3-GW Salem and 1.2-GW Hope Creek nuclear generating stations. (Only one other nuclear plant operates in New Jersey, Oyster Creek, but it is slated to be closed in 2019 under a deal reached in 2010 by Exelon and the state’s Department of Environmental Protection, even though it is licensed to operate through 2029.) Also present were representatives from PJM’s independent market monitor, Monitoring Analytics, energy companies who have opposed state nuclear subsidies, and energy users’ groups.

No bill has yet been introduced in the state’s Democratic-controlled legislature but a measure could rapidly advance during the state’s lame-duck session, which ends on January 9, a week before Democratic Gov.-elect Phil Murphy takes office. Industry sources suggest that the Senate Energy Committee could hold a hearing on an actual bill on December 11, followed by hearings in House committees within a week.

The measure is being closely watched as a chasm widens within the power sector concerning federal and state measures to boost or preserve the economic viability of nuclear generation. As nuclear subsidies in Illinois and New York are being challenged in federal court, state efforts are also taking shape in Connecticut, Ohio, and Pennsylvania, emboldened by the Department of Energy’s recently proposed Grid Resiliency Pricing Rule. The Federal Energy Regulatory Commission (FERC) is expected to vote on the controversial federal notice of proposed rulemaking on December 11.

PSEG CEO: ‘U.S. Nuclear Industry Is in Crisis’

According to Ralph Izzo, chairman, president, and CEO of Newark-headquartered PSEG, the Salem and Hope Creek plants produced a combined 30 TWh in 2017—nearly half of all power generated in the state. On December 4, he said in testimony submitted to state lawmakers that “The U.S. nuclear industry is in crisis,” pointing out that several nuclear plants have closed and more are at risk of closure from economic pressure “resulting from flaws in deregulated energy markets.” In New Jersey, those flaws were “implicit” even as the state’s energy industry was deregulated in the 1990s, though they were “masked” by comparatively high prices for natural gas and have been revealed “only as the prices of gas has fallen to historic lows and remained there,” he said.

“At this moment—today—our nuclear plants are in the black,” Izzo admitted, a feat partly accomplished by operational measures to improve efficiency. “But it is due primarily to the fact that our company was able to pre-sell electricity the past three years under contracts that are above current market prices.”

However, he warned: “Those contracts are finite, and some of those contracts are set to expire before the end of this year—most by the end of next year. Unless market prices change, we will no longer be covering our costs, within the next two years. Without intervention—without a thoughtful, economic safety net—PSEG will be forced to close its New Jersey nuclear plants.”

Running the two plants required $1 billion per year, he noted. “No successful business would continue to make those kinds of investments without a glimmer of hope for an adequate return. So if our nuclear plants are failing to cover their costs—which is the forecast trajectory as our hedge contracts roll off—and I am forced to make the decision to shut them down, it will not be a difficult decision from a business perspective,” he said.

Yet the big picture losses could be steeper, he contended. Echoing arguments made by proponents of nuclear subsidies in other states, including by Exelon Corp. in Illinois and New York, Izzo listed nuclear’s carbon-free attributes, its contribution to fuel diversity and resiliency, and its relevance to the state’s economy.

Izzo also said that while low-cost natural gas “is good for New Jersey,” lawmakers should consider that if the company’s plants retire, the state could be completely dependent on gas-fired generation, which would leave it “vulnerable to price fluctuations” as seen during the polar vortex in 2014 as well as power disruptions. Loss of the plants would also mean job losses for PSEG’s 1,600 nuclear plant workers and spur a cascade that would affect 5,800 jobs statewide.

“For all these reasons, it’s cheaper to keep it,” he said.

Preventing a Slap-Dash Measure

Legislature’s interest in possible nuclear subsidies prompted the quick coalescence of an opposition group—“New Jersey Coalition for Fair Energy”—comprising independent power producers who have legally challenged nuclear subsidies implemented in New York and Illinois. They include Calpine, Dynegy, NRG Energy, and the Electric Power Supply Association. The group has launched a campaign, “Stop the PSEG Energy Tax,” which alleged on November 29, even before a bill has been introduced, that state support could impose a tax increase on customer bills with costs ranging from $475 million a year to more than $4 billion in total.

On December 4, Ray Long, NRG Energy vice president of government affairs , told lawmakers that the measure “creates one winner and many losers, including my company.”

But for Izzo, the reason competitors seek to oppose nuclear measures is because they would benefit from higher power prices. “Other advocacy groups are opposed to a safety net for nuclear, I suppose, because they don’t believe that we will close our nuclear plants. As the executive vested with the authority to make such decisions on behalf of our corporation and its shareholders, I am here to tell you that those plants are in trouble and that, if nothing changes, I will close them,” he said.

Yet, he noted, PSEG wasn’t asking for a “bailout.” The company recently retired 4 GW of power plants—more than the combined capacity of the company’s nuclear plants— without state intervention.

“This isn’t about us. This is about what is best for New Jersey,” he said.

While the DOE, FERC, and the PJM Interconnect, the region’s grid operator, were actively considering the problem, state lawmakers should act on New Jersey’s behalf urgently, Izzo said. “The decision to shut down a nuclear plant is a long, expensive and deliberate process. Once a nuclear plant is closed, it’s permanent. The plant, its product and its jobs are gone for good.”

But according to David Gaier, a spokesperson for NRG Energy, a key concern for parties opposing the measure is how quickly the issue is developing. “[We] don’t see the need to hastily jam through a bill during the lame-duck session for something this important, something that needs thoughtful consideration,” he told POWER on December 5.

“As for the merits, we believe that the best way to ensure fair and reasonable power prices is to support and respect the established energy markets to which [PSEG] and all generators have access, in this case PJM,” he added. “If a single company is permitted to put its thumb on the scale in this way, ratepayers will suffer and the state’s business climate will become even more challenging.”

PJM Independent Monitor: Subsidies Are Inconsistent with Market Design 

Joseph Bowring, the independent market monitor for PJM Interconnection—the nation’s regional transmission operator (RTO) whose region includes New Jersey—disputed Izzo’s claim that the markets are flawed. As president of Monitoring Analytics, Bowring noted that he does not represent PJM, though he acts in a FERC-defined capacity to ensure that PJM’s wholesale markets are competitive and efficient.

“A benefit of competitive power markets is that they are dynamic, flexible and resilient,” he said in testimony submitted to lawmakers. Despite significant changes in underlying market forces such as technical innovation and significantly lower gas costs, which have resulted in substantial unit retirements, the market has seen new entrants on a substantial scale, he said, noting “The result of new entry has been lower costs and increased reliability.”

Monitoring Analytics says in its 2017 quarterly state of the market report published this November that in the first nine months of 2017, nuclear units generated 35.3% of PJM’s total output, beating out coal generation’s share of 32.2% and the natural gas portion of 26.8%.

Curiously, that report also notes that the proportion of nuclear units considered marginal resources increased from 0.03% in the first nine months of 2015 to 1.25% in the first nine months of 2017. That increase, it says, “was primarily due to a small number of nuclear units offering with a dispatchable range.” The increase is noteworthy because most nuclear units are offered as fixed generation in the PJM market.

On December 4, Bowring said he saw no reason for entities to intervene in the markets, not even to provide reliability and resilience. “If PJM or FERC or DOE identify a need for greater reliability, it can be addressed using market mechanisms,” he said.

Bowring acknowledged that in “times of stress on markets and on some generating technologies,” non-market solutions, top-down, integrated resource planning approaches, subsidies, and cost-of-service regulation appeared tempting as quick fixes.

However, he issued a clear warning: “But once the decision is made that market outcomes must be fundamentally modified, it will be virtually impossible to return to markets. The subsidy model is inconsistent with the PJM market design and constitutes a significant threat to PJM markets.”

Bowring also noted that over the past year, the rationale behind nuclear subsidies had “evolved.” In Ohio and Illinois, proceedings stem from a contention that competitive markets resulted in the retirements of uneconomic and uncompetitive generation. In New Jersey, however, proposed subsidies go way beyond that, looking to prop up units that “have not demonstrated that they are financially viable.” Neither Hope Creek nor Salem was defined as “at risk” according to the monitor’s criteria, he said.

The subsidy solution, meanwhile, ignores the “opportunity cost” of subsidizing uneconomic units, he also said. “Such subsidies suppress energy and capacity market prices and therefore suppress incentives for investments in new, higher- efficiency thermal plants but also suppress investment incentives for innovation in the next generation of energy supply technologies and energy efficiency technologies. These impacts are large and long lasting.”

Finally, and perhaps as importantly, as Bowring pointed out: “Subsidies are contagious, as this legislation illustrates. If subsidies are provided to one generating plant, this will suppress prices for all generating plants and create a need for additional subsidies for the remaining units. Competition in the markets will be replaced by competition to receive subsidies.”

All considered, “Subsidies to economic units are simply a way to increase prices to individual plants at the expense of customers, with no impact on the operational status of the units,” he told lawmakers.

 

—Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)

 

SHARE this article