Maryland Regulators Order Construction of Combined-Cycle Plant

Setting the state on a collision course with the Federal Energy Regulatory Commission (FERC) and its independent system operator, PJM, the Public Service Commission (PSC) of Maryland ordered the construction of a new combined cycle power plant and further ordered Baltimore Gas and Electric, Potomac Electric Power, Potomac Edison, and Delmarva Power & Light to execute contracts to support the plant.

The April 12 order was the latest in a long-running dispute between the Pennsylvania-New Jersey-Maryland Interconnection (PJM) and local authorities in Maryland over the state’s power capacities, and the ability of PJM’s market model to sufficiently incentivize new capacity. The state has argued for several years that PJM’s Reliability Pricing Model (RPM) has failed to attract sufficient new generation capacity, and as a result, the state is at risk of running short of power over the next few years.

Under the RPM, PJM conducts yearly auctions for power. The auction prices are constrained in part by a calculated cost of new entry (CONE) value that is intended to ensure prices remain high enough to encourage new capacity where it is needed. One important rule, designed to prevent states from subsidizing construction and skewing the auction prices, is that new plants can offer their power into the market at prices no lower than 90% of the CONE value.

The effectiveness of this model has been the subject of dispute. PJM insists it has supported substantial new construction and adequate reserves, while detractors insist it is too complex and inefficient to ensure adequate capacity across the entire region.

The core concern of the PSC is the likely retirement of some, and perhaps substantial, amounts of coal-fired power in the region as a result of plant obsolescence (70% of Maryland’s coal capacity is over 40 years old) and pending federal regulations. Maryland also has a Renewable Portfolio Standard (RPS) requiring the state to source 20% of its power from renewables by 2022. Since nearly all of Maryland’s generation capacity is either coal or nuclear, it has limited ability to integrate renewables into the mix. 

As a result, the PSC in 2009 began considering whether it should order the construction of a new plant outside RPM rules. In late 2011, it issued a request for proposal for a new gas-fired plant. While the plant owner would be required to offer its power into the PJM markets, the arrangement contains a key safety net: Any year in which its revenues from the PJM auction fall below a fixed contract price, the Maryland power companies will be required to make up the difference. This provision is apparently intended to be an "end-run" around the 90% CONE rule, since the owner must otherwise comply with all standard RPM auction rules.

With the April 11 order, the PSC awarded a contract to Silver Spring-based CPV Maryland to build a 661-MW combined cycle plant in Waldorf (about 20 miles southeast of Washington, D.C.), with a planned operation date of June 1, 2015.

The power companies are, not surprisingly, strongly opposed to the plan. They argued unsuccessfully that the PSC’s view of the need for new capacity was overly conservative and that foreseeable demand can be met with existing resources, efficiency gains, and demand response. Further, some estimates show growth in the area’s electricity demand to be flat or negative at least through 2020.

One element that opponents of the order point to is that CPV has been trying to build the plant in Waldorf for several years but so far has been unable to secure financing. This, they argue, indicates that the new plant does not make financial sense.

Litigation over the order appears to be a certainty. On May 4, Potomac Electric and Delmarva Power announced they had filed notices of appeal in Maryland state court. In a teleconference that day, PEPCO President Joe Rigby noted their concerns with the order, "including the full cost burden being placed on customers who may choose to switch to other energy suppliers as well as the impact the [mandatory] contract will have on utilities’ balance sheets and credit metrics."

Maryland and New Jersey have already unsuccessfully challenged the RPM with FERC, which upheld the model last year and found that Maryland’s plan would unfairly subsidize the proposed plant. That previous order is also being challenged in court.

Some of the force behind Maryland’s argument was undercut by PJM’s auction results in mid-May, which procured 4,900 MW of new generation—a record amount in one year, as well as record amounts of demand response and renewables. In addition, capacity imported from west of PJM increased about 8% from 2011 to 4,335 MW. PJM officials attributed the increases to substantial amounts of retiring coal capacity. The majority of the new generation was gas-fired.

—Thomas W. Overton, JD is POWER’s gas technology editor. Follow Tom on Twitter.

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