Anger over a recent dramatic rate hike and fears of energy shortfalls because of a predicted future rise in demand have prompted New Jersey to look anew at whether the state should consider pulling out of PJM or otherwise reorganize the relationship with the RTO. 

A bill introduced by three Assembly Democrats, A5902, would require the New Jersey Board of Public Utilities to “work in collaboration with other states to explore alternative options to PJM’s capacity auction for securing the capacity necessary for grid reliability.” 

Specifically, the states would study whether they should withdraw from PJM’s Reliability Pricing Model and develop a multistate compact to engage in the fixed resource requirement (FRR) alternative to secure electric capacity through contracts with private entities, competitive capacity auctions or some combination. 

The group also would look at whether they should “withdraw from the regional, high-voltage electric transmission grid operated or managed by PJM Interconnection.” And the group would look at the merits of creating an independent electric transmission grid or joining “an existing electric transmission grid that operates within another state or region.” 

In an unrelated move, the BPU has organized a technical conference Aug. 5 to focus on “concerns over resource adequacy.” Among the conference goals is to “evaluate alternatives to the PJM capacity market” and to “identify potential paths forward in achieving long-term resource adequacy within the state of New Jersey.”  

Protecting Ratepayers

The two initiatives spotlight a concern New Jersey has voiced or studied several times in the past decade: that it does not get the energy quantity or quality — mainly enough clean energy — it wants from its partnership with PJM. Past efforts have not resulted in significant changes, but this time the severity of the situation — dramatic electricity rate hikes and a potential future power shortage — could have an impact. 

Assemblyman Robert Karabinchak (D), a bill co-sponsor, said in a release announcing the bill’s introduction that it will “start the tough but necessary conversation about PJM’s future.” 

The RTO has “for far too long” operated in a way that “ignores the needs of the states in our region and saddles our residents with higher utility bills,” he said. “Their inability to adapt has become harmful to families and businesses across the Northeast, and it’s time we push for a system that works for us.” 

Assemblywoman Lisa Swain (D), in the same release, said it is “time we explore our options to find an energy partner that is better aligned to serve our communities.” 

“We have heard from our constituents, and we are committed to finding the most effective solution, whether or not PJM is a part of it,” she said. 

But PJM dismissed the suggestion that New Jersey would be better off if it departed from PJM. 

“New Jersey needs new electricity supply; a ‘leave PJM’ bill is not going to solve that problem,” said Jeff Shields, a spokesman for PJM. “Actually, it will make the investment climate for new supply in New Jersey far worse by creating uncertainty for private developers seeking to earn a return on their investments in New Jersey through PJM’s markets.” 

He rejected the suggestion that PJM is at fault for the rate hike, calling it a “red herring.” PJM has reformed its interconnection process and has approved 46,000 MW worth of power projects that are not getting built “due to industry challenges that have nothing to do with PJM,” Shields said. “Of these, about 1,500 MW are in New Jersey, and another 1,800 MW are in the transition queue,” he said. 

“Even if you get both of these categories to build out in full, New Jersey is still very short of creating a balanced supply portfolio,” Shields said. 

Past Studies

The legislation follows a similar study launched in March 2020 by the BPU after FERC expanded its minimum offer price rule (MOPR) to include “all resources receiving state support,” which effectively made clean energy resources more expensive in the auction, according to the order setting up the study. New Jersey considered the move a “direct attack” on the state’s clean energy programs and feared it might disrupt state efforts “to shape its electric generation” and hinder clean energy development in favor of fossil fuel generation. (See FERC Extends PJM MOPR to State Subsidies.) 

The BPU study was conceived to look at whether New Jersey could achieve its clean energy objectives “under the current resource adequacy paradigm” at PJM. If not, the order said, the study should “recommend how best to meet New Jersey’s resource adequacy needs.” 

The BPU updated that report in 2022. But friction with PJM had erupted before: Then-BPU President Joseph Fiordaliso in 2018 threatened to pull the state out of PJM over frustration at a lack of coordination between the RTO and member states.  

The recent proposals were triggered by the events that led to the 20% increase in the average electricity bill on June 1, levels that were set by the state’s basic generation services (BGS) auction in February. State officials say the hike was shaped by PJM’s capacity auction in July 2024, in which prices were 10 times higher than in the previous auction.  

PJM says the sudden hike stemmed in large part from an unforeseeable rise in demand — mainly due to heavy energy-using data centers — and a looming energy shortfall, as the rapid closure of old fossil-fuel generators outpaces the much slower introduction of new clean energy facilities. 

New Jersey officials, however, say the PJM capacity auction was flawed, with prices driven up by an inaccurate count of the impact of new clean energy sources. New Jersey Gov. Phil Murphy (D) has asked FERC to investigate “potential market manipulations” in the PJM Base Residual Auction (BRA). (See N.J. Gov. Urges FERC to Investigate PJM; Christie and Phillips Defend PJM.) 

BPU President Christine Guhl-Sadovy, in a written statement to FERC on May 28, as the agency prepared to hold a June hearing on the issues, said states like New Jersey “must be allowed to play a significantly greater role in ensuring resource adequacy at the lowest cost to ratepayers than is currently allowed by PJM.”  

“This includes being free to procure some or all of states’ capacity needs outside of PJM’s Reliability Pricing Model, commonly referred to as the PJM capacity market,” she said. Guhl-Sadovy also called for “significant reforms to PJM governance” to give states a greater role in resource adequacy planning. 

Starting Anew

Yet the previous study, completed by BPU staff and the Brattle Group, showed that changing the status quo would be far from simple. An unrelated study also concluded it could be expensive. 

“Incorporating New Jersey’s clean energy goals in the regional market is the most efficient way to provide New Jersey consumers with reliable, affordable and carbon-free electricity,” the Brattle report concluded, saying it would be “premature to consider leaving the regional market structure.” 

Project researchers studied several “resource adequacy alternatives that involved leaving the regional market and adopting a New Jersey-centric resource adequacy model under the fixed resource requirement alternative,” the report said. Under such a plan, New Jersey — and perhaps other states — would set up their own capacity auction, for developers to commit to developing future capacity, while remaining inside PJM for the energy market. 

But the report concluded the state should wait while “important market reforms are being considered at the regional and federal level that could facilitate the rapid decarbonization of the electricity sector.” The report found that customer costs under MOPR were the highest, but if it were removed, customer costs under the existing system would be cheaper than other options studied. 

However, the report also said that “New Jersey should continue to explore the option to implement a New Jersey or multistate ICCM [integrated clean capacity market] under the FRR structure.”  

The 2022 update report, largely echoing the previous report, said New Jersey could meet its “clean energy targets at substantially lower costs by participating in a regional clean energy ‘buying pool,’ such as an ICCM, to purchase clean energy attributes.” 

Development Costs

The BPU eventually did not pursue any of the discussed changes, in part because PJM largely dropped the MOPR, removing the state’s main concern. In addition, the election of President Biden created a more friendly environment to renewable energy. 

Observers of the situation said one difficulty with New Jersey departing PJM would be the sheer logistics of setting up a new system, coupled with coordination issues associated with adding other states to the mix that would be needed to make the venture viable. Another challenge would be attracting energy suppliers in an environment in which energy supply is expected to be scarce, putting New Jersey’s venture in competition with PJM’s own auction. 

Furthermore, the cost of setting up the system could be hefty. A report by the Independent Market Monitor for PJM, titled “Potential Impacts of the Creation of New Jersey FRRs” and released in May 2020, concluded that net load charges for an FRR that covered all of New Jersey would cost between $32 million and $386.4 million, depending on the way it was calculated. 

The monitor also questioned the efficiency of such a system. 

“Creation of an FRR creates market power for the small number of local generation owners from whom generation must be purchased in order to meet the reliability requirements of the FRR entities,” the report concluded, emphasizing that it is a “non-market approach” that excludes competition. “In the FRR approach, there is no PJM market monitoring of offer behavior by generation owners, there are no market rules governing offers, and there are no market rules requiring competitive behavior.” 

Given the challenges, the suggestion that the state could leave PJM may be more of a negotiating strategy. 

Alex Ambrose, a researcher for New Jersey Policy Perspective, a liberal-leaning think tank, said the main impact of the bill may be to refocus PJM. 

“What would happen with this bill is that then BPU would study it,” she said. “PJM will feel that pressure and New Jersey gains some leverage, and PJM implements the reforms that we want,” such as improved governance and greater transparency in the RTO’s decision-making, she said.  

Another possibility is that the BPU concludes that the state is better off leaving PJM, she said. 

“What will end up coming out of this bill is better governance, more supply and better market rules for New Jersey,” she said.