Public Service Enterprise Group CEO Ralph Izzo said Monday it would be “logical” for New Jersey to abandon the PJM capacity market by adopting the fixed resource requirement (FRR) option.
The New Jersey Board of Public Utilities opened a proceeding to consider the FRR option in response to FERC’s December order expanding the PJM minimum offer price rule (MOPR) to all new state-subsidized resources — including PSEG nuclear units receiving zero-emission credits (ZECs) and offshore wind.
Speaking during a first quarter earnings call, Izzo said although capacity prices could be higher under an FRR, the state could see savings because the FRR would require only a 15% or 16% reserve margin. That’s far below the margins produced by PJM’s Reliability Pricing Model, which have been 24% or more for all but one of the delivery years between 2012/13 and 2020/21, according to one recent study. (See Report Slams PJM Forecasting, CONE Estimates.)
“So, the unit cost is more [under FRR], but the number of units is fewer,” Izzo said. “The product of the two turns out to be less expensive in the state.”
Turnabout?
Izzo’s comments appear to represent a shift in his thinking. During his fourth-quarter 2019 earnings call in February, Izzo was skeptical that the state would switch to FRR, saying it would be “overkill” to pull 15,000 MW from the capacity market for 7,000 MW of offshore wind. (See PSEG’s Izzo Skeptical of FRR Option.)
A PSEG spokesperson said later Tuesday that Izzo’s “`seeming change of opinion’ is not a change at all.
“The first comment related to nature of FERC’s chosen solution – that the proposed solution, to allow an FRR-type arrangement for a single unit, was not selected by FERC, and as such, an entire FRR area would be needed, which would be `overkill’ in trying to solve the stated problem. The state’s desire to not pay twice for capacity in pursuing a clean energy agenda is perfectly logical, and because of FERC’s decision, it will simply need to do so on a broader scale.”
In his remarks Monday, Izzo cited the likelihood that the 7,500 MW of offshore wind planned by New Jersey by 2035 will be unable to clear the capacity auction under MOPR. The state awarded a contract for 1,100 MW to Ørsted in June 2019; commercial operation is projected for 2024.
“If you were to … take a look at what typical Eastern MAAC capacity prices have been and then you factor in what the capacity value of the offshore wind that might be granted by PJM, you quickly get to eight, if not nine figures in just a few years in terms of extra payments on the part of New Jersey customers for not having offshore wind be able to clear the auction,” Izzo said. “So, you have this double benefit that the state could realize if it designs the FRR in a competitive way that recognizes the carbon-free resources that it is committed to securing.”
Izzo said PJM’s MOPR compliance filing proposed an avoidable cost rate (ACR) price floor for PSEG’s nuclear units “that would preserve the full bidding flexibility to clear in the upcoming PJM capacity auction.”
“If New Jersey were to implement the FRR auction in broad terms, it would provide a choice for our nuclear units and the majority of our fossil fleet to bid into either PJM’s capacity auction or into a New Jersey FRR. An FRR could be structured to have a longer tenure, a preference for zero carbon generation and would have locational delivery requirements.”
Very Likely?
“It sounds like … it’s very likely that [New Jersey] probably will go for the FRR option. Is that the way we should be thinking?” asked Glenrock Associates analyst Paul Patterson.
“Look, they’re the final decider of that,” Izzo responded. “But I think that that is the logical thing for the state to do. Why New Jersey would want to pay twice for capacity in what is obviously an extremely ambitious carbon-free energy agenda would boggle my mind. New solar and offshore wind are not going to clear the auction at these ACRs. So, I think that the state would be greatly incented to do an FRR.”
PSEG is in discussions with Ørsted on a potential acquisition of a 25% equity interest in Ørsted’s 1,100-MW Ocean Wind project and expects to make a decision this fall. Izzo said the company’s decision will not be dependent on whether New Jersey opts for an FRR.
“The state is absolutely committed to building that project,” he said. ” … So, it’s really not a question of the FRR at all. The BPU order’s quite clear on what the commercial terms of that project will be, are and will be.”
The BPU is accepting comments on the FRR option through May 20. Izzo said he expected the BPU to make a decision on the FRR no sooner than the end of the year or the first quarter of 2021. “Remember the state really doesn’t have to worry about paying double for capacity now that the nuclear units are covered for at least for the foreseeable future until offshore wind comes online, and that’s not going to happen until 2024.”
Consumer Perspective
Stefanie Brand, director of the New Jersey Division of Rate Counsel, said whether FRR would be cheaper for consumers will depend on whether the program can adequately counter the market power of generators that could supply the state. She also said costs could be impacted by whether the FRR covers the entire state or just the Public Service Electric & Gas (PSE&G) zone.
“There aren’t going to be too many companies that are going to be in a position to set up an FRR. So, there’s going to be a market power element that’s going to have costs in it,” she said in an interview Tuesday. Izzo “doesn’t include that in his equation. And it’s money that might be going to his company, so that may have been the reason why it was included” in his comments.
Brand said her office hasn’t come to a conclusion on the wisdom of an FRR and hopes to learn more from an analysis PJM’s Independent Market Monitor is doing on a potential New Jersey FRR. The Monitor issued an analysis on the impact of Exelon’s Commonwealth Edison leaving the capacity market for an FRR in December and one on Maryland’s options April 17 that concluded ratepayers are likely to see cost increases under an (FRR). (See PJM Monitor Defends FRR Analyses in MOPR Debate.)
“We deregulated generation with the idea that competition was going to bring positive impacts in terms of [lower] prices. And it actually did for a long time,” Brand said. “We’ve kind of all been thrown into a frenzy right now. But I wouldn’t want to return to a situation where we had just a single unregulated monopoly. I don’t think that’s going to be a good outcome.”
Brand said her two biggest concerns over MOPR are how it affects offshore wind and the state’s basic generation service (BGS) auctions held by PSE&G and the state’s three other distribution utilities to provide service to customers not served by a competitive retailer.
In its April 16 order largely rejecting rehearing of its December MOPR ruling, FERC said the BGS is a “state subsidy because it is a state-sponsored process and includes indirect payments to the resource.” (See FERC: RGGI, Voluntary RECs Exempt from MOPR.)
“I don’t have a whole lot of basis to really check his math … It may end up being cheaper” to leave PJM, Brand said. “We really need a full analysis of what we think the costs are going to be before we jump to any kind of conclusion. It could be that if [nuclear generation, solar and energy efficiency] clear then we just figure out a way to deal with the offshore wind problem [separately] and stay exactly where we are right now.”
COVID Impact
Izzo also talked about the impact of the coronavirus pandemic, saying the company’s PSE&G and PSEG Long Island units — which serve some of the areas with the highest incidence of confirmed COVID-19 cases — have suspended non-essential fieldwork while continuing emergency work.
Izzo said infection rates among PSEG’s 13,000 employees are below those for New Jersey and Long Island as a whole. About 1% of the workforce is currently self-monitoring.
The company is continuing its work on critical energy infrastructure projects although PSEG’s nuclear team reduced the scale of the current Salem Unit 2 refueling outage to protect all workers at the site, which also includes Salem Unit 1 and Hope Creek.
Izzo said that the pandemic could result in “lumpy” access to mutual aid resources, noting that during a recent storm the company was able to secure only about 40% of the assistance it sought from other utilities.
“It was a combination of, candidly, utilities not willing to risk their own employees in terms of their exposure … and travel limitations put on some of the contractors,” he said. “So, if we have that experience when the trees all have leaves on them and the wind blows, then we will have to communicate extensively with customers about some of the likely delays that they will experience in being restored.”
Earnings
PSEG reported non-GAAP operating earnings of $520 million ($1.03/share) in the first quarter, a drop from $547 million ($1.08/share) in 2019. Net income under GAAP was $448 million ($0.88/share) compared to $700 million ($1.38/share) in Q1 2019.
The company said its results were aided by rate-based expansion from transmission and distribution investments at PSE&G and ZEC revenue for PSEG Power, which added $0.07/share.
Those gains were offset by a scheduled decline in capacity prices, which reduced operating earnings by $0.11/ share, and the second mildest first quarter ever recorded in New Jersey.
PSE&G said pandemic stay-at-home orders caused a weather-normalized decline of 5% to 7% in electric load from the end of March through April. It said the ranges and the mix of usage among residential, commercial and industrial customers are imprecise because New Jersey lacks advanced metering infrastructure. (Izzo said the company hopes to complete BPU proceedings allowing it to spend $600 million on advanced metering infrastructure and $400 million on electric vehicle energy storage programs by early next year.)
Chief Financial Officer Daniel J. Cregg said that although PSE&G temporarily suspended all non-safety-related service shut-offs for non-payment during the COVID-19 crisis, the company can recover bad debt expenses through the state’s “societal benefits charge.”
Beginning June 1, the average PJM capacity price will rise to $168/MW-day from $116/MW-day, Cregg said. A scheduled decline in ISO-NE capacity prices will be partially offset by its nearly year-old Bridgeport Harbor 5 plant, which has a seven-year capacity lock at $232/MW-day.
PSEG Power has hedged more than 95% of its production at an average of $36/MWh for the remainder of 2020. It has hedged more than 55% of forecasted production at an average of $35/MWh for 2021 and more than 25% of output at $35/MWh for 2022.
