Maryland’s Plan to Subsidize Unnecessary Power Plant Development Will Harm Electricity Consumers
Officials in Maryland are moving forward blindly with a mandate for the state’s utilities to enter into contracts with power plant developers that will saddle Maryland consumers with the costs of these unnecessary generation facilities.
This comes despite the fact that a December 1, 2011, Maryland Department of Natural Resources report describes several approaches to future generation needs, and concludes that the most probable scenarios indicate no new generation resources will be needed until 2019 or 2020. Less conservative assumptions move the need for new generation facilities even further into the future.
Yet Maryland is marching forward with blinders on – blinders that were created in the context of the conditions of 2008 – conditions that vary dramatically from those in 2012. The rationale for seeking 1500 megawatts of new generation references a PJM Interconnection analysis produced in the summer of 2008. Economic conditions in Maryland have changed dramatically since mid-2008. Inexplicably, Maryland continues to rely upon those outdated 2008 conditions. This analysis together with several “what ifs” is the apparent justification for the imposition of unknown costs of unnecessary power plant subsidies on consumers.
Variables like energy prices, pollution-control mandates, technological advances and energy-efficiency gains make “what if” predictions tricky, and any assumptions typically fail to foresee variables that ultimately prove the predictions wrong. This is one of the most important reasons why policy makers long ago opted for competitive market participants to bear the risk of making capital investments in new generation plants.
By requiring captive ratepayers to subsidize power plant development, however, Maryland is reverting to the failed command-and-control monopoly regulation model that prompted state and federal policy makers two decades ago to adopt competitive markets for electricity as a more efficient and cost effective means of assuring adequate supplies of affordable electricity for consumers. Under this model, the investment risk of building these multibillion-dollar projects is borne by the generation facility developers, not electricity customers.
New Jersey, which also endorsed subsidizing development of generation development, is instructive to the issue at hand. The signature power plant development proposal in New Jersey that prompted the state to adopt a program to subsidize new generation facilities on the backs of consumers is now moving forward as a “merchant” power project. That means it will rely on returns from PJM’s competitive market (including PJM’s capacity market), rather than consumer subsidies, to develop and operate its facility. Clearly, New Jersey’s experience demonstrates the folly of Maryland’s assertion that the competitive market structure of PJM is a failure. In fact, the operation of PJM has proved and is proving Maryland wrong.
Maryland officials complain that PJM’s market for generation capacity is too costly and has failed to build any new generation in Maryland. Let’s run down the facts, which tell a different story.
PJM Interconnection is the world’s largest and most successful wholesale power market. It has expanded far beyond its Pennsylvania, New Jersey and Maryland beginnings in 1927 to include much of the Midwest as well as the Mid-Atlantic region.
PJM’s capacity market is called the Reliability Pricing Model, or RPM. It is intended to ensure that enough power generation capacity is available at the least cost to ensure continued reliable operation of PJM’s multistate power grid. It never guaranteed Maryland a new power plant (and certainly not under economic and demand conditions that no longer exist). RPM considers economic conditions, including consumer demand and the efficiency and cost of different solutions to reliably meet that demand and objectively and systematically selects the most efficient, least cost option for consumers within its footprint.
The highly respected Brattle Group, a Massachusetts-based consulting firm, recently assessed the success of PJM’s capacity market, and found it to be “performing well.” Brattle found that “RPM has been successful in attracting and retaining” 28,400 megawatts of committed additional generation capacity (28.4 gigawatts). This is the equivalent of more than 10 large nuclear power plants, or more than 20 conventional fossil fuel-fired power plants.
As this bar graph from PJM clearly illustrates, the RPM auction has been oversubscribed every year (more capacity offered than accepted, or “cleared” in the auction), resulting in an oversupply of resources, including demand-side resources encouraged by the Maryland Public Service Commission.
Brattle looked at the benefits of RPM in its totality, in terms of new generation capacity (which includes new power plants and investments to boost the output of existing generation plants), generation facilities that would have otherwise ceased operations without the revenues provided by RPM, and “demand response” programs in which customers are paid to reduce their consumption of electricity.
“RPM has reduced system costs by fostering competition among all types of new and existing capacity, including demand-side resources. It has also facilitated cost-effective tradeoffs among investment in environmental retrofits on aging coal plants, retirements, and replacement with lower-cost resources,” Brattle concluded.
The Brattle report also specifically cited a lack of support for the arguments Maryland officials and others have put forward to justify mandates for anti-consumer generation plant development subsidies.
“Stakeholders have raised a number of key concerns. We find, however, that several major criticisms of RPM are contradicted by evidence available to date – most notably the arguments that RPM prices are too high, that RPM does not support investment in new generation of the right types in the right places, or that RPM cannot maintain reliability in the face of environmental retirements,” the report said.
PJM’s most recent RPM auction resulted in lower prices for Maryland electricity customers, 4,170.3 megawatts of new capacity (new generation capacity resources, capacity upgrades to existing generation capacity resources, new demand resources, upgrades to existing demand resources, and new energy efficiency resources) and produced a remarkably robust 20 percent generation capacity reserve margin. When the full potential of supply is considered, PJM’s reserve margin is in excess of 25 percent. Meanwhile, demand response resources clearing the auction totaled 14,118 megawatts. This last fact is significant, since it is far more economical to pay customers to reduce consumption during peak demand periods than it is to build a new generation plant to meet peak demand.
This chart from PJM demonstrates the dramatic growth in cost-effective and consumer-friendly demand response participation in PJM’s capacity market, which has been encouraged by Maryland in many different venues.
At the same time the capacity market is producing highly economical results and a robust reserve margin that Maryland can safely rely upon, PJM’s forecast for electricity demand is projecting much lower growth in electricity consumption than previously anticipated. The significant participation of demand response resources in PJM’s capacity market is a key factor in the revised forecast.
Taken as a whole, these facts and more clearly demonstrate that Maryland does not need to subsidize the construction of new power plants on the backs of the state’s consumers. PJM is a robust competitive power market providing a wealth of cost-effective resources the state can rely upon to assure continued reliable, affordable electricity for the state’s electricity consumers well into the future.
Joel Malina | January 18, 2012
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