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Power plants coming to electricity-hungry region

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Developers haven't built a new power plant of any significance in Maryland for over a decade — one reason the state imports more electricity than almost any other in the country, racking up extra charges for consumers.

But change is coming.

Two large projects, permits in hand, could begin construction this year. Two more seek approval. Land-clearing work is underway on a fifth, a small facility intended to run when demand is high.

Industry veterans say it's hard to guess at the impact on rate-paying customers, given how much is in flux. Coal-fired units at two other plants in Maryland are earmarked for retirement in 2018. Expected closures of out-of-state coal plants could ripple locally, too. And the proposed new plants might not all get built.

If the Baltimore-Washington corridor comes out with a net gain in electrical generation, though, that could push down energy costs and two recurring charges that customers pay to keep the lights on.

"The result of competition … should be falling prices," said Kimberly Frank, an attorney at the law firm Kaye Scholer who represents state utility commissions in federal proceedings. "That's the only reason we deregulated markets in the first place."

Angst over a lack of competition — and dissatisfaction with the regional system to incentivize it — prompted Maryland regulators two years ago to, in effect, order up a new power plant. That sparked a pitched battle between the state and owners of existing power plants that's still working its way through the courts.

But the heart of the matter is a debate about whether the system for getting new power plants is good for consumers. Supporters say it allows the market to work. Critics say the primary beneficiaries have been the owners of existing plants, such as Chicago-based Exelon Corp., parent of Baltimore Gas and Electric Co.

Maryland officials are among those unhappy with the setup. The state imported 42 percent of its electricity in 2010, the fifth-largest share in the country, according to the most recent analysis by the Maryland Public Service Commission.

Abigail Ross Hopper, director of the Maryland Energy Administration, said the state wants "as much local generation as possible" — from both conventional power plants and other sources, such as solar panels and wind turbines.

"Having energy close by that doesn't have to travel so far along the energy highway makes sense," she said.

The state's concern is partly about reliability, partly about cost. Electricity rates in Maryland are the 13th highest in the country, according to the U.S. Energy Information Administration.

Electricity is often cheaper to the south and west, where plants are plentiful and population less so. It can be imported — but for large swaths of Maryland, that comes with a catch. Massive importing clogs transmission lines, adding costs.

Under the system run by multistate grid manager PJM Interconnection, the BGE territory paid about $90 million in "congestion" charges each of the last two years, according to the Public Service Commission.

Separately, BGE customers in recent years have collectively forked over hundreds of millions of dollars in "capacity" charges — essentially a reservation fee. The money flows to power plant owners in exchange for being available to churn out electricity. The payment has generally been higher than average here due to the constraints.

Capacity payments cost the average BGE residential customer about $190 last year, compared with roughly $77 across PJM overall. That's according to an analysis by the American Public Power Association, a critic of the system.

These charges are part of the reason that BGE and Pepco customers who buy electricity from their utility are paying over 20 percent more for that supply this summer than customers of Potomac Edison in Western Maryland, beyond the point of transmission congestion.

'Really big detriment'

Ryan Barbera is president of Columbia-based Unleashed Technologies and Intelishift Technologies in Ashburn, Va. The cost of electricity is always on his mind — data centers gobble kilowatts. He contends that urban Maryland would have more of the facilities if not for higher electricity expenses.

"The No. 1 issue is the cost of power," he said. "It becomes a really big detriment."

The higher payments to power plant owners in PJM's capacity-charge system are supposed to attract new generation, solving the problem.

But years went by in Maryland with nothing to show for "exorbitant" charges, the Public Service Commission said in a 2012 order intended to spur development of a new plant.

When Gov. Martin O'Malley asked the panel to step in, he said Marylanders would cough up an estimated $5 billion between 2008 and 2013 due to the "perverse" capacity system — "enough to pay for seven new power plants."

Commissioners wrote in their order that the system doesn't properly help developers get financing because it's not a multi-year commitment. Capacity prices are set one year at a time — for three years into the future — through a complex auction.

PJM does not agree that Maryland had a problem. Five years ago, the grid operator analyzed why new power plants weren't sprouting here and concluded that importing was "just frankly the cheaper alternative to building new resources" in this urbanized area, said Stu Bresler, PJM's vice president of market operations.

Transmission upgrades since then — though not enough to wipe out congestion — should help, he added.

But economist and energy consultant Robert McCullough said more electrical generation in Maryland would lower costs for consumers significantly.

"In PJM, there aren't lots of players — it's increasingly concentrated," said McCullough, a former utility executive based in Oregon.

As a result, he said, power plant owners in PJM can actually make more money by selling less. The increase in price more than compensates for the loss in volume.

Consider the capacity auction held in May, for the 12 months to begin in June 2017.

As electrical generation capacity in PJM fell, the payment in much of the region doubled, rising to the level of the normally higher Baltimore area. Some of that vanished capacity belongs to Exelon, but the capacity's not actually gone.

Three of the company's nuclear power plants failed to "clear" the auction, meaning that Exelon's bids topped the highest accepted offer for the last plant needed to ensure the lights won't go off on a high-demand day. Nuclear plants are typically among the lowest bidders.

Analysts at financial services firm UBS concluded that the net result for Exelon was about $150 million more revenue than if all its plants had cleared.

In its May research note, UBS said it wasn't implying Exelon did that on purpose. But it noted that the company received close to the "maximum uplift" possible from any hypothetical strategy of withholding plants.

Joe Dominguez, Exelon's senior vice president of government and regulatory affairs and public policy, said the bids simply reflected what those plants needed to continue operating, and "not a penny more." Lower energy prices brought by the natural gas boom and wind power have pummeled Exelon's nuclear revenues, particularly for Illinois plants.

"All of our bids are scrutinized to reflect our needed revenue," Dominguez said. "The market monitor has concluded that Exelon and others who have done the same thing have behaved completely appropriately."

Coming — and going

Even now, with incoming plants in the queue, there's still a lively debate about whether the capacity system will bring in enough generation. Waves of old coal-fired plants are expected to shut down in the next several years as stricter environmental rules and lower natural gas prices make them uneconomical to run.

Up to 15 percent of coal-plant capacity in the Mid-Atlantic will be lost in the next five years or so, according to an estimate by consulting firm the Brattle Group. That could include the coal-fired units at two Maryland plants owned by NRG Energy, which has indicated to PJM that it plans to deactivate all five units in 2018.

Maryland environmental regulators are developing rules that would target coal-plant emissions. NRG says it will see what the rules require and make a final decision.

"If you ask why is one state paying more money [for electricity] than another, one of the reasons is the state has chosen a better air quality for its citizens," said Lee Davis, president of NRG's East region. "And that's not necessarily a bad answer."

The incoming-plant side of the equation includes the Waldorf facility that the Public Service Commission ordered in 2012 with a 20-year revenue guarantee.

Customers of BGE and two other utilities would subsidize the plant if its major revenue streams fell below a certain level; otherwise, they'd get a credit. (The commission expected that customers would average a small monthly credit over the 20 years of the contract.)

Current power plant owners sued, calling the deal unfair competition and bad for consumers. A federal appeals court invalidated the arrangement in June, ruling that Maryland's commission overstepped its authority by getting into federal territory.

"We believe it's best to let those competitive markets work," said Ryan Hill, a spokesman for PPL Corp., one of the plaintiffs. The Pennsylvania power-plant owner sells electricity in Maryland.

The state and the developer, Competitive Power Ventures, have both asked for a rehearing. But in the meantime, the Silver Spring company is pressing ahead. It's in the process of closing on financing so it can build.

John E. Shelk, president and CEO of the Electric Power Supply Association, a national group that represents power producers that sell into deregulated markets, said there's more than enough power in PJM to go around. If there's a need for more, then developers will step in, he said — and he argues that's exactly what's now happening in Maryland as plants queue up.

The commission's arrangement and a similar one in New Jersey, also in the courts, shift risk to customers, he said. Only the developers who get those "sweetheart" deals benefit, Shelk said.

"Sure, they'll take your money, but do you really need to do it?" he said. "No. … They've gone ahead with the project without the contract."

Braith Kelly, a senior vice president at CPV, argues that consumers would fare far better with longer-term contracts than the capacity market. A new power plant needs 20 to 30 percent more revenue under the current model to cover its financing, given the high costs driven by a greater level of uncertainty, he said.

"If we like spending 20 percent more of ratepayer money, which is where it comes from, then it's a great plan," Kelly said. "If we would like to reduce the cost, then we need a new plan."

Two other incoming plants aren't pure-play market entrants, either.

The small peak-demand project, an expansion of an existing plant in Harford County, was required under the terms of state regulatory approval for Exelon's purchase of Baltimore-based Constellation Energy Group. Exelon says the facility had been planned before the merger, though, and it sees this type of unit — which can run on natural gas or oil — as the wave of the future.

Old Dominion Electric Cooperative, which supplies power to 11 co-ops, plans to start building a larger plant in Cecil County as soon as this fall so its members can rely less on power sold on the open market. Old Dominion has decades-long contracts with those members — a plus for financing the project, said Rick Beam, the company's senior vice president of power supply.

But two other proposed plants are the sort that the Electric Power Supply Association means when it says the market will provide. The separate developers of the Keys and Mattawoman projects, both in Prince George's County, are each seeking state approval. Both say they'll work to close on financing afterward.

Todd R. Chason, a Baltimore attorney representing the Keys project, said the years Maryland went with no new plants included the deep recession, which reduced electricity usage and dried up financing. Now, money's available again. Plant retirements loom. And natural gas, the fuel Keys would run on, is far cheaper than it was six years ago.

Genesis Power hopes to start construction on the plant before the end of the year.

"There really is demand," Chason said.

jhopkins@baltsun.com

twitter.com/jsmithhopkins

Copyright © 2014, The Baltimore Sun
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