New Jersey utility Public Service Enterprise Group, facing state clean energy mandates and an economic imperative to shift its business to regulated assets, is seeking to exit its merchant fossil and solar generation business, while retaining its nuclear power plants and exploring a major expansion into offshore wind.
PSEG announced Friday that it’s “exploring strategic alternatives” to its more than 6,750 megawatts of fossil generation in New Jersey, Connecticut, New York and Maryland, and its 467-megawatt Solar Source portfolio spread across 14 states. It expects the transactions involved to begin in the fourth quarter of 2020 and to be completed sometime in 2021, CEO Ralph Izzo said in a Friday second-quarter earnings conference call.
The sale is expected to “accelerate the transformation of PSEG into a primarily regulated electric and gas utility,” with its subsidiaries serving 2.1 million customers in New Jersey and another 1.1 million in New York's Long Island, Izzo said.
The move to exit merchant generation while retaining its three nuclear power plants “could reduce overall business risk and earnings volatility, improve our credit profile and enhance an already compelling [environmental, social and governance] position driven by pending clean energy investments, methane reduction and zero-carbon generation,” Izzo said.
PSEG’s move would align it with other utilities in states that have set future zero-carbon mandates, as well as those that are seeking the relative security of revenue based on regulator-guaranteed rates of return rather than being dependent on the vagaries of wholesale energy markets.
New Jersey Gov. Phil Murphy has set a goal of 100 percent clean energy by 2050 and directed state utility regulators to develop a statewide clean energy plan to shift away from carbon-emitting generation. PSEG has laid out a $3.5 billion clean energy plan that aligns with Murphy’s plan and a 2018 state law setting a renewable portfolio standard of 35 percent by 2025 and 50 percent by 2030.
Wholesale power generation: A tough game
At the same time, prices in energy markets of mid-Atlantic grid operator PJM, which includes New Jersey and PSEG’s merchant fleet, have remained quite low, Izzo said. Despite hot weather that typically drives electricity demand, PJM market prices have “remained in the mid-teens to low $20s per megawatt-hour most days during the second quarter,” and only exceeded $30 per megawatt-hour twice in the past 30 days, he said.
These same low prices have harmed the economics of nuclear power plants in New Jersey and across PJM territory, driving utilities that own them to seek state subsidies in the form of credits for the zero-carbon energy they produce. In New Jersey, zero-emissions certificates approved by lawmakers last year will provide about $300 million per year in support to the Hope Creek nuclear plant owned by PSEG and the Salem plant owned by PSEG and Chicago-based utility Exelon, which produce more than 90 percent of New Jersey’s current carbon-free electricity.
Nuclear power plants could also face problems in PJM’s capacity market, due to the Federal Energy Regulatory Commission’s order directing PJM to set minimum bidding prices for state-subsidized resources that could prevent them from clearing the market. Although PJM’s draft compliance plan would allow some nuclear power plants to avoid being priced out of the market, FERC has yet to make a decision on the plan.
PSEG plans to file applications this fall to seek a second round of zero-carbon subsidies and expects a decision in mid-2021. While Izzo said PSEG is confident that its nuclear plants would be able to compete in PJM's capacity market, given the vital role nuclear power plays in the state’s zero-carbon energy goals, “the financial need for [zero-emissions certificates] is more critical than ever,” Izzo said.
Amping up plans for offshore wind
Beyond nuclear power, New Jersey is joining states like New York and Virginia in setting its sights on offshore wind as a major component of its future clean energy power mix.
Last year New Jersey more than doubled its offshore wind target from 3.5 gigawatts by 2030 to 7.5 gigawatts by 2035, an amount that could provide half the state’s electricity needs; the state contracted with Denmark’s Ørsted for its first 1.1-gigawatt project called Ocean Wind, expected to be complete by 2024. PSEG has said it is considering buying a 25 percent stake in the Ocean Wind project.
Last month the state released guidance for a new solicitation for between 1.1 gigawatts and 2.4 gigawatts of offshore wind development, with winners expected to be announced in 2021. In a bid to capture the economic value of supplying the East Coast’s massive offshore wind development plans, Gov. Murphy announced plans to build an offshore wind port on an artificial island in the Delaware River near a PSEG nuclear plant, one that could rival similar ports that may be built in New York and Virginia.
PSEG is selling its 479-megawatt solar portfolio because the relatively small size and scattered locations of those projects don’t fit with the utility’s focus on “our green and carbon-free attributes in the mid-Atlantic region,” Izzo said on Friday’s earnings call. He added that PSEG’s investment into transmission could rise as New Jersey’s offshore wind farms grow to scale.
"This is becoming more and more real every day," he said of New Jersey's offshore wind plans. "I have no reason not to believe that the state's full aspirations of 7,500 megawatts" will be reached by 2035.
"This is going to happen at a scale that I wouldn't have predicted three or four years ago, but you see it coming along right now."