New Jersey Governor Chris Christie signed into law Friday a program of long-term incentives to build new power plants in the state, against opposition from within the U.S.'s largest electricity market.

The program would provide up to a decade of incentive payments to developers for the construction of 2,000 megawatts of natural gas-fired generation, enough to provide electricity for about two million homes. The move guarantees a minimum return to developers to build plants.

New Jersey is part of the 13-state competitive electricity market operated by PJM Interconnection LLC, where companies have used market price signals to determine whether to build a new plant or pursue other investments.

Lawmakers say the program will reduce some of the highest power prices in the country, curb greenhouse gas emissions and create jobs.

The current pricing model benefits existing electricity suppliers and "it actually serves to discourage the development of new power generation to replace the old, inefficient and polluting power plants with new, more efficient and cleaner plants," said spokesman Michael Drewniak for Gov. Christie in an email.

Initial projects expected to benefit from the new law include a 640-megawatt plant by LS Power Development LLC in West Deptford, the town where proponent New Jersey Senate President Stephen lives, and a roughly 700-megawatt plant by Competitive Power Ventures LLC in Woodbridge.

But major power producers in the state oppose the legislation and are expected to seek legal action against the bill.

"We believe that it will ultimately lead to higher energy bills for New Jersey consumers, fewer jobs and make it unlikely future power plants will be built in the state without government subsidies," Public Service Enterprise Group Inc. (PEG) spokesman Michael Jennings said in an email. PSEG, the state's largest utility company, has said the program will cost consumers more than $1 billion.

The P3 Power Providers Group is preparing to file a complaint to the Federal Energy Regulatory Commission, which has jurisdiction over the regional electricity markets, to prevent subsidized power plants from undermining market prices, said Glen Thomas, president of the industry advocacy group. Its members include PSEG; Exelon Corp. (EXC); Constellation Energy Group Inc. (CEG); NextEra Energy Inc. (NEE); NRG Energy Inc. (NRG); Calpine Corp. (CPN); PPL Corp. (PPL); and GenOn Energy Inc. (GEN)

PJM's independent market monitor has also opposed the program.

The program concerns what are known as capacity payments made regularly to power companies as a reward for keeping plants ready to meet peak demand load three years from now, not for power produced. The payments are set through annual PJM auctions and the capacity payments are funded by consumers through electricity rates. Power plant owners rely on this cash flow to cover costs and make investment decisions.

The new state law will allow developers to lock in capacity payments outside of this auction system for up to 10 years, instead of the three-year limit set up by PJM.

The new generation built under the New Jersey law will have to bid into the PJM auction in May 2011 or 2012 and to win it developers are expected to place artificially low bids because their payments will be guaranteed through a separate charge on utility customers' bills.

New Jersey has some of highest capacity payments in the country. Last May, it was set at $245 a megawatt a day, compared to less than $30 a megawatt a day in western parts of the PJM market, where population centers are less congested. The new generation could cut $2 billion in annual PJM capacity payments, Drewniak said.

PJM spokesman Terry Williamson said that these cost-savings are not guaranteed and that next month a task force will discuss revising rules to subsidized developers from placing zero-dollar bids. PJM is also considering whether to offer longer term contracts to support building new generation.

While capacity prices are headed higher, Exelon Chief Executive John Rowe said in a call with analysts last week that the outlook "remains murky" given New Jersey's program and PJM's reduced forecast for power demand growth over the next decade.

Despite staunch opposition, state legislators passed the bill with little opposition with the hope of stirring local economies.

Competitive Power could not be reached for comment.

-Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com
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