NRG Energy Inc. is brooking legal and regulatory challenges to build a natural gas-fired plant in New Jersey, even as the Japanese nuclear crisis has prompted the company to back out of expanding its nuclear fleet in Texas.

The Princeton, N.J.-based utility is building a 660-megawatt, combined-cycle natural gas plant in Old Bridge, N.J., under a state law that is facing legal challenges in federal court. The state is providing NRG guaranteed revenue for building the gas plant through a 15-year capacity agreement, but a group of utilities and generators says the state is overstepping its authority and that the law is illegal.

Federal regulators last week also acknowledged concerns about the effects of the state's program on power markets in the Northeast and said market rules must be implemented to protect capacity prices in the region.

Even so, David Gaier, a spokesman for NRG's Northeast region, said the Oak Bridge site is ideal for a gas plant and the facility is expected to receive all necessary permits by midyear 2012 and be fully operational by 2015.

But challenges in the wake of the Japanese nuclear crisis are too great to continue investing in two nuclear reactors at its South Texas nuclear plant near Bay City, in Matagorda County, NRG President David Crane told reporters yesterday on a conference call.

NRG is pulling its financial backing for building Units 3 and 4 at the site but will continue to operate the 2,600-megawatt Units 1 and 2.

The utility is evaluating impacts across its energy portfolio from the March 11 earthquake and tsunami that severely damaged the Fukushima Daiichi nuclear complex in Japan and fueled concerns around nuclear safety in the United States, Crane said.

"The extraordinary challenges facing U.S. nuclear development in the present circumstance and the very considerable financial resources expended by NRG on the project over the past five years make it impossible for us to justify to our shareholders any further financial participation in the development of the [Texas] project," Crane said.

Kevin Book, an analyst with ClearView Energy Partners, cast doubt on whether NRG's decisions reflect a trend in the market, saying that a significant number of existing plant operators forgoing relicensing would have a much larger impact than a small number of would-be nuclear plant developers backing out on expansion plans.

N.J. challenges

Meanwhile, NRG's plan to press ahead with its proposed natural gas plant in New Jersey is under scrutiny.

Gov. Chris Christie (R) signed a law in January that creates a state program to offer long-term capacity agreements to generators. The state wants to encourage construction of up to 2,000 megawatts of in-state, gas-fired generation.

The long-term agreements provide developers with guaranteed revenue, allowing them to build facilities or undertake projects that would not have been feasible otherwise.

In March, New Jersey regulators chose NRG subsidiary New Jersey Power Development LLC -- along with Hess Newark LLC and Competitive Power Ventures LLC -- to enter into long-term capacity agreements and build three gas-fired combined cycle projects in Newark, Old Bridge and Woodbridge. Together, the plants will generate almost 2,000 megawatts.

Under the program, utilities would make net payments to eligible generators through the long-term agreements, and generators would then recover the costs from customers through rates.

New Jersey regulators have said the new gas generation would reduce emissions equivalent to a 250-megawatt coal-fired power plant running at full capacity for one year. Competitive Power Ventures could not be reached for comment, but Hess Newark said the company is moving forward with constructing a natural gas-fired facility in Newark, N.J.

Generators and utilities -- including Calpine, PSEG and Exelon -- are suing the state in the U.S. District Court for the District of New Jersey, challenging the legality of the New Jersey law (Greenwire, March 2).

The lawsuit charges that the Federal Energy Regulatory Commission, not the state, has exclusive authority to regulate those markets and that state law cannot dictate how the generators interact in wholesale capacity auctions, which grid operator PJM oversees.

PJM oversees wholesale power markets in New Jersey and 13 other states and conducts the capacity markets to determine the cost of constructing new generation in the region.

The state has long been frustrated by PJM rules and FERC, and the law seeks to circumvent existing federal rules and undermine PJM's wholesale capacity market, the lawsuit says.

While the lawsuit is ongoing, opponents of the New Jersey law have also lodged complaints at FERC and last week received some assurance the markets will be protected.

The PJM Power Providers Group -- whose members include Calpine Corp., Constellation Energy Group Inc., Exelon Corp., NRG Energy Inc. and PSEG -- had filed complaints, raising concerns that the law would artificially suppress capacity clearing prices in the PJM, which would ultimately damage the region's competitive market structure.

FERC ruled on April 12 that PJM must impose market rules to limit the minimum prices for new capacity offered into the market.

Glen Thomas, president of PJM Power Providers Group, said FERC sent a clear message that the agency is willing to protect the region's wholesale capacity markets.