Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Using Hourly System Lambda to Gauge Bulk-power Prices

Fortnightly Magazine - May 1 1995

option on a present-value basis. Thus, system lambda will offer crucial information for evaluating resource options. While future rather than historical data is what is needed, forecasts will be calibrated to the new Form 714 and other data.

Capacity value reflects plant reliability. In regions with a reserve margin constraint, and no excess capacity, the value of this capacity is equal to the cost of the least expensive type of capacity to build (em the combustion turbine. Thus, regulators and competing power producers who operate in regions that need capacity will ask two questions. First, "Is more capacity required?" If yes, then, "Is any resource effective other than a simple-cycle combustion turbine?" Plants other than combustion turbines will compete only if their energy savings offset their higher initial capital costs, relative to the costs of a combustion turbine. Energy savings in turn depend on system lambda.

The importance of lambda is highlighted by comparing the value of alternative plants for systems with annual average lambdas of 25 and 35. Table 1 shows

the annual costs and revenues

of new power plants, assuming average annual lambda equals 25 mills/Kwh. The net value is the sum of the operating revenues (em which also equals marginal energy savings plus capacity value less the costs of the power plants. Costs include operations and maintenance and the carrying costs of the plant's capital investment, with these assumptions:

s Combustion Turbines. Capacity value only (zero operating hours).

s Combined Cycle Plants. Revenues exceed costs (the most economic).

s Coal Plants. High energy value (many operating hours); negative net value (high investment costs).

The results change at lambdas of 35. This effect occurs because the net value of new combined cycles increases, but not as fast as the value of coal plants (see Table 2). The energy value of the coal plant increases faster than that of the combined cycle since it operates more frequently (that is, peak and off-peak). Energy savings for coal plants become large enough eventually to offset their higher fixed costs.

Conversely, at lambdas well below 25 only combustion turbines make sense. Their net profits are zero (though they provide benefits to customers in terms of reduced blackouts and the like), but other options have negative values.

In essence, whether a power plant should be built will become largely a question of what the system lambda is and what assumptions (or in the case of turnkey bids, what "all-in" costs) underlie the analysis (such as power plant capital and other fixed costs, and variable operating costs).

Note also that a similar analysis can be performed for existing power plants, except that capital construction costs are likely to be zero. For example, in a competitive market, the value of existing power plants selling on a merchant basis may fall below book value or vice versa. t

William C. Booth is the special assistant to the director of the Office of Electric Power Regulation at the Federal Energy Regulatory Commission. The analyses and conclusions presented here are his own and do not necessarily reflect the views of