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The Choice of Fuel in Competitive Generation

Fortnightly Magazine - June 15 1995

industry and the public, as well as the government.

The course of events since 1975 is, of course, well known. A number of huge baseload nuclear plants became redundant because electric demand fell far short of forecasts. Nuclear costs (em whether due to poor construction management or to regulatory waffling (em climbed out of sight. Meanwhile, natural gas, freed of an earlier regulatory regime, began to fill the interstate pipelines. Gas surpluses and price declines developed. Gradually, there seemed to be enough of the "premium" fuel to find a broad range of satisfactory uses (em even in power plants. In fact, in the last year or so, estimates of crude oil prices (and presumably natural gas prices) forecast a declining trend.15 Now there appears to be sufficient oil and gas to last literally forever (em and at cheaper and cheaper prices. In contemplating the competitive universe, the combined-cycle natural gas-fired turbine appears to be the plant at the margin (em setting the market price and exposing many nuclear behemoths as an embarrassment. In 20 years, conventional thought, which was by no means confined to government regulators or the electric power industry, has suffered a total reversal.

A New Pecking Order?

I wish I could believe that we are really smarter in 1995 than we were in 1975. But I think the real lesson of history is that prediction is a very imperfect science; it is virtually impossible to provide an accurate 20-year forecast. This is one reason a competitive regime faces what I consider unusual difficulties in the electric power industry. Perhaps these problems are no more serious in a competitive regime than in a regulated one. Yet these problems make one wonder just how different one regime may be from the other.

I make this observation because many of the cost differentials in generation hinge on choice of fuel. But the choice of fuel is dictated by a complex array of factors (em such as perceived national security, environmental, and available resource base considerations not necessarily reflected in the day-to-day market price. As I have pointed out elsewhere, these considerations, like externalities, potentially undercut decisionmaking in the electrical world.16

So the market for electric generation promises to be heavily constrained and regulated. Unless the past has no message for the future, we will find ourselves in a market where choice of fuel (em certainly a major factor in competitive performance (em will be heavily impacted, if not dictated, by government policy (and by public opinion). Government policy, in turn, will be determined by current estimates of availability of various fuels, fuel price trends, dependence on foreign sources, national security considerations, and other nonmarket factors. Perhaps current thinking about these matters will prove more durable than past thinking, but there seems to be no guarantee of stable views.

For instance, deregulation of natural gas and the unbundling of gas pipeline services partially prompted the trend toward natural gas as a boiler fuel. Some believe that deregulation will save us from repeating the "errors" of the past (e.g., substituting other fuels for gas).