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The Choice of Fuel in Competitive Generation

Fortnightly Magazine - June 15 1995

True marketeers hold that the substitution of market forces for "command and control" assures, if not infallibility, at least alignment with a wondrously reliable invisible hand. This is an act of faith that only experience can put to the test. But the historical record suggests caution.

Quite apart from public policy involving world and domestic supply and considerations of national security, we also face major issues of safety and environmental impact. Public opinion and the government's outlook on these matters changed the prospects of nuclear energy rather dramatically between 1960 and 1990. Markets will have to operate within these changing constraints (em presumably discounting them as much as possible. The fundamental question of electricity's place in the energy pecking order is also open. How many gasoline-powered automobiles will bereplaced by electric cars? Again, extra-market forces will be in play.

The Real Promise of Competition

Obviously, the builders and buyers and sellers of electric generation will try to take government policy and public perception into account in arranging long-term contracts. But the factors we have mentioned are matters that markets, with their short-run focus, do not adequately reflect. The cheapest source today may be unavailable tomorrow because of some shift in the politics or economics of world trade. All industries risk an uncertain future (em dress manufacturers must guess what may be in style next season (em but no industry is more fundamental to the economy, or to national security, than the electric industry, which has massively capital-intensive investments at stake.

Admittedly, competition in generation may take place primarily at the level of heat rates and the like; these do not raise such serious and fundamental questions. Choice-of-fuel questions may not be a major factor because the mix of competing generating plants will be uniform and optimal; then competition will occur at the margins.17 But this does not seem obvious to me, and such an assumption should not be lightly made.

As I have indicated, the real promise of competition is in Schumpeter's "creative destruction" (em the belief that whole new ways of doing things will emerge from the competitive struggle and, as a consequence, drastically improve quality, reduce price, or provide other benefits. On the whole, this has not been the story of electric power to date. Incremental progress (em bigger units and higher pressures (em has been the norm. The giant leaps we have seen (em such as the development of nuclear power (em have thus far produced more failure than success. Somehow the electric industry's record has not paralleled that of the telecommunications industry, where major innovation has been spectacularly successful.

One possible reason for this is the extraordinary impact of electricity on the world it pervades (em on the environment in the largest sense. One power plant may be narrowly more "efficient" than another, but should it raise havoc with the environment, national security, or any number of other matters external to the market, extraordinary complications will arise. We must be vigilant to ensure that our thinking about a more competitive electrical generation system addresses with realism the many