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Is Competition Lacking in Electric Generation? (And Why It Should Not Matter)

Fortnightly Magazine - January 1 1997

combustion turbine powerplants are 40 to 50 percent less thermally efficient than combined cycles. The combined-cycle plant can save enough on fuel costs to more than pay for the higher capital cost. The model includes a mix of both plant types, which generally produces a lower price ceiling than that obtained by referring only to combined-cycle plants.Thus, we present a modified approach that involves four steps in determining the appropriate mix of simple- and combined-cycle units:11. Break-even Point. Determine the capacity factor or annual service level at which the average levelized power costs of the two plants are equal (see Figure A1). This break-even point depends on gas prices and on the costs and performance of the two types of plants.2. Capacity Mix. Review the system demand profile. For example, in the case in which the portion of demand to be served by simple-cycle plants is that portion with low load factors (10 percent or less),2 then the percentage of simple cycles in the mix is approximately 45 percent, as shown by the load duration curve (see Figure A2).3. Plant Operations. Employ the load duration curve to determine specifically the relative utilization levels of peaking and baseload units. We expect low utilization of peaking units (simple-cycle turbines), but a high utilization rate for the baseload units (combined-cycle plants).4. Average Costs. Determine average costs as the sum of the generation weighted average variable costs and the capacity-weighted fixed costs. B. The Competitive Market PriceIn the competitive market, prices are equal to marginal costs. In particular, firm wholesale competitive prices are determined as the sum of unbundled marginal costs of supplying electrical energy (system lambda or economy energy) and the costs of supplying pure or unbundled capacity.3Figure B1 shows estimates of the competitive marginal costs of electrical energy, the first and largest component. These estimates are derived from recent historical statistics. In most regions, today's prices reflect primarily the marginal costs of producing electrical energy from existing powerplants. These figures are often low, reflecting the low operating cost of coal-fired generation. These low prices exist because of excess capacity, much of it in coal and nuclear resources that would not be built today.Around 2000 to 2005 (note our estimates presented in Table 1 are for 2000), firm prices will reflect the combined costs of electric energy and pure capacity. The equilibrium marginal capacity cost is set by the cost of installing gas-fired combustion turbine capacity (see Figure B2). This figure can account for about 25 percent of the cost of meeting customer demand. As the excess capacity of low-cost coal powerplants is exhausted, prices increasingly reflect the marginal costs of higher-cost coal plants, gas-fired steam plants, and combustion turbines.4Over twenty to thirty years, the price under a competitive market will equal the ceiling price under market power today. In other words, we can expect the premium between the two prices to decrease over time, and for the prices to converge, since in both cases prices will reflect a rebuilt system.

7. In this analysis, the costs of the rebuilt system do not depend on