Virtual DisCos? Utilities might be stepping out,
but outsourcers could be cutting in.Wholesale competition and the prospect of competitive retailing are leading many electric utilities to turn...
prices, they must sell below cost, or lose out to the competition.
But market equilibrium is quite another matter.
Prices respond to supply and demand. If today's surplus capacity is unleashed, it stands to reason that prices will fall initially. But over time, as economic growth fuels demand for power, that surplus will be absorbed and prices will inch back up to a steady-state level.
Where that steady-state level might fall remains unknown, but technology can provide an important clue. When a technology can be put into production, over and over again, without limitation, at a constant cost, it creates a sort of "backstop" for costs and prices. Producers view such a backstop technology as one they can "clone" indefinitely, flattening the supply curve for a long time.
In the generation business, gas-fired, combined-cycle technology may provide such a backstop to costs and prices, as long as gas stays cheap. Many observers feel that this technology can deliver electricity for $35 to $45/MWh in perpetuity, allowing for recovery of both operating costs and invested capital.
Tomorrow's Good News
Today's market price of $15-25/MWh has plenty of room to grow before it approaches tomorrow's more realistic steady-state price of $35-45. Compare that prediction with nuclear's low-cost operating profile (on the order of $10-20/MWh, in many cases).
In the future, then, many of today's nuclear plants may well become valuable assets, not only to their owners (because of their "cash cow" potential), but to society at large.
The key lies with capital investment (em both sunk and ongoing. Today, the need to recover past investment is what pushes up costs for many nuclear plants. This need is quite real for plant owners, as they owe fiduciary duties to stockholders and bondholders. It marks a big part of today's "stranded asset" debate, and invites interest in shemes for accelerated depreciation. Over time, however, recovery of past investment may begin to take care of itself (em if not in the short term (3-5 years) years, then at least 10 years down the road, when much of this "sunk" investment may well be recovered (or even written off), turning nuclear assets into cash cows with low operating costs.
Looking forward, the biggest uncertainty apart from market prices (em indeed, the biggest barrier to realizing the future described above (em will prove the ability of nuclear asset owners to control future investment needs and future costs in general. If these owners can continue to keep operating costs under control, gradually pay off past investments, and not add significant new investments, their assets will become enormously valuable. If, on the other hand, they must continue to invest just in keep operating (em in new steam generators, for example, or massive repiping projects (em their nuclear assets will fall far short of competitive, even at a long-run equilibrium price of $35-45.
"Life extension" comes into play here. If nuclear owners can control new investment, and at the same time extend useful life from 40 to, say, 60 years, the asset may very likely become a money machine. On the other