Trends

Fortnightly Magazine - February 15 1997
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Competitive Power Markets

Put Capacity at Risk

Generation markets in the U.S. are about to go through a period of radical transformation as full competition is introduced to the industry. One of the largest impacts of this transformation will be the creation of a more efficient generation industry. According to a new study by Resource Data International, the drive towards increased efficiency will result in the premature shutdown of some high-cost, inefficient power plants.

Our analysis starts by analyzing the costs of every utility owned power plant in the country. The cost portion of our analysis distinguishes between two different types of costs: sunk costs and on-going costs. Sunk costs include the depreciation, capital and tax expense associated with existing facilities and some portion of long-term fuel supply commitments. On-going costs include the future fuel expenses, operation and maintenance expenses, and the replacement capital costs required to keep the plant operating or to extend the plants life. On-going costs are the basis for efficient competition in markets. In an open market, a generator would shutdown its plant if the potential revenue generated by the plant is less than its avoided costs. To do otherwise would result in additional losses, regardless of the initial investment in the plant.

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