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FERC's Plan for Electric Competition

Fortnightly Magazine - July 15 1998

cases involving the obligations of nuclear license applicants to wheel power, share reserves and engage in power coordination. His views have been presented to the FERC and the D.C. Circuit Court of Appeals (Louisiana Energy & Power Authority v. FERC, D.C. Cir. No. 97-1098, decided April 24, 1998), but neither body responded to the arguments. This article is adapted from a chapter from a work in progress, "The Electric Power Business," a book the author expects to publish soon.

Unworkable Competition

The economics of electric distribution without reserve sharing or coordinated development.

TOO UNRELIABLE. Agree to build a 500-MW generating unit and try to sell the power. You are selling unit power, not RQ power. You can call it "long-term firm" and agree not to interrupt its output, but that won't make the power commercially acceptable to a retail distribution system. You can only sell the output to a marketer or other bulk power supplier. (Once the plant is built the output is "short-term firm," but the result is the same.)

FIRMING UP. Do you want to firm it up? Then you have to build an additional 500-MW unit for reserves. If each kilowatt costs $1,000 dollars, your investment will be $2,000 per kW for RQ power but your established competitor can supply RQ power with only $1,100 or $1,200 of investment per kilowatt.

AN ALTERNATIVE. You could try using 250-MW units. Build three and you can sell 500 MW of firm power. The heat rate won't be as good and you are still maintaining 50 percent reserves compared to your competitor's 10-20 percent. You have to carry the fixed charges for that extra 30 percent. You burn more coal for each kWh.

GOING ALL OUT. If you enter the market in a big way, you can match these economics until your load starts growing. How much investment will that take? If you had a power system of 2500 MW you could build a 500 MW unit for reserves and maintain only a 20 percent reserve. (If you wanted only a 10-percent reserve you would have to build a 5000 MW system.) Assuming you can build a new 500-MW unit in today's market for $1,000 per kW with the necessary antipollution equipment, 2500 MW will cost $2.5 billion. Know any investors who will bite simply to compete with someone else already in the market and well-prepared for competition?

WHAT IT WILL COST. If you do, and your load grows, you have to keep on adding those 500-MW units. You can add some peaking in small increments which will help. Eventually you will have to add base load. If your load is only 2500 MW and your load growth is 3 percent, each year you will need an additional 75 MW. That means that the first year you have added a new 500-MW unit you will have 425 excess MW (and 350 in year two) on which you will have to pay carrying charges.

COSTS OF GROWTH. It is likely that the fixed annual charges for capital cost, insurance, maintainance and operation will