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Boom and Bust? Understanding the Power Plant Construction Cycle

Rising energy demand could spur investment in waves, but a fixed capacity charge might flatten the curve.
Fortnightly Magazine - July 15 2000

optimal power model. His illustrative calculation shows a 39 percent increase in net present value of earnings if generators optimize their operations across multiple markets.


This article is adapted from a detailed description of the simulation study, which is reprinted from , Vol. 27, Andrew Ford, "Cycles in Competitive Electricity Markets: A Simulation Study of the Western United States," pp. 637-658, 1999, with permission from Elsevier Science. Additional readings are listed below.

Bunn, Derek, and Larsen, Erik, "Sensitivity of Reserve Margin to Factors Influencing Investment Behaviour in the Electricity Market of England and Wales," , May 1992.

Borenstein, Severin, "Price Convergence in California's Deregulated Wholesale Electricity Markets," Fifth Annual Research Conference on Electric Industry Restructuring, University of California Energy Institute, Berkeley, Calif., March 17, 2000.

California Independent System Operator, Market Surveillance Unit, "Annual Report on Market Issues and Performance," Folsom, Calif., June 1999.

California Public Utilities Commission, "Electric Restructuring Resource Notebook," San Francisco, Calif., 1999.

Cambridge Energy Research Associates, , Summer 1997.

Deb, Rajat, "Rethinking Asset Values in a Competitive Environment," , Feb. 1, 2000.

DePasquale, Denise, and Wheaton, William, , Prentice Hall, 1996.

Ford, Andrew, "System Dynamics and the Electric Power Industry," , Vol. 13, Num. 1, Spring 1997.

Graves, Frank, "How Competitive Market Dynamics Affect Coal, Nuclear and Gas Generation and Fuel Use_A 10-Year Look Ahead," Final Report TR-111506 by the Brattle Group to the Electric Power Research Institute, Palo Alto, Calif., 1999.

Hoyt, Homer, , University of Chicago Press, 1933.

Grix, Richard, "Market Clearing Prices Under Alternative Resource Scenarios 2000-2010," California Energy Commission, Sacramento, Calif., February 2000.

Klein, Joel, "Interim Staff Market Clearing Price Forecast for the California Energy Market," California Energy Commission, Sacramento, Calif., December 1997.

Levesque, Carl, "Merchant Mania: Regional Markets Draw Gen Plant Projects," , Jan. 1, 2000.

Moore, Taylor, "Merchant Plants Drive Market Competition," , Vol. 24, Num. 2, Summer 1999.

Northwest Power Planning Council, "Analysis of the Bonneville Power Administration's Potential Future Costs and Market Revenues," Portland, Ore., 1998.

Northwest Power Planning Council, "Regional Power Supply Adequacy/Reliability Study," Phase I Report, Portland, Ore., December 1999.

O'Donnell, Arthur, "Exceptions to the Rule: Bypassing the California Transition Charge," , Nov. 15, 1996.

Richard, Dan, and Lavinson, Melissa, "Something for Everyone: The Politics of California's New Law on Electric Restructuring," , Nov. 15, 1996.

Rose, Judah, and Mann, Charles, "Unbundling the Electric Capacity Price in a Deregulated Commodity Market," , Nov. 15, 1995.

Rose, Judah, "Last Summer's Pure Capacity Prices," December 1997.

Singh, Harry, and Jacobs, Jonathan, "Capacity Products and ISO Markets," Fifth Annual Research Conference on Electric Industry Restructuring, University of California Energy Institute, Berkeley, Calif., March 17, 2000.

Sterman, John, , Irwin McGraw-Hill, 2000.

Thurston, Charles, "Merchant Power: Promise or Reality?" , Jan. 1, 1999.

Technical Appendix: A Description of the Model

Electricity demand is represented by the annual average demand for electric energy in the western United States. Demand grows at a constant rate year after year, thus eliminating variability in demand as a confounding factor. Demand is satisfied by a power pool following the rules adopted by the Power Exchange (PX) and