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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

the Independent System Operator (ISO) in California. The combination of the PX day-ahead price and the ISO real-time price are combined into a single, market price. Since the PX day-ahead price and the ISO real-time prices seem to have converged, for the sake of simplicity the article refers to this combined price as simply the "PX price." *

The model assumes that all of the demand in the U.S. West is bid without a price, so the PX price will be set at the cost of the most expensive generating unit needed to meet the total demand. If the region is short of resources, the PX will be forced to impose an administrative limit, and the model imposes a "circuit breaker" mechanism to interrupt the normal operations.

Existing Generation

Nuclear and Hydro. There are around 2,000 generating units in the West, and several models are available to simulate each and every unit. For our purposes, it makes more sense to combine the units into broad categories like hydro and nuclear. These generators have low variable costs or operating constraints that require them to operate in a "must-run" mode. Nuclear capacity is held constant at just over 9,000 megawatts; the hydroelectric generation is constant at just over 20,000 MW. Of course, it is well known that hydro will change from year to year due to changes in the weather. We assume constant output from hydro generators to maintain focus on the construction cycle. If we see waves of construction and periods of over-/under-supply, we will be able to trace the waves back to their underlying cause without becoming lost in a myriad of "external" factors like changes in the weather.

Coal and Gas. There are around 36,000 MW of coal capacity and 33,000 MW of gas capacity in the West. Their generation is controlled by the PX price. The price is measured in dollars per megawatt-hour, and represents an annual average price for electric energy. We calculate the fraction of coal and gas capacity in operation by finding the heat rates of the marginal units. The model uses a simple search heuristic to find the PX price that will bring forth the needed generation. The demand is represented by an annual average demand for electric energy, so the model does not simulate the hourly or seasonal variations in the PX price. Instead, we use the annual average price to summarize a complex distribution of prices over the many hours in a year. We rely on a single price because it is believed that the average price over the entire year is likely to be studied by investors contemplating construction of new units.

New Plant Construction

We assume that combined-cycle, combustion turbines (CCCTs) will be the most popular technology for "merchant plants" constructed in the coming decades. The simulations envision CCCTs with:

Construction Cost 650 $/kW ('97$)
Average Heat Rate 6,842 Btu/kWh
Fixed O&M Costs 2.87 mills/kWh
Availability Factor 90%

If the investors' fixed charge rate is 15 percent per year, the levelized fixed cost would be around $16 per megawatt-hour. If natural gas