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To: reaper who wrote (220676)	2/12/2003 2:34:19 PM
From: yard_man	Respond to of 436258

>>the capital is sunk, so all that matters is marginal cost<< [energy price == electrical power price] this is exactly right. Capacity costs are sunk;hence, they have almost nil to do with energy prices. Energy prices reflect costs of production, availibility of transmission access between markets and simply the rationing function of the markets -- period. That's an instantaneous thing -- it doesn't care about whether a utility has 1 extra turbine or 5 extra turbines or if anyone makes their debt service or not. (Obviously, the utility cares a little bit -- but maybe not if they have a lot of baseload generation and a captive set of customers. Baseload coal or nuclear plants are several times more expensive with regards to capital than a peaker or a combine cycle plant). [Coming in June we may have as much as 400 MW extra gen capacity -- we'll have no trouble whatsoever making the debt payments and being profitable -- even if they never go in the money for 3-4 years. Sure you can look back and say woulda been nice not to have 5 turbines, but what if volatility returns -- you could get killed in less than 10-15 bad days.] Here are the influences on the price of electrical energy: Load -- which is nonlinearly dependent on temperature (e.g. peaking supply which could be as much as 30% of the total capacity is bought to operate only 5-10% of the year -- but that spike can be quite high) Fuel price of the marginal unit Transmission constraints (High load and transmission constraints are often correlated.) Main thing is this -- doesn't matter how much excess peaking capacity there is for the markets -- loads get real high, transmission gets constrained, large number of untis on line, most expensive units at the margin -- prices are going up to ration supplies just like in any market -- maybe more. Residential HVAC (esp AC) load just isn't price elastic for the most part and that's what produces the peaks. A shortness of capacity will produce more volatility and higher prices when these conditions hit -- but the converse is NOT true -- excess capacity will not depress prices below the level where they are greatly profitable to the players when loads are high or fuel prices are high. Generation on line is almost always profitable from an operational costs standpoint. Is volatility gone for the next two years? I doubt it -- got to keep in mind that all NERC regions and utlities keep more capacity than they hopefully need at any given time -- it's called reserves. Energy supplied == demand at all times -- hence there is never a glut of energy. Now for those utilities that built intermediate and peaking generation to simply sell into the wholesale markets?? -- yeah, those guys can be in a situation where they make an operating profit that is too small to cover the debt service on the units. We may even operate these units at a loss for a year or years when considered on their own, but we have to have them to serve load when it is high. That's why not much capacity trades right now, unless it must -- someone is being liquidated. Who wants to mark those assets down? does that answer your question?? -- I'm going to sneak down and read that article in a minute.