Question
The utility projects its annual electricity demand to grow by an additional 7 million Mwh to 19 Mwh per year. The utility anticipates that its
The utility projects its annual electricity demand to grow by an additional 7 million Mwh to 19 Mwh per year. The utility anticipates that its peak load will grow by 1,000 Mw, so needs to add 1,000 Mw of new capacity. Utility managers considering whether to install a nuclear power plant or a set of gas-fired turbines. The table below summarizes the capital and operating costs of the two options.
Fuel source | Capacity (Mw) | Capital cost ($millions) | Operating cost ($/Mwh) |
Nuclear | 1,000 | $5,000 | $5.00 |
Natural gas | 1,000 | $500 | $50.00 |
Suppose now that the utility made the decision to expand its capacity by 1,000 Mw, but its projections are too optimistic, and demand growth turns out to be only 4 million Mwh instead of 7 million Mwh. What would be the earnings and regulated price of electricity under each alternative in this case, still assuming that the old capacity continues to generate 12 million Mwh per year, and that the new plant, or plants meet all the demand growth? a. What is the regulated price of electricity? Show how you derived the answer. b. What are the utility's annual profits? Show how you derived the answer. c. Who ends up paying how much (ratepayers vs. utility owners) for the managers' forecasting error?
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