NCPA - National Center for Policy Analysis

New Technology Creates "Stranded Costs"

June 4, 1999

 

As states and the U.S. Congress consider creating competitive retail electricity markets, utilities are lobbying for recovery of "stranded costs." These are past investments by utilities that cannot generate electricity at competitive prices.

Stranded costs are being created by technological progress, argues a new study by economists Michael T. Maloney and Wayne Brough.

Rapid technological improvement has dramatically reduced the cost of electricity production. Gas turbines of the 1960s and 1970s had thermal efficiencies -- the rate at which an electric generator can turn fuel into electricity -- comparable to conventional powerplants, around 30 percent.

Since then, the thermal efficiencies of gas turbines have increased:

  • In the latter part of the 1970s thermal efficiencies jumped from around 30 percent to 34 percent.
  • From 1980 to 1990, efficiencies jumped again to around 37 percent, and the newest turbines have efficiencies of 40 percent.

Further increases in thermal efficiency came when the exhaust gas of turbines was recycled to produce more electricity in "combined cycle" units.

  • Harnessing exhaust heat increases electricity output by 50 percent, which means the thermal efficiencies of combined cycle units are 50 to 55 percent when the turbine itself has an efficiency of 34 to 37 percent.
  • Thus the very newest technology attains efficiencies of 60 percent -- twice those of old conventional steam units.

This means that the fuel cost of generating electricity is cut in half, and coupled with the much lower construction costs for turbines, the cost of generating power has been cut in half.

Maloney and Brough say nonutility producers accounted for half the U.S. electrical power capacity added in the first half of the 1990s. But due to new technology, they have retired or mothballed 10 to 15 percent of generating capacity they put on- line as recently as the 1980s -- without any stranded cost recovery.

Source: Michael T. Maloney & Wayne Brough, "Promise for the Future, Penalties from the Past: The Nature and Causes of Stranded Costs in the Electric Industry," May 1999, CSEF and International Mass Retail Association, Citizens for a Sound Economy Foundation, 1250 H Street NW, Suite 700, Washington, D.C. 20005, (202) 783-3870.

 

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