Future Electricity Prices and EPA Regulation of Air Quality

One of the key variables in modelling the economics of a proposed solar project is the price of electricity in future years.  Our baseline economic model includes an assumption about electric price escalation that is based on historic data.

However, we also point out that we believe our assumption includes a conservatism based on the potential for electric price increases resulting from things like climate change and air quality regulations.

As usual, the tone of the debate in Washington over the potential impacts of rules under considertion by the Environmental Protection Agency is full of hyperbole.  On one hand, the industry argues that EPA's proposed regulations will result in dramatically higher prices as coal plants are forced to close.  On the other hand, enviros argue that cost is not a consideration.

With this in mind, I appreciate thoughtful, balanced analysis of issues like this.  Congressional Research Service to the rescue.  As pointed out by Ezra Klein in the Washington Post:

[T]the CRS report says, although the transition won’t be simple. For one, most of these plants don’t provide as much baseload power as it appears on first glance—pre-1970 coal plants operating without emissions controls are in use, on average, only about 41 percent of the time. Second, the report notes that “there is a substantial amount of excess generation capacity at present,” caused by the recession and the boom in natural gas plants. Many of those plants can pitch in to satisfy peak demand. Third, electric utilities can add capacity fairly quickly if needed — from 2000 to 2003, utilities added more than 200 gigawatts of new capacity, far, far more than the amount that will be lost between now and 2017.

The Washington Post blog post by Ezra Klein summarizes the CRS report nicely.

Overall, we are comfortable with the future price assumptions we make in modelling projects for our customers.  But we are also aware that we might be underestimating the risk of price increases over and above the historical rates.