Decision makers in the regulated part of the business of producing electricity have short memories when it comes to the behavior of natural gas prices, but long memories when it comes to the potential for nuclear power plant construction costs to get out of hand.
They publicly worry about the “bet the company” proposition of building new nuclear power plants and ask for as many assurances and risk mitigations as they can get before undertaking a new nuclear plant construction project, even though nuclear plants use a fuel with a low and predictable cost. In contrast they will choose to build substantial new capacity that burns natural gas and fuel oil. They pay less attention to the long term risk of using fuels with a demonstrated history of price volatility that can double or triple a production cost component that represents between 75 and 95% of the total cost of generating electricity. In case you do not follow gas and fuel oil prices, here is a graph of the actual prices during the past 6 years.
Utility company power plant decision making can be confusing unless you know that almost every service area in the United States where electricity prices are regulated on a rate of return basis allow fuel prices as a pass through charge to consumers that can be adjusted on a frequent basis – often as often as every six months. In contrast, capital cost rate cases are infrequent, complex and often contentious with every major charge subject to detailed questioning about prudence.
If a regulated utility does a great job of building new nuclear facilities and keeps cost well under control, they end up with an asset that produces electricity at a low and predictable marginal cost. The price they are allowed to charge for the electricity is set by regulators at a rate that will enable recovery of the allowed cost plus a bureaucratically determined 8-15% return on their capital investment. The allowed electricity price has nothing to do with the prices charged by other sources of power in the marketplace. If the nuclear plant construction costs get out of control because of poor management, regulatory changes during construction, imposed legal delays, or high interest rates, the utility can end up with a large portion of the cost of the plant ineligible for cost recovery.
In contrast, a regulated utility that builds a natural gas power plant can predict the cost and schedule for plant construction with reasonable precision. At least 75% and perhaps as much as 95% of the marginal cost of producing electricity from that plant will be associated with purchasing delivered fuel. However, that cost will be passed directly to the customers, who unwittingly accept all of the volatility risk. The regulated utility will still be allowed between 8-15% return on capital investment.
Does it make you happy to find out that your utility company and your public utility regulators may have put you on the hook for natural gas price volatility during the 20-40 years that the gas plants will be operating?