How to reduce the price of electricity
The price of electricity is rising faster than inflation is raising the general price level. As a result of high electricity prices, people are more critical of the planning by utility companies and are putting increasing pressure on these utility companies through the public utility commissions. Unfortunately the direction of this pressure is often wrong, and will in itself lead to future price increases instead of price reductions.
New England is a case in point.
New England, even in 1981, generates 60 percent of its electricity from oil. In 1971 some oil was bought by utility companies at $1.75 per barrel -- about four cents per gallon. Now it costs 17 times as much ($30 per barrel or 70 cents per gallon).
The only way to avoid steadily increasing prices of electricity is to break the dependence upon oil by replacing existing generating stations by other power stations which use cheaper fuels. These power stations must be paid for; yet the only action on prices that an electric utility can take without approval by a public utility commission is to pass through this increase of oil price to the consumer. This is allowed legally by the Fuel Adjustment Charge, which was originally intended to force the utility companies to pass on reductionsm in oil prices!
In contrast, utility companies have problems in paying for the needed capital for new construction: public utility commissions neither want them to charge in advance, nor do they want them to charge in advance, nor do they want to allow enough return on capital, in this time of inflation, to encourage banks to lend the money. In Massachusetts the situation is even worse; Massachusetts utility companies have been trying to invest in the Seabrook nuclear power facility for two years but have until now been prevented from doing so by the Massachusetts Public Utility Commission.
The recent decision of MPUC to allow further purchases in Seabrook is a sound one, but it is not enough. The commission must make sure that utilities are financially able to meet their commitments to Seabrook. It is politically tempting to blame utilities for problems that owe much more to the failure of the region's utility commissions to support nuclear power wholeheartedly a decade ago. The result is worse than stagnation, because future price increases are built into the system.
There are two types of new power plants that are possible in New England; coal, including conversion of oil to coal, and nuclear. There are only a few power plants for which it is easy to convert to coal. For many power plants there is no space for coal storage, or waste storage, or adequate pollution suppression devices. It would seem unwise to convert the plants in the major cities of Boston and New York. But there are several new nuclear power plants being planned and under construction -- Millstone 3, Seabrook 1 and 2, and Pilgrim 2. If these are completed, New England could reduce the amount of oil used by half. Yet these power plants are being delayed by state regulatory and political actions.
We therefore decided to study in detail the cost savings to the New England Region when these plants are finished. If, for example, Millstone 3 had been finished in 1978 when planned, it would have cost a little over a billion dollars -- or about $900 per kilowatt.At that cost the wholesale price of electricity from this plant would now be about 4.4 cents per kilowatt hour, which is less than the 5 cents per kilowatt hour from burning oil alone. Moreover, the 4.4 cents would have declined as the power plant was paid for, falling to 3.5 cents per kilowatt hour in 1990.
Although the cost of power plants is rising even faster than inflation, the cost of oil is also rising faster than inflation. As residual oil costs approach even present world oil prices the fuel cost for a kilowatt hour of electricity from oil will increase from 5 cents to 6 cents.
We therefore draw the important conclusion: now and in the forseeable future it is economic to build new nuclear power plants, and throw away oil-fired power plants as the new plants are finished. Yet public utility commissions have erroneously chastised utility companies for having "too much excess capacity" -- overlooking the fact that the people are best served by building until all oil-fired electrical generating capacity is excess.
We have added up the total cost that New England consumers will pay in the next decade, assuming that they use the same amount of electricity as today, and assuming that inflation continues at 10 percent and oil prices go on rising. If we do not finish these new electricity plants, we will spend $39 billion at wholesale prices. If we had finished them on time, we would be spending only $ 26 billion. The difference is a $13 billion charge for the delays we have had. If we complete these plants now as quickly as possible, we will spend $31 billion. If oil plants are converted to coal in the few cases where it is feasible, we will spend a few billion less.
We have omitted many costs of an indirect nature: mining hazards associated with coal; oil spills; and nuclear safety problems. These are not part of the direct costs to New England. In the long term, prices of nuclear electricity and coal prices are likely to be comparable over much of the country with nuclear having a 10-20 percent edge in New England.
Utilities have been trying to buy hydroelectric power from Quebec since 1965 but have failed. The capital costs of electric power from the sun or wind in 1980 remain considerably higher than nuclear or coal. In 1970 planners preferred nuclear power to the only reasonable alternative, coal, for environmental reasons. We believe they were right, and that those who claim that nuclear power is unacceptably dangerous to the environment are tragically wrong.
New England will pay a stiff price for delaying these power plants. Losses can be limited by delaying no further. The political actions can be reversed, and then the capital can be found for rapid completion of these and any other power plants, coal or nuclear, needed to disconnect the region from expensive foreign oil.