Long-run marginal costs lower than average costs
The thesis of this article is that the long-run marginal costs of electricity are not always greater than the present average costs, as is often assumed. As long as short-run costs decrease with new plant additions, the long-run marginal cost is less than long-run average cost. When average costs increase with new additions, long-run marginal costs are greater than long-run average costs. The long-run marginal costs of a particular utility may be less than, equal to, or greater than its long-run average costs - even with inflation present. The way to determine which condition holds for a given utility is to estimate costs under various combinations of assumptions: probable load growth, zero load growth, and load growth greater than expected; and changes in load factor with attendant costs. Utilities that can demonstrate long-run marginal costs lower than long-run average costs should be encouraged to build plant and increase load, for the resulting productivity gains and slowing of inflation. Utilities that face long-run marginal costs greater than long-run average costs should discourage growth in sales through any available means.
- Research Organization:
- Southwestern Public Service Co., Amarillo, TX
- OSTI ID:
- 5681207
- Journal Information:
- Public Util. Fortn.; (United States), Vol. 105:1
- Country of Publication:
- United States
- Language:
- English
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