Economies of scale, reliability and generation capacity: the economics of small versus large electricity generating units

The type of analysis which should be conducted in the selection of the most economical electricity generation capacity expansion plan is discussed. Major points are that scale economies are probably no longer as substantial factor as they were once thought to be. At the same time, the system reliability impact of large generating units is a factor tending to offset any scale economies that might remain. When these two elements were juxtaposed in a composite analysis it was concluded that the system reliability effects of the small unit plan more than offset the somewhat higher capital cost per installed kw. This conclusion was robust to rather substantial changes in capital cost, heat rate and discount rate, the three most important variables in the calculation. It seems clear that utilities should examine the full costs of a variety of different capacity expansion plans.