A COST-BENEFIT APPROACH
10.3 Comparison of Expansion Plans
We now have the expansion plans corresponding to five projections of the quantity demanded. The first is the original projection, which led to the expansion plan being analyzed. The remainder correspond to alternative pro-jections, resulting from the tariff increases shown in Table 10.5.
Table 10.8 shows the present value of the investment, fuel, operating and maintenance costs of the generating sub-system for each of the projections of the quantity demanded, expressed at efficiency prices. Note that the alterna-tive expansion plans result in considerable savings in relation to the original expansion plan. However, these are not all the cost savings that can be expected since there will also be savings in the transmission and distribution sub-systems. The total cost savings valued at efficiency prices for each alter-native to replace the existing expansion plan are presented in Table 10.9.
As Section 10.2 pointed out, the tariff increase affects customers and ELEC as indicated in Table 10.1. That level of disaggregation of the effect of the
17. The smaller losses for industrial consumption are due to the fact that part of the energy is supplied at medium voltage.
18. The entry into operation of a 125-Mw thermal power station in 1982 corresponds to a project already being carried out and its entry date was imposed on the model as a constraint.
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Table 10.7 Alternative Expansion Plans (In number of accumulated units)
Existing Plan VP2H: Thermal steam plants of 125 Mw.
VP1H: Thermal steam plants of 75 Mw.
GA25: Gas turbines of 25 Mw.
VHYD: Hydroelectric power stations.
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EXPANSION PLANS FOR ELECTRICITY GENERATION
Table 10.8 Investment and Operating Costs of the Generating Sub-System for Alternative Expansion Plans, at Efficiency Prices (In thousands of $)
Expansion Plan
Table 10.9 Present Value of Savings at Efficiency Prices for Alternative Expansion Plans
(In thousands of $) Savings in Costs
tariff increase is useful for distributional analysis. For the selection of the expansion plan according to the efficiency criterion, it is sufficient to value energy G^ — G\ (see Figure 10.1) in accordance with willingness to pay for the reduction in consumption in each year t.19 This willingness to pay will be measured according to the customers' actual substitution, reflected in the slope of the demand curve resulting from the adjustment they were able to make in their stock of equipment during the previous period.
19. If the market prices of the alternative sources of energy differed considerably from their efficiency prices, the use of willingness to pay would include an error; the bigger this price difference and the bigger the substitution brought about by the tariff change, the bigger this error would be.
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Figure 10.4 Adjustment to a Tariff Increase
The example of Figure 10.4, which reflects the adjustment of a residential customer over a period of three years, will clarify the above. At time t = 1, when tariff increase p{ — p0 occurs, if the consumer could adjust his stock of equipment immediately, he would be prepared to forego the consumption of other goods up to a maximum of G\ABCG10, provided that he did not do without G0 - G| units of energy. However, he does not adjust his stock of equipment immediately and this stock will initially be higher than desired at the new tariff p,. Until he adjusts his stock to the desired level (for example, by replacing his refrigerator with one that consumes less for the same cooling capacity), the reduction GQ — G} in energy consumption will be more valu-able than it would be if the adjustment had already been made (and with the more efficient refrigerator, he could chill to the same degree with less energy consumption). This is why, if it were necessary, in year / = 1 he would forego as much as Gj/?' CG$ of other goods before doing without GQ — Gj. Given that for Gj — G| he has to pay less (G\BB'G{) than what he is willing to pay, he consumes these units and substitutes only those (G^> - Gj) whose value in terms of other goods that year (G[A'B'CG§ is less than the new price />,. In the following period (t = 2) the consumer has been able to partially adjust his
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EXPANSION PLANS FOR ELECTRICITY GENERATION
Table 10.10 Comparison of Alternative Expansion Plans9 (In thousands of $)
Present Value of Effects
stock of equipment, which improves his substitution possibilities. For this reason, he substitutes some additional units of electricity. Thus, in year t = 2 he reduces his electricity consumption by Gg — G" units for a total value of G"B"CGl in terms of other goods. In other words, the value the consumer attributes to a unit less of energy depends on the adjustment he actually made in his stock of equipment, and that adjustment takes time. As a result, the value of the energy no longer consumed can be calculated in the following way:
This has been the method used in this study. Values p} + p0 for each alterna-tive and the respecalterna-tive annual reductions in energy consumption come from Tables 10.5 and 10.6. On the basis of these data, we calculated the present value of the flows corresponding to willingness to pay for the difference between the electricity that would be used under the existing plan and the electricity that would be used with the tariff increases described above. The results appear in the first row of Table 10.10 as the value of the reduction in electricity consumption. The second row shows the savings in generating, transmission and distribution costs for each alternative brought about by the supply of a smaller quantity of electrical energy. These savings exceed cus-tomers' willingness to pay for that energy in any of the four alternatives studied. It is therefore advisable, on the basis of the "efficiency" criterion, to increase the tariff and modify the existing expansion plan. However, AP2 is better than the three remaining plans in terms of this criterion, in that the tariff level can be increased by 9% with advantages in relation to increases of 4%,
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13% and 18%. The estimate of the distributional effect, which will be made in the following section, will be based on plan AP2.20