Andrew Ford

This paper describes simulated scenarios for power plant construction in the western United States. The simulations show construction lagging behind the growth in demand, allowing prices to climb to surprisingly high values during the years 2000 and 2001. When construction is completed, new power plants come on line in great number, allowing market prices to fall surprisingly rapidly in the years 2001 and 2002. These results indicate that the restructured electric industry will experience the classic pattern of boom and bust that has been seen in the commodity industries and in capital intensive industries like real estate. The model is then used to simulate the impact of major conservation savings in an era of boom and bust. Background on Boom and Bust Many industries have experienced persistent cycles of boom and bust. The cyclical tendency is especially strong in the commodities. A commodity is usually defined as an undifferentiated product, often supplied by many small, independent producers. Examples include mineral products (i.e. aluminum and copper), forest products (i.e. lumber and pulp) and agricultural products (i.e. coffee and cattle). The instability in the commodity industries is costly for each industry, for its customers and for the nations that depend on commodity exports for the bulk of their hard currency. Cycles of boom and bust also appear in non-commodities, industries dominated by a small number of large producers or industries with highly differentiated products. Examples include aircraft and real estate. Real estate and electric power are similar in many important respects. For example, there are no inventories in these industries to serve as a buffer between producers and consumers. Also, developers in both industries confront significant delays for permitting and for construction. Developers also face high fixed costs which they hope to recover through high capacity utilization.