This useful post on Gristmill details the economics of power plants. It explains how costs are divided into four categories (fuel costs, non-fuel operating costs, capital recovery, and profits) and how some of these vary with commodity prices and output, while others are fixed. It makes an excellent point about the marginal effects of price changes. Basically, there is an incentive to run your plant whenever the hourly revenues exceed the hourly costs. Since the hourly costs are lower than the real costs associated with an hour of production (because of capital costs, etc), this creates a disincentive to build more capacity. The existing plants that have the option of selling for less than their true cost but more than their true costs will undeprice you. Nuclear plants are a special case of this:
The U.S. power grid has long relied on this bucket (central-station coal and nuclear, specifically) to provide baseload power. You’d be a fool to build these plants if you didn’t first secure guaranteed equity returns, but that’s what our regulatory model is really good at. Note that these plants actually have very high costs, but since they are so cheap to operate on the margin, they tend to depress prices for power on the grid once they are built. The interesting point of comparison here is with renewables — specifically wind and solar — which also have comparatively high capital costs, but very low variable costs. We frequently talk about wind needing over $100/MWh to pencil, but this is a cost discussion, not a price discussion. You may need over $100/MWh to justify the investment in a wind turbine, but a grid dominated by such units will put downward pressure on the prices for power due to it’s low variable costs — just as nuclear and coal have done for decades.
Clearly, these are the kind of second-order economic impacts that regulators need to take into consideration, if they are to help encourage the emergence of an efficient and low-carbon energy system.
In addition to considering the impacts of fixed versus variable costs, it probably makes sense for regulators to encourage profits from energy conservation. If all the benefit goes to the consumer and the producer suffers from reduced revenue, the incentives for improvement are curtailed.