3. SPS Energy Sold at the Incremental Cost of Base-Load Alternatives • If the inflation rate continues at roughly the same as present rates, it would be possible to price energy from an SPS (capital cost = $7.6 billion) at the incremental cost of alternative fossil fueled generation and eventually make a profit. The size of the profit depends on the inflation rates. • If the capital cost of the SPS is significantly higher than $7.6 billion, the inflation rates necessary to eventually make a profit using this pricing alternative, would be significantly greater than the present inflation rates. • Pricing SPS generated energy in this manner requires the operation of the SPS at a loss for roughly twenty years. The risks associated with this arrangement are too large for private industry- financial guarantees from the government would be required. • If the government provides financial guarantees to a corporation intending to price SPS energy in this manner, the interpretation of this decision may be that either the government is willing to subsidize the SPS or that the government expects the inflation rate to continue at its present level or higher.
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