Figure 14-7. Contribution of SPS to United States installed electrical capacity. 14.6.2 PRICE LEVELS AND THE COST OF CAPITAL To exercise the economic methodology discussed in subsection 14.4. 2 and calculate the generation cost of the SPS program, it is first necessary to resolve several issues. Two of the more important assumptions that must be made regard prices (choosing price inflation rates) and the cost of capital (choosing an interest rate to use for discounting). Prices in the energy sector of the economy have been rising at a rate higher than general price inflation. Power plant capital costs have been rising because of environmental and safety concerns, longer construction lead times, higher interest rates, etc., while operating costs have been rising primarily because of the scarcity of fuel resources. When comparing different types of power plants it is necessary, of course, to take these price changes over time into account. However, it is only necessary to account for the differential energy sector price changes. There is no reason (with the exception of budget planning purposes) to impact the cost estimates with changes in the general price level, because any such changes will affect SPS and other types of power plants equally and thus have no relative effect. Thus, as shown in Figure 14-8, price changes are broken down into two components, those attributable to general price changes and those resulting from energy sector price changes. In this study, general price changes have been ignored (except for interest rate effects), and all costs are in constant dollars of mid-1976 purchasing power.
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