The Competition Between Coal and Natural Gas: The Importance of Sunk Costs

A. Denny Ellerman


A. Denny Ellerman, July 1996This paper explores the seeming paradox between the predominant choice of natural gas for capacity additions to generate electricity in the United States and the continuing large share of coal in meeting incremental generation, despite little new coal capacity and the aging of existing plants. The explanation offered here relies upon a consideration of the factors which affect fuel choice in new and existing plants, and decisions about retirement and the expansion of capacity to meet load growth. The sunk costs of past investment are an important unifying theme in the explanation.