Opponents of increased distributed energy resources who advocate for centralized power distribution insist that marginal costs are substantially below retail rates–as little as 6 cents per kilowatt-hour. Yet average costs generally continue to rise. For example, a claim has been repeatedly asserted that the marginal cost of transmission in California is less than a penny a kilowatt-hour. Yet PG&E’s retail transmission rate component went from 1.469 cents per kWh in 2013 to 4.787 cents in 2022. (SDG&E’s transmission rate is now 7.248 cents!) By definition, the marginal cost must be higher than 4.8 cents (and likely much higher) to increase that much.
Average costs equals the sum of marginal costs. Or inversely, marginal cost equals the incremental change in average costs when adding a unit of demand or supply. The two concepts are interlinked so that one must speak of one when speaking of the other.
The chart at the top of this post shows the relationship of marginal and average costs. Most importantly, it is not mathematically possible to have rising average costs when marginal costs are below average costs. So any assertion that transmission marginal costs are less than the average costs of transmission given that average costs are rising must be mathematically false.
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“Fixed costs” cannot “rise”–they are fixed. The capital return on existing investment is a fixed cost–the cost to replace that investment is not a fixed cost. Any incremental cost to the transmission system is a marginal cost, even if it is caused by a multitude of factors. Wildfire mitigation costs are not “fixed”–they are incremental costs incurred by existing customers (and new development on the WUI.) Grid hardening also is a marginal cost to existing customers created by changing conditions. This is no different than increasing fuel use at generators as performance degrades over time.
Unfortunately this discussion illustrates a lack of a rigorous discussion of what constitutes marginal costs in the electricity system. Rising total costs must be completely described mathematically. Heuristics won’t cut it.
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If someone insists that the marginal cost or value related to one particular aspect does not follow this pattern, e.g., costs avoided by added DERS, then they must calculate the total marginal cost and identify the components of that marginal cost that are excluded from the aspect that they’ve focused on.
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