Overbuilding Fossil Capacity and Locking In Stranded Capital from Flawed Planning Assumptions
Flawed integrated resource planning processes systematically approve uneconomic fossil plants by underestimating alternatives and fuel costs — raising consumer costs by hundreds of millions to billions per plant over its operating life.
What Is Fossil Capacity Overbuilding from IRP Planning Errors?
Integrated Resource Planning (IRP) is the process by which regulated electric utilities determine what generation capacity to build or contract. IRPs that are methodologically flawed — defining 'need' in terms of desired fossil capacity rather than system load requirements, omitting demand-side resources and non-fossil alternatives, or using optimistic fuel cost assumptions that understate long-run gas and coal price risks — systematically produce approvals for uneconomic fossil generation projects. All-source procurement studies demonstrate that in many U.S. jurisdictions, competitive processes that include renewable energy, energy storage, demand response, and efficiency resources produce least-cost portfolios that are materially cheaper than utility-preferred fossil builds. When fossil capacity is built instead of cheaper alternatives, consumers bear the cost difference over the plant's 20–40 year operating life through higher electricity rates. Unfair Gaps research identifies this as a decision error driven by structural incentive misalignment in regulated utility planning — utilities earn regulated returns on capital but pass fuel costs through to customers via riders, creating systematic incentives to prefer capital-intensive fossil builds over fuel-cost-sensitive alternatives.
How Flawed Planning Assumptions Drive Fossil Capacity Overbuilding
Unfair Gaps research maps the fossil overbuilding decision error pathway across the IRP cycle. Step 1 — Biased need assessment: the utility defines the capacity need based on projected demand growth and planned retirements. IRPs that overestimate load growth, ignore demand response as a capacity resource, or exclude energy efficiency from the supply portfolio produce inflated need assessments that create apparent justification for more new capacity than the system actually requires. Step 2 — Omission of alternatives: competitive all-source solicitations require utilities to evaluate all resource types including renewables, storage, and demand-side resources on equal terms. Many IRPs define the comparison set as fossil alternatives only — building coal versus gas, or single-cycle versus combined-cycle — rather than fossil versus all alternatives. This omission prevents the IRP from identifying cases where a renewable plus storage portfolio is cheaper. Step 3 — Optimistic fuel cost assumptions: utilities have incentives to use low fuel price assumptions in IRP economic comparisons because capital-intensive projects earn regulated returns while fuel costs are passed through. Low assumed gas or coal prices favor fossil builds in cost comparisons by underweighting the fuel cost risk that consumers will bear. Step 4 — Regulatory approval: state public utility commissions approve IRP resource selections — commissions that do not require robust competitive solicitations or independent review of planning assumptions allow flawed processes to produce uneconomic plant approvals.
Financial Impact: Hundreds of Millions to Billions in Consumer Cost Overruns
Unfair Gaps analysis of all-source procurement studies confirms the consumer cost impact of fossil overbuilding is measured in hundreds of millions to billions per plant over its operating life. The cost gap between utility-preferred fossil builds and competitive all-source least-cost alternatives includes: higher capital cost recovery (fossil plants cost more to build than equivalent-capacity renewables plus storage), higher fuel cost (fossil plants burn fuel continuously at volatile market prices; renewables have zero fuel cost), and higher environmental compliance cost (emission controls, allowance purchases). One industry study notes that consumers bear fossil fuel cost risk via fuel riders, creating incentives to low-ball fuel cost forecasts in IRP presentations and approve plants that later prove uneconomic when gas or coal prices rise. Unfair Gaps findings show the IRP planning error compounds across the utility sector: each two-to-three-year IRP cycle at dozens of regulated utilities produces overlapping fossil overbuild decisions, creating a sector-wide annual exposure measured in billions.
Which Stakeholders Bear the Cost of Fossil Capacity Overbuilding
Unfair Gaps methodology identifies six stakeholder groups with direct roles in the fossil overbuilding decision error. CFOs are accountable for capital allocation decisions — approving fossil projects over cheaper alternatives creates long-term financial exposure to stranded asset risk if policy or market shifts reduce the plant's economic viability before capital is recovered. VP Resource Planning determines the IRP methodology and resource comparison framework — planning directors who define 'need' as fossil-first and exclude demand-side alternatives from the comparison set create the conditions for systematic fossil overbuilding. Generation Planning Directors develop the load forecasts and plant economics analyses — optimistic demand projections and low fuel price assumptions that favor fossil builds originate at this level. Regulatory Affairs VPs manage the IRP approval process — how the IRP is presented to state public utility commissions determines whether commissioners have the information needed to require competitive all-source solicitations. Board Investment Committees approve final capital project authorizations — without robust alternative comparisons, board members cannot evaluate whether the capital commitment is truly least-cost. Public Utility Commissioners are the regulatory check on IRP quality — commissions that do not require competitive solicitations or independent planning reviews allow systematically biased processes to produce uneconomic approvals.
The Business Opportunity: Hundreds of Millions in Cost Avoidance Through All-Source Planning
The financial opportunity from eliminating fossil overbuilding decision errors lies in consistently choosing the least-cost resource portfolio through competitive, all-source planning. Unfair Gaps research identifies all-source competitive solicitations as the single most effective mechanism: when utilities are required to evaluate renewable energy, energy storage, demand response, and efficiency resources alongside fossil alternatives on equal economic terms, studies consistently show that the least-cost portfolio includes fewer or no new fossil plants in most U.S. markets. The cost savings from selecting the least-cost portfolio rather than the fossil-preferred portfolio can reach hundreds of millions to billions per plant over its life — savings that flow directly to utility customers as lower electricity rates. For utilities, the strategic benefit includes reduced stranded asset risk (plants selected through all-source competition are chosen because they are least-cost under multiple scenarios, not just the base case) and improved regulatory credibility with state PUCs increasingly requiring competitive planning processes.
How Utilities Can Eliminate Fossil Overbuilding from IRP Planning Errors
Unfair Gaps methodology recommends a four-part approach to eliminating fossil overbuilding from IRP planning errors. Part 1 — All-source need assessment: define capacity need based on system load requirements and retirement schedules — not based on desired technology type. Include demand response, energy efficiency, and distributed energy resources in the need assessment to quantify demand-side alternatives that reduce new supply requirements. Part 2 — Competitive all-source solicitation: require an open request for proposals that accepts bids from all resource types — fossil, renewable, storage, demand response, efficiency — and evaluates them against identical economic criteria including capacity value, energy value, fuel cost risk, and environmental compliance cost. Part 3 — Independent fuel cost assumptions: use reference class fuel price forecasts from DOE's Energy Information Administration or independent consultants — not utility-generated assumptions subject to approval-incentive bias. Fuel price sensitivity analysis must be required to show how the comparison changes when fuel prices are 25% and 50% above the base case. Part 4 — Independent planning review: engage an independent resource planning expert to review IRP assumptions, methodology, and alternative comparisons before regulatory submission. Independent review consistently identifies fossil-preference biases in utility IRPs that commissions would otherwise approve without scrutiny. Unfair Gaps research confirms utilities that implement all-source planning with independent review consistently select lower-cost resource portfolios and avoid the hundreds-of-millions-to-billions in consumer cost overruns from fossil overbuild decisions.
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How much do flawed IRP planning decisions cost utility customers from fossil overbuilding?▼
All-source procurement studies show that utilities that build fossil plants instead of competitive least-cost portfolios raise consumer costs by hundreds of millions to billions per plant over the 20–40 year operating life — paying higher capital, fuel, and compliance costs versus cheaper renewable and storage alternatives.
What causes utilities to overbuild fossil capacity in integrated resource planning?▼
Biased need assessments that exclude demand-side resources, omission of renewables and storage from the alternative comparison set, optimistic fuel cost assumptions that understate long-run price risk, and regulatory environments that do not require competitive all-source solicitations combine to systematically favor uneconomic fossil builds.
How can utilities eliminate fossil overbuilding from IRP planning processes?▼
Unfair Gaps methodology requires all-source need assessments, competitive solicitations accepting all resource types, independent reference class fuel price forecasts, and independent planning review before regulatory submission to eliminate the fossil-preference biases that produce systematically uneconomic capacity approvals.
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Sources & References
Related Pains in Fossil Fuel Electric Power Generation
Capital Lock-In and Underutilized Fossil Assets from Mis-timed Retrofit and Retirement Planning
Chronic Capital Cost Overruns and Delays in Fossil Power Megaprojects
Planning-Driven Compliance Risk and Financing Barriers for Fossil Capital Projects
Constrained Generation Due to Allowance Shortages and Costly Marginal Compliance
Excess Compliance Cost from Late or Reactive Allowance Purchases
Lost Value from Mis‑timed and Sub‑optimal Allowance Trading Decisions
Methodology & Limitations
This report aggregates data from public regulatory filings, industry audits, and verified practitioner interviews. Financial loss estimates are statistical projections based on industry averages and may not reflect specific organization's results.
Disclaimer: This content is for informational purposes only and does not constitute financial or legal advice. Source type: Mixed Sources.