Power System Planing and Operation (PCE5312) : Chapter Four: Power Economics

POWER SYSTEM
PLANING AND
OPERATION
(PCE5312)
BY: MESFIN M.
CHAPTER FOUR: POWER

Economics
2
Outline
➢Basic Concepts of Power Economics
➢Economic Criteria for Evaluation of Projects
➢Generation System Cost Analysis
➢Operation and Maintenance Costs
➢Environmental and Social costs

3
Basic Concepts of Power Economics
– Engineering economics is the study and comparison

of alternative courses of action with respect to their
costs.
– It encompasses the principles, concepts and
techniques required for making economic decisions
about competing alternatives.
4
Cont.…
– It encompasses the principles, concepts and techniques

required for making economic decisions about competing
alternatives.
– Time value of money: Money you have today is more valuable
– Interest formulas:
– Escalation and inflation: Percentage increase per specific period
– Discounting,
– Present worth: How much future money worth today
– Depreciation: Loss in value
5 Economic Criteria for Evaluation
of Projects:
– Benefit to cost ratio: Benefits (or savings) divided by costs

𝑅𝑡
σ𝑁
𝑡=1(1 + 𝑖)𝑡
𝐵𝐶𝑅 =
𝑁 𝐶𝑡
σ𝑡=1
(1 + 𝑖)𝑡
– Criterion of internal rate of return: That sets the net present
value of all cash flows (both positive and negative) from
the investment equal to zero.
𝑁
𝑅𝑡 − 𝐶𝑡
𝐼𝑅𝑅 = ෍ 𝑡
=0
(1 + 𝑖)
𝑡=1
6
Cont.…
– Criteria based on payback or capital recovery time:

The time in which the initial cash outflow of an
investment is expected to be recovered from the
cash inflows generated by the investment.
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡
𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 =
𝑁𝑒𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑖𝑛 𝑓𝑙𝑜𝑤
– Where, 𝑅𝑡=benefits in period t, 𝐶𝑡= costs in period t,
𝑁=life of the investment, 𝑖= Interest/discount rate
7
Generation Cost Analysis
– From an economic point of view, it is desirable (but

seldom possible) to expand a power generating
system by adding plants that are both:
– Cheap to build and
– That produce electrical power at the lowest
possible cost.
8
Cont.…
– Two distinct figures of merit are therefore important

when discussing or comparing the economics of
power generating technologies:
– Capital investment costs, expressed in $/kW of
installed capacity, that denote the capital outlay
necessary to build a power plant; and
– Power generation costs, expressed in $/kW-h of
generation, that represent the total cost of
generating electricity.
9
Cont.…
– Power generation costs consist of the costs

associated with the initial capital investment in a
power plant (fixed investment charges), fuel costs,
and operation and maintenance (O&M) costs.
– These costs can be divided into two broad
categories: fixed costs and variable costs.
10 Cont.…
Figure 1: A breakdown of the general categories of costs for power generating

technologies
11
Cont.…
– The levels of costs for the cost categories identified

in Fig. 1 will vary considerably depending on the
technology examined.
– For example, nuclear power plants are
characterized by high capital investment costs and
low fuel costs, while no fuel costs are usually
associated with a hydroelectric power plant.
12
Operation and maintenance costs
– O&M costs include all non-fuel costs that are not

included in the fixed cost category.
– They include costs of
– Labor,
– Supervisory personnel,
– Consumable supplies and equipment
– Outside support services.
13
Cont.…
– Power plant O&M costs are generally divided into:

– Fixed Cost- determined by the size and type of
plant and are independent of the plant capacity
factor.
– Variable Cost - vary directly with production (i.e.
with capacity factor). It is the costs of all items
except fuel that are consumed during the
operation of the plant.
14
Environmental and Social costs
– The environmental and social costs associated to

generation construction and operation include:
– Compensation cost,
– Carbon-tax due to the emission of carbon element to
the environment and
– Other expenses of the power utility to reduce the
emission of GHGs (example, flue gas recovery system of
coal plant).
– etc
End of Chapter Four
Next
Chapter Five

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POWER SYSTEM

CHAPTER FOUR: POWER

➢Basic Concepts of Power Economics

➢Economic Criteria for Evaluation of Projects

➢Generation System Cost Analysis

➢Operation and Maintenance Costs

➢Environmental and Social costs

– Engineering economics is the study and comparison

– It encompasses the principles, concepts and techniques

– Benefit to cost ratio: Benefits (or savings) divided by costs

– Criteria based on payback or capital recovery time:

– From an economic point of view, it is desirable (but

– Two distinct figures of merit are therefore important

– Power generation costs consist of the costs

Figure 1: A breakdown of the general categories of costs for power generating

– The levels of costs for the cost categories identified

– O&M costs include all non-fuel costs that are not

– Power plant O&M costs are generally divided into:

– The environmental and social costs associated to

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