Economics of Power Generation

Introduction
Operational Flexibility and Cost of a PP

• Lots of Technologies and Fuels

• Cost to Build Vs Cost to Run
• Equipment Vs Fuel
• Comparison is not simple
Relative comparison of Operating cost and operational
flexibility
 Basic Cost Concepts ̶ Microeconomics

• Total cost: The total cost of producing (Q) MWh of

electricity
• Average cost of energy: The average cost of
producing one MWh of electric energy (Rs/MWh)
• Average cost of capacity: The average cost of one
MW of electric power capacity (Rs/MW)
• Marginal cost of energy: The incremental cost of
producing an additional unit of electric energy
(Rs/MWh)
 Basic Cost Concepts ̶ Microeconomics

• Variable costs: Costs those change when output

changes, e.g., cost of fuel, the cost of labor or
materials, costs to start up and shut down plants,
and some types of environmental costs
• Fixed costs: Costs those remain at a fixed amount no
matter how much electricity the plant produces,
e.g., capital cost, insurance and land cost
What are the biggest drivers in overall power plant
economics: 1-Cost of capital, 2-Cost of fuel
Which cost is complex and which is straightforward?
 Fixed Cost Concepts for Power Generation

• Fixed costs: Capital costs and land cost

– Capital costs: Building Central Stations varies from
region to region
– Depends upon
• labor costs, regulatory costs
• obtaining siting permits
• environmental approvals
• Building time (at least 2 years, may take many years)
 Operating Costs
• Fuel, labor, maintenance costs
– Depends on how much electricity the plant produces
• Fuel costs dominate the total cost of operation for
fossil-fired power plants
– Sensitive to changes of the fuel prices
– What about renewable fuels?
– What if the fuel is biomass?
– What about Nuclear fuels?
• Fuel cost is low
– What is the dominant operating cost then?
• Labour and Maintenance
 Capital Vs Operating cost
• Tradeoff between capital and operating costs
• Plants that have higher capital costs tend to
have lower operating costs
• Operating cost, comparing the overall costs of
different power plant technologies is not
straightforward
• Levelized Cost of Energy (LCOE): Average
price/kWh needed for the plant to break even
over its operating lifetime
 Tech: Capital Vs Operating cost
Technology Capital Cost Operating Cost
($/kW) ($/kWh)
Coal-fired combustion
$500 — $1,000 0.02 — 0.04
turbine

Natural gas combustion

$400 — $800 0.04 — 0.10
turbine

Coal gasification combined-

$1,000 — $1,500 0.04 — 0.08
cycle (IGCC)

Natural gas combined-cycle $600 — $1,200 0.04 — 0.10

Wind turbine
$1,200 — $5,000 Less than 0.01
(includes offshore wind)

Nuclear $1,200 — $5,000 0.02 — 0.05

Photovoltaic Solar $4,500 and up Less than 0.01

Hydroelectric $1,200 — $5,000 Less than 0.01

 Characteristics Influencing Operations
• Capacity [MW]: The maximum output of a plant
• Lower Operating Limit (LOL) [MW]: The minimum amount
of power a plant can generate once it is turned on
• Minimum Run Time[h]: The shortest amount of time a
plant can operate once it is turned on
• No-Load Cost [Rs/MWh]: The cost of turning the plant on,
but keeping it "spinning,"
– is fixed cost of operation; i.e., the cost incurred by the generator
that is independent of the amount of energy generated
• Start-up and Shut-down Costs [Rs/MWh]: Costs involved
in turning the plant on and off
Characteristics Influencing Operations
• Ramp/Run time [h]: The amount of time it
takes from the moment a generator is turned
on to the moment it can start providing
energy to the grid at its lower operating limit
• Ramp rate [MW/h]: How quickly the plant can
increase or decrease power output, or
[% capacity per unit time]
 Ramp and Run Times
• Ramp and run times determine how flexible the generation
source is
– Depends upon regulations, type of fuel, technology
• Less flexible: Plants have longer minimum run times and slower
ramp times
– Operates on base load energy
• More flexible: plants have shorter minimum run times and
quicker ramp times
– better-suited to filling peak demand
• To run a Nuclear plant for five hours and then shut it down.
What Will happen?
– It will impose a large cost in the form of wear and tear on the plant's
components
 Ramp and Run Times
Technology Ramp Time Min. Run Time
Simple-cycle minutes to
minutes
combustion turbine hours

Combined-cycle
hours hours to days
combustion turbine

Nuclear days weeks to months

Wind Turbine
(includes offshore minutes none
wind)

Hydroeletric
(includes pumped minutes none
storage)
 Relative comparison of Operating cost and operational
flexibility
Why this excludes most renewables:
Their operational flexibility is partially dependent on prevailing weather conditions such
as irradiance and wind speed/direction
 Total Fixed Capital Cost
Total Fixed Capital Costs for a 500 MW Hydro
plant with capital costs of $2,000 per kW
(time=2mins)

$2,000/kW × 500,000 kW = $ 1 billion

 Variable Costs for Power Generation
• Costs of power generation that change with generation of
electricity
– Marginal cost of generation ($/MWh) = Marginal cost of Fuel +
Variable operations and maintenance costs (O&M)
• Fossil fuels plants: Dominated by fuel costs, and labor and
maintenance are additional costs
– these are smaller
– less than 10% of total variable cost,
– sometimes we will simply assume them negligible, or zero
• Renewables and Nuclear power are dominated by O&M
costs
– Because fuel from the sun, wind and water is free
– market price of nuclear fuel has been extremely low
 Marginal Cost
• Marginal Fuel Cost: heat rate (HR), ratio of input energy to output
energy [BTU/kWh],
– how much fuel it takes to produce a unit of electrical energy,
[million BTU/MWh] or mmBTU/MWh
• One MWh (electricity) =3.412 mmBTU (fuel).
• HR =3.412 / E or E =3.412 / HR
– What is the efficiency of a Power Plant having an HR of 8 mmBTU/MWh?
• E = 3.412 / 8 = 0.43, or 43%
– A power plant with 30% efficiency would have a heat rate?
• (HR = 3.412 / 0.3 = 11.37 mmBTU / MWh)
• MC = HR × F
– Natural gas Fuel cost, F=$5/million BTU, HR=8,000 BTU/kWh
• $5 / mmBTU × 8 mmBTU / MWh = $40 / MWh
 Coal Plant’s Marginal Cost
• Coal costs $2.50 per million BTU and a coal
plant is 35% efficient. Calculate the plant's
marginal cost (3mins)
– First convert the efficiency to a heat rate
• HR = 3.412 / 0.35 = 9.75 mmBTU / MWh
– multiply the heat rate by the fuel price
• MC = $2.50 / mmBTU × 9.75 mmBTU / MWh
= $24.37 / MWh
HR =3.412 / E
MC = HR × F
 EFFECT OF POWER PLANT TYPE ON COSTS
• Fixed Cost: Initial cost of the plant, Rate of interest,
Depreciation cost, Taxes, and Insurance
• Operational Cost: Fuel cost, Operating labour cost,
Maintenance cost, Supplies, Supervision, Operating taxes
• INITIAL COST
– Land cost
– Building cost
– Equipment cost
– Installation cost
– Overhead charges during construction
• transportation cost,
• stores and storekeeping charges,
 OPERATIONAL COSTS
• Cost of Fuels
– Heaviest item of operating cost
– Selection depends upon design of PP and economy
– Its transportation and handling cost is also included
• Cost of Labour + Maintenance and Repairs (M&R)
– Coal PP needs highest M&R, hydraulic/diesel power plants of equal capacity requires
a lesser number of persons
– Automation can reduce this cost
– Depends upon complexity of Power Plant
– Overhauling, cleaning, greasing, adjustments, shutting down, repairs etc.
• Cost of stores
– articles as lubricating oil and greases, cotton waste, small tools, chemicals, paints etc.
– Cost is higher for thermal stations than hydro-electric station
• Supervision
– station superintendent, chief engineer, chemists, engineers, supervisors, stores
incharges, purchase officer and other establishment
– Coal power plants have a higher cost than the hydro-electric ones
• Taxes
 Important Terms
• The art of determining the per unit (i.e. one kWh)
cost of production of Electrical Energy is known as
Economics of Power Generation
• Variable Load on Power Station: The load on Power
Station varies from time to time due to uncertain
demands of the consumers and is known as variable
load on power station
• Connected Load: The Sum of Continuous rating of all
the equipment (bulbs, tubes, Fans, Electrical Motors
etc.) connected to Electrical Supply System
– Calculate the connected loads of your homes (3mins)
• Load Curve: It is a curve showing the variation of power with
time. It shows the value of a specific load for each unit of the
period covered. The unit of time considered may be hour, days,
weeks, months or years
• Cold Reserve: Reserve generating capacity which is not in
operation but can be made available for service
• Hot Reserve: Reserve generating capacity which is in
operation but not in service
• Dump Power: In hydro plants it shows the power in excess
of the load requirements and it is made available by
surplus water
• Firm Power: It is the power, which is always be available
even under emergency conditions
• Prime Power: Mechanical, hydraulic or thermal that is
always available for conversion into electric power
• Load Factor: Ratio of the average load to the peak
load during a certain prescribed period of time

– should be high
– It is always less than one
• Utility Factor: Ratio of the units of electricity
generated per year to the capacity of the plant

– rated capacity of a plant of 200 MW, The maximum load

on the plant is 100 MW at a load factor of 80%,
– What is the Utility Factor?

• Utility Factor = (100 × 0.8)/(200) = 40%

• Plant Operating Factor: Ratio of the time during
which the plant is in actual service, to the total
duration of time considered

• Plant Capacity Factor: Ratio of actual kWh Produced

to Maximum Possible kWh that might have produced
during the same period

• Demand Factor: Ratio of the maximum demand of a

system to its connected load

– it is always less than one, since all the appliances will not
• Plant Use Factor: Ratio of kWh generated to the
product of plant capacity and the number of hours
for which the plant was in operation

• Diversity Factor: Ratio of the sum of the individual

maximum demands to the maximum demand of the
total group
– DF
– it is known from experience that the maximum demands
of the individual consumers will not occur at one time
– It is always greater than unity
 Load Curve

The Load Curve is defined as the curve which is drawn between

loads (kW, MW) versus Time (daily, weekly, monthly, yearly)
It tells the variation of Loads over a period of time.
 Load Curves
• Variation of load: The daily load curve shows the
variation of load on the power station during different
hours of the day
• Area under Curve: Area (in kWh) under daily load curve
= Units generated/day
• Daily Peaks: The highest/lowest points on the daily load
curve represents the max/min demand
• Average Load: The area under the daily load curve /
total number of hours = the average load on the station
– Average Load=
 Load Factor

• Planning the number of generating units

• Preparing the operation schedule of the station
• The monthly/yearly load curves can be obtained
from the daily load curve
• Monthly/yearly load factors can be also be
calculated
 Load Duration Curve
• When load curve are arranged in the order of
descending order of magnitudes in spite of
chronological order

The magnitudes are

20MW for 8 Hours, 15MW for 4 hours, 5 MW from 12 hours,
It tells about price market
 • Unit Generated per Annum form maximum
demand and load factor

Average load = Load Factor X Maximum demand

Units generated/annum= Average load X number of hours in 1yr (8760)
Units generated/annum =Maximum demand X Load factor X 8760
 Cost of Electrical Energy
1. Fixed cost: Cost independent of maximum
demand and units generated
– The fixed cost is due to the annual cost of central
organization
– interest on capital cost of land
– and salaries of high officials
2. Semi-fixed cost
3. Running or operating cost
Total annual cost of energy =Fixed cost + Running cost
=Constant + Proportional to kWh generated
 Depreciation
• Depreciation: The decrease in the value of the
power plant equipment and building due to
constant use,
• Depreciation charge: An amount set aside
annually so that by the time the life span of
the plant is over, the collected amount equals
the cost of replacement of the plant
 Interest
• The cost of use of money
– For a power station supply company borrows a
huge capital from banks has to pay the annual
interest on this amount
– while calculating the cost of production of
electrical energy, the interest payable on the
capital investment is included
– The rate of interest depends upon market position
– vary from 4% to 8% per annum.
 Rental charge for the use of money

Simple

Capital
Compound
Recovery

Interest
Series
Present
present
Worth
amount

Series
Sinking
compound
fund
amount
 Simple interest
• Assume Ali has borrowed Rs 15000 from Ahmed
and both agreed that the money will be return
after three years and the interest is 5%

15000 + 15000 x (3) x (0.05) =17250

S = P + Pni = P (1+ ni)
• S future amount
• P present amount
• n number of periods (years)
• i rate of interest per period
 Compound interest
• Agreement changes
At the end of the 1st, 2nd and 3rd year
15000 + 15000 x (0.05 ) = 15750
S = P + Pi = P(1+ i)
15750 + 15750 x (0.05) = 16537.5,
S = P(1+ i)+ P(1+ i)i
= P (1+ i)(1+ i)= P (1+ i)2
165375 + 16537.5 x (0.05) = 17364.3 S future amount
S = P (1+ i)2 + P (1+ i)2 i P present amount
n number of periods (years)
S = P (1+ i)2 (1+ i) i rate of interest per period

=P(1+ i) i
3

S = P (1+ i)n = P (CAF) ,

 Present worth
• Present worth is the value of a sum of money at
the present time with compounded interest,
will have a specified value of a certain time in
the future

CAF (compound amount factor) is reciprocal of

PWF
 Series Compound Amount
• Equal payments are made at regular intervals in order to accumulate an amount
some time in the future. The sum earns interest on the progressively increasing
amount (Ins. policy etc.)
S1=15000
S2 = 15000 (1+ i) + 15000 =15000[(1+ i) + 1]
......
S = 15000[(1+i )n-1 + (1+i) n-2 + . . . . . . . . . .+ (1+i)+1 ]
S(1+i)=15000[(1+i )n + (1+i) n-1 + . . . . (1+i)2 + (1+i) ] (multiply (1+i)

SCAF=Series Compound Factor

 Sinking Fund
• If the amount that is to be accumulated by
some specific time in the future has been
specified, the sinking fund calculation
determines the regular payments that must be
made in order to accumulate the amount.

SCAF=Series Compound Factor

• Series present worth
– amount exists at the start and equal withdrawals
are made periodically so that the amount is
exactly used up after a specified time
• Capital recovery factor
– Reciprocal of series present worth factor
calculated from Series present worth
Summary
 Economics of Hydropower Plants

Cost and Benefits

• The economics of a hydropower plant is quite different from that of

any other type of power plant since various considerations such as
water supply, irrigation and river navigation are involved besides
regular economic aspects of cost of generated power.

• In fact, some of these aspects, such as effect on irrigation or

recreation facilities are difficult to quantify

• True economic analysis of a hydro power plant, especially a large

hydro power plant, is a mix of quantitative and qualitative
approaches.
The major benefits and cost components for estimating annual the
net benefits from a hydropower plant

Gross power benefits

These benefits reflect the income from sale of power or avoided cost
of power if the hydropower plant did not existing and power has
taken from costlier source
Benefits of avoided pollution
Relative to alternative types of power generation, such as a coal-fired
plant, hydropower production generates less air pollution or greenhouse
gases. The avoided pollution is considered as a benefit of hydropower
projects

Costs of operation
Sum of investment costs for the project, anticipated future reinvestment
costs, and operation and maintenance (O&M) costs

Benefits of project services

Beyond power generation, e.g., flood control, water supply, irrigation,
river navigability and improvement of infrastructure and economical
prosperity of the region.
Costs of environmental measures
• Licensing decisions dictate operating conditions to protect,
mitigate damages to, or improve environmental quality.

• This may result in direct costs and/or reduced power values

• Examples:
 construction of fish passage facilities incurs direct costs
 environmental measures to protect flora and fauna can
restrict flow of water that reduce power generation, shift
power generation from periods when energy prices are
high to periods when energy prices are low
Benefits of environmental measures

• Environmental measures
 fish screens
 changes in minimum flow requirements,
o improve fish
o wildlife resources
o recreational opportunities
o and other aspects of environmental quality
o Since these benefits are different from the direct
revenue from sale of power, they are often referred
to as ‘‘non-power’’ benefits
 Cost Structure

1. Initial Cost
• The cost of hydropower plants can hardly be generalized since every site may
offer a unique set of challenges
 Lengths of pipes and tunnels,
 the difficulty in transporting equipment due to a poor road network,
 or necessary investments in infrastructure,
 different geology

• The initial costs of hydropower plants vary between 1,000–5,000 Euro per kW
depending site location
 Itaipu hydropower plant 1,300 Euro per kW
 Three Gorges Dam plant 1,000 Euro per kW
 When relatively smaller capacities, the capital cost per kW is higher than these
values
 where no dam has existed before the hydropower project (green field Projects)
o civil engineering works account for 65–75% of the total initial cost,
o meeting the environmental and legal criteria requires 15–20%.
• The cost of plant machinery
 Turbine, generator & control systems = 10% of the total initial
cost

• No fuel costs associated with hydro power plant during operation

• Operation and maintenance costs are quite low in comparison to a

fossil power station

• For non green field projects, i.e., where dams already exist
 Locations can be upgraded to have hydro power plants at
relatively lower costs

• Run-of river is less costly as compared to reservoir type power

plants, as less civil works are involved
 2. Operation Cost

• Operation & maintenance cost comprises three major

components
 Maintenance of plant machinery + replacement of parts
 Salary of staff
 Insurance
• The life of hydropower plants
 Ranges from 20 years to 40 years and beyond
 For financial calculations, usually a calculative lifetime of
around 30 years is considered
2.1 Maintenance Costs

• The maintenance cost of plant machinery has two major components

 preventive maintenance & breakdown maintenance
• Per year (initial years)
 ~ 3–5% of the capital investment is O&M cost
 usually increases as the plant gets older
• The turbine runner requires most of the maintenance work
• Due to the cavitation effect or hammering action of the silt arriving
with the water
 the runner blade gets damaged
 Predominant in some during the rainy season

• Another important cost element is insurance costs

 secure the loss of their investment fully/ partially where parts are
damaged
 cover possible loss due to flooding if something goes wrong with
the dam
 2.2 Plant Utilization Factor
• Theoretically, hydro power plants are assumed to be available for
power generation whenever water is available.
• Practically, this may not be true in all situations
• With modern preventive & predictive maintenance practices of
advanced plant control
 The availability of hydropower plants has increased (the best
plants ~95%)
• The unavailability of water for full capacity utilization of a
hydropower plant though becomes a constraint
 the plant utilization ranges from 60% to 80%
 In some good locations, where water availability is consistent
o due to a mix of rain-fed and snow melting systems, and where
the reservoir has a large capacity of storage,
o an even higher plant utilization factor (PLF) can be achieved
o in case of very small plants, this factor may even be lower
than 50%
 2.3 Salary and Administrative Expenses

• A hydropower plant requires continuous monitoring and maintenance t

salary component cannot be ignored in the financial analysis

• Old power plants

 require more persons to operate and control various systems
 due to automatic controls

• New plants require much less manpower

 3. Electrical Tariffs

• Different types of tariff systems are found due to differences in

policies in different countries/locations all around the world

• Important influences on the decision to introduce a certain tariff

system
 are liberalized or non liberalized markets
 plentiful or shortage of electricity available
 incentives for clean electricity production etc
3.1 Feed-in Tariff

• The feed-in tariff scheme

 based upon the principle of paying amount to the power producer
as per the amount of electricity fed into the grid
• This is done at a pre-declared rate per unit of electricity (kWh, MWh)
• The most important aspect
 the grid operator cannot deny the acceptance of the power
generated by the hydropower plant even if it is surplus
• In this case other non hydropower stations must reduce their power
generation
 exists e.g. in Germany, India, many other countries
3.2 Availability Based Tariff (ABT) System
• ABT is a mechanism for the recovery of fixed charges of a power plant or
transmission licensee through the commercial means of incentives or disincentives
• It is a performance-based tariff for the supply of electricity by generators
 owned and controlled by the central government
 or those which are involved in selling power in more than one state
• It requires both generators and beneficiaries to commit to day-ahead schedules
 system of rewards and penalties
 seeking to enforce day ahead pre-committed schedules
 though variations are permitted if notified in advance
• It facilitates
 grid discipline
 helps in trading capacity and energy
 facilitates the merit order dispatch of power.
• ABT has three parts
 A fixed charge (FC) payable every month by each beneficiary to the generator for making
capacity available for use
 The second part is the energy charge payable for every kWh of energy supplied
as per a pre-committed schedule
 The third part of ABT is a charge for unscheduled interchange (UI charge) for
the supply and consumption of energy in deviation from the pre-committed daily schedule
3.3 Bulk Electricity Tariff System

Bulk tariff means the annual fixed charges (AFC) in respect of

each hydropower station which is determined by the Central
Electricity Regulatory
Commission

The components of AFC calculation are:

1. Interest on loan capital

2. Depreciation
3. Return on equity
4. Operation and maintenance expenses
5. Interest on working capital
 3.4 Time Dependent Rates

• In some regions state owned electricity companies are more interested in

buying
• electricity during the periods of peak load time at maximum consumption on
the electrical grid, because in this way they may save using the electricity from
the less efficient generating units to produce power at higher costs.
• Therefore, in some areas, power companies apply variable electricity tariffs
depending on the time of day, when they buy electrical energy from private
power plant owners
• Normally, power plant owners receive less than the normal consumer price of
electricity since that price usually includes payment for the power company’s
operation and maintenance of the electrical grid, plus its profits
3.5 Quota System or Renewable Energy Certificates
• In this system, every producer of electricity for grid is given a ‘quota’
e.g. 20%
• The total electricity produced by every company has to include a 20%
share of energy coming from renewable sources such has hydro, wind
and solar
• If this quota is not met provisions for penalties have been taken
• Provisions are being developed to provide that if any company produces
energy from renewable in excess of its quota, e.g. 25%, it would be
granted a certificate for this excess renewable energy, called Renewable
Energy Certificate
• This certificate can be purchased by other companies with a smaller
share of renewables than the quota of e.g. 15%
• With the purchase of certificates, the second company will also be
considered to be complying with its quota
• This system is quite similar to the concept of ‘emission trading’ for
• greenhouse gases
 3.6 Production Tax Incentives/Investment Incentives
• The Production tax incentive is a generation-based mechanism, which
supports renewable energies through payment exemptions from
electricity taxes, e.g. the energy tax for renewable energies

• Hence it is a system that affords an avoided cost on the producer side.

3.7 Environmental Credit and Clean Development Mechanism
• Many governments and power companies around the world wish to promote
the use of renewable energy sources.

• Developed or industrial countries offer a certain environmental premium to

renewable energy coming from hydro, solar or wind power plants, e.g. in the
form of refund of electricity taxes etc.

• In developing countries like India, due to the fact that every unit of electricity
generated avoids generation of the same amount of electricity in fossil fuel
based power plants, the avoided environmental emissions offer an opportunity
of getting for additional earnings through the Clean Development Mechanism
under the Kyoto Protocol

• Every ton of carbon dioxide gas saved or avoided, termed as one carbon
credit, was sold to industrialized countries at rates of about 15 Euro ( 2010)