Economics of Power Generation

Economics of Power Generation

The economics of power generation compares capital, financing, fuel, operation, maintenance and end-of-life costs with the electricity and capacity a plant provides. The cheapest plant to build is not always the cheapest to own, and the plant with the lowest energy cost may not provide the same operating value to the grid.
Engineers therefore compare costs over a defined study period, using consistent assumptions for output, plant life, financing, fuel, maintenance and capacity factor.

A simple annual-cost model separates expenditure into three categories:

1. Fixed Charges
2. Semi-fixed Charges
3. Running Charges

These categories provide an introductory model for the Economics of power generation. Modern studies may instead report capital expenditure, fixed and variable operation and maintenance, fuel cost, levelised cost of electricity and the value of capacity or grid services.

Fixed Charges of Power Generation

In this three-part model, fixed charges do not vary with installed capacity or annual energy output within the stated study case. Examples include central administration and rent for land held for possible future expansion. In broader cost studies, the term fixed O&M means costs that do not vary with generation, even though some of them may scale with plant capacity.

Semi Fixed Charges of Power Generation

Semi-fixed charges scale with installed capacity but not directly with annual energy output. In an annual-cost equation, they are usually expressed as a cost per kilowatt-year. Examples include:

1. Annual financing and depreciation associated with the generating plant, interconnection, buildings and civil works. The underlying capital cost can include engineering, development, construction-period finance, transport, installation, commissioning and site work.
   For a nuclear plant, the accounting treatment may also include initial fuel inventory, decommissioning obligations and expected salvage value, according to the study boundary.
2. Property taxes, insurance and other recurring owner costs that relate to the installed asset.
3. Land lease payments for the operating site.
4. Capacity-based service agreements and other recurring costs that are incurred even when annual generation changes. Start-up and shutdown costs vary with cycling and should be treated as variable running costs rather than semi-fixed costs.

Running Charges of Power Generation

Running charges are the costs of operating a power plant that change with electricity generation, operating hours, starts or another measure of use. They can affect dispatch decisions because a system normally calls lower-variable-cost units before higher-variable-cost units, subject to technical and grid constraints. Typical running charges include:

1. Delivered fuel and fuel-handling costs. A coal-fired thermal power plant uses coal, while a diesel generating plant uses liquid fuel. Hydroelectric, wind and solar plants have no purchased fuel, but they still have capital, operation, maintenance, environmental and site-related costs. Plant size and cost depend on the specific project, not simply on the fuel type.
2. Operating labour and maintenance. The fixed portion belongs in fixed O&M, while overtime, outage work or production-linked service costs may vary with operation.
3. For a thermal plant, make-up water, water treatment, wastewater handling and process chemicals.
4. Generation-linked consumables such as lubricants, plus maintenance costs that vary with operating hours or starts. Major maintenance should be modelled according to its actual inspection or replacement interval.

The simplified total annual cost can therefore be represented by the following equation, where capacity-related and energy-related terms are kept separate:

1. ‘a’ is the annual fixed amount in $/year for the defined study case. It does not change with the capacity or annual energy variables in this simplified equation.
2. ‘b’, the capacity-related coefficient in $/(kW·year), is multiplied by rated plant capacity in kW and does not depend directly on annual operating hours.
3. ‘c’, the energy-related coefficient in $/kWh, is multiplied by annual electrical energy in kWh. Costs per start or operating hour can be added as separate terms when they are material.