This chapter deals with power economics of different power system parts which includes the generation, transmission and distribution systems. This slide is specifically prepared for ASTU 5th year power and control engineering students.

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

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
2

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.
3

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
4

5. Economic Criteria for Evaluation
of Projects:
– Benefit to cost ratio: Benefits (or savings) divided by costs
𝐵𝐶𝑅 =
σ 𝑡=1
𝑁 𝑅𝑡
(1 + 𝑖) 𝑡
σ 𝑡=1
𝑁 𝐶𝑡
(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.
𝐼𝑅𝑅 = ෍
𝑡=1
𝑁
𝑅𝑡 − 𝐶𝑡
(1 + 𝑖) 𝑡
= 0
5

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.
𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 =
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡
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
6

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.
7

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.
8

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.
9

10. Cont.…10
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.
11

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.
12

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.
13

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
14

15. End of Chapter Four
Next
Chapter Five