POWER DISTRIBUTION AND UTILIZATION

Lecture 8
 Economics of Power Generation
“The art of determining per unit cost of
electrical energy”

Power engineers have to plan for cheapest

electrical power so that consumer can utilize it
conveniently
 Economics of Power Generation
Interest
Cost of use of money is known as interest

Plant is constructed normally by borrowing capital

from banks, investment has to be paid on it

Even if construction is from own reserves, interest is

counted as it would gain interest if invested
elsewhere
 Economics of Power Generation
Depreciation
The decrease in the value of power plant equipment
and building due to constant use

Every plant has a useful life 50-60 years,

due to wear and tear in equipment
Equipment has to be replaced after the useful life
Reduction in the value of plant every year is called
annual depreciation
 Economics of Power Generation
Cost of Electrical Energy

i. Fixed Cost
ii. Semi Fixed Cost
iii. Running Cost
 Economics of Power Generation
Cost of Electrical Energy
i. Fixed Cost
Independent of maximum demand and units
generated

e.g. central organization, cost of land and its

annual interest, salaries of officials
 Economics of Power Generation
Cost of Electrical Energy
ii. Semi Fixed Cost
Depends on maximum demand but not on units
generated
e.g. annual interest on equipment and building,
taxes, salaries of management and clerical staff

Greater the value of maximum demand, greater will

be the value of above factors.
 Economics of Power Generation
Cost of Electrical Energy
ii. Running Cost
depends upon the number of units
generated.

e.g. cost of fuel, machine oil, repair and

maintenance and cost of operating staff.
 Economics of Power Generation
Expressions for Cost of Electrical Energy

i. Three part form

ii. Two part form
 Economics of Power Generation
Expressions for Cost of Electrical Energy
i. Three part form
Total annual cost of Energy
=fixed cost + semi fixed cost +running cost
= a + b kW + c kWh

a= annual fixed cost

b= annual semi fixed cost per unit max demand
c = annual running cost per unit energy
 Economics of Power Generation
Expressions for Cost of Electrical Energy
i. Two part form
Total annual cost = semi fixed cost + running cost
= A kW + B kWh

A= annual semi fixed cost per unit max demand

B= annual running cost per unit energy
 Economics of Power Generation
Methods for Determining Depreciation

i. Straight Line Method

ii. Diminishing Method
iii. Sinking fund Method
 Economics of Power Generation
Methods for Determining Depreciation
i. Straight Line Method
a constant depreciation charge is made every year
Annual Depreciation Charge= (P-S)/n
Where P = Initial Cost
S = Scrap value of equipment
n = useful life
 Economics of Power Generation
Methods for Determining Depreciation
i. Straight Line Method
It is the simplest method, its graph is a straight line with
negative slope
 Economics of Power Generation
Methods for Determining Depreciation
i. Straight Line Method
It has two drawbacks
a. assumption of constant depreciation every year is not
correct
b. it doesn’t account for the interest that accumulates
every year
 Economics of Power Generation
Methods for Determining Depreciation
ii. Diminishing Value Method
depreciation is made every year on a fixed rate on the
diminished value of the equipment.
With initial cost ‘P’, scrap value ‘S’ and annual unit
depreciation ‘x’, then after ‘n’ years
Value of equipment after n years= P(1-x)^n
also S= P(1-x)^n
(1-x)^n= S/P
x= 1 – (S/P)^1/n
 Economics of Power Generation
Methods for Determining Depreciation
ii. Diminishing Value Method
 Economics of Power Generation
Methods for Determining Depreciation
ii. Diminishing Value Method
Drawbacks
a. it draws low depreciation charges in late
years when maintenance cost is high
b. it doesn’t include interest that accumulates
each year
 Economics of Power Generation
Methods for Determining Depreciation
iii. Sinking Fund Method
A fixed depreciation charge is made every
year and interest compounded on it annually.
For the same variables mentioned above and ‘q’
is depreciation charge every year and ‘r’ is
annual rate of interest then
An amount ‘q’ at annual interest rate ‘r’ will become q(1+r)^n at the
end of ‘n’ years
at the end of first year it will be q(1+r)^n-1
at the end of first year it will be q(1+r)^n-2

Total sum at the end of ‘n’ years= [q(1+r)^n-1]+[q(1+r)^n-2]+…..+

[q(1+r)]

Total fund=q ((1+r)^n-1)/r

Also P-S=q ((1+r)^n-1)/r
q= (P-S) (r/ ((1+r)^n-1)))

Hence the total annual charge will be (rP+q)

 Economics of Power Generation
Importance of High Load Factor
i. Reduces cost per unit generated

High load factor means for a given max

demand, units generated are high, making total
cost per unit of energy lower
 Economics of Power Generation
Importance of High Load Factor
ii. Reduces variable load problems

High load factor means less variation in the

load in daily routine, this reduces the use of
regulating devices connected.