The Economics of Power Generation

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Implementation feasibility of power plant design relies heavily on the economic benefits. More often than not, newer technology cannot be implemented due to high cost of electric generation which would not be acceptable in the market since energy is a price sensitive commodity. Sometimes while deciding on a design to choose, we are given a choice between a high initial equipment cost and efficiency versus a lower capital cost with lower efficiency. The designer must be able to choose which design would fit best with their needs and goals.

While running a power generation plant, there are three types of cost that need to be taken into consideration: capital cost, operational cost and financing cost. With point one and two to being of higher priority.

Capital cost generally covers the cost of land, construction, equipment and so on. In other words, capital cost includes all costs in the initial phase of building the plant itself. Capital costs varies from time to time, and from one location to another. Largely, it is a function of labor costs, material costs and regulatory cost –which all is dependent on investment time and the availability of resources as well as the administrative regulation that governs the area. For example, building a power plant in an engineering hot spot like Texas would be much easier then it would be in a residential area such as near a neighborhood in California due to environmental laws as well as construction regulations. Consequently, the time needed to build a plant of the same size in both cases could be significantly different, thus making a noticeable gap in the capital cost. In common practices, capital costs are not necessarily paid in advance as cash, rather sometimes in debt and equity. This fact brings us to financing cost, which would be the cost of paying off the capital expenditure for a period of time.

In practice power plants take into consideration three main things while calculating for operating cost: fuel, labor and maintenance. With that being said, there are many other aspects to consider that could vary based on each individual designs. Operational cost usually varies with the capacity of the plant or with plant operations. In most cases, fuel cost dominates the marginal cost of a conservative power plant, say fossil-fuel, whereas newer technology such as biomass or geothermal, the cost of fuel is generally “free” though higher capital cost. The trade-off between operating and capital cost investment should be taken into consideration while designing a power plant.

For more information and to calculate your power plant costs, check out AxCYCLE Economics!

Reference:

  1. https://www.e-education.psu.edu/eme801/node/530

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