CHAPTER 3

Generation System Cost Analysis

 INTRODUCTION
• power station is required to deliver power to a
large number of consumers to meet their
requirements.*
**There are several factors which influence the
production cost such as cost of land and
equipment, depreciation of equipment, interest on
capital investment etc. Therefore, a careful study
has to be made to calculate the cost of
production.
• In this chapter, we shall focus our attention on
the various aspects of economics of power
generation.
 Economics of Power Generation

The art of determining the per unit (i.e., one kWh) cost of
production of electrical energy is known as economics of
power generation. *
(i) Interest. The cost of use of money is known as
interest.**
(ii) Depreciation. The decrease in the value of the
power plant equipment and building due to
constant use is known as depreciation.***
 Cost of Electrical Energy
• The total cost of electrical energy generated can be
divided into three parts, namely ; (i) Fixed cost ; (ii)
Semi-fixed cost ; (iii) Running or operating cost.
(i) Fixed cost. It is the cost which is independent of
maximum demand and units generated *
(ii) Semi-fixed cost. It is the cost which depends upon
maximum demand but is independent of units
generated.**
(iii) Running cost. It is the cost which depends only
upon the number of units generated. ***
 Expressions for Cost of Electrical
Energy
• * (i) Three part form.
• **Total annual cost of energy = Fixed cost + Semi-fixed
cost + Running cost = Constant + Proportional to max.
demand + Proportional to kWh generated. = ETB (a + b
kW + c kWh)**
• (ii) Two part form.
• *** Total annual cost of energy = ETB(A kW + B kWh)
 Methods of Determining Depreciation
*The following are the commonly used methods for
determining the annual depreciation charge :
(i) Straight line method ;
(ii) Diminishing value method ;
(iii) Sinking fund method
(i) Straight line method. In this method, a constant
depreciation charge is made every year on
the basis of total depreciation and the useful life of the
property. *
Total depreciation
Annual depreciation charge =
Useful life
 P −S
• *Annual depreciation charge = *
n
(ii) Diminishing value method.
• In this method, depreciation charge is made every year at
a fixed rate on the diminished value of the equipment. **
• Mathematical treatment
Let P = Capital cost of equipment
n = Useful life of equipment in years
S = Scrap value after useful life ***
• Value of equipment after one year
= P - Px = P (1 - x)
Value of equipment after 2 years
= Diminished value - Annual depreciation
= [P - Px] - [(P - Px)x] = P - Px - Px + P𝑥 2
= P(𝑥 2 - 2x + 1) = P (1 − 𝑥)2
• Value of equipment after n years
= P (1 − 𝑥)𝑛
• *∴ S = P (1 − 𝑥)𝑛
• or x = 1 − (𝑠/𝑝)1/𝑛 (i)
• (iii) Sinking fund method. In this method, a fixed
depreciation charge is made every year and
interest compounded on it annually. **
Let P = Initial value of equipment
n = Useful life of equipment in years
S = Scrap value after useful life
r = Annual rate of interest expressed as a decimal
Cost of replacement = P − S
*** An amount q at annual interest
rate of r will become *q (1 + 𝑟)𝑛 at the end of n years. ***
• Now, the amount q deposited at the end of first year will
earn compound interest for n - 1 years shall become
q (1 + 𝑟)𝑛−1 i.e.,
Amount q deposited at the end of first year becomes
= q (1 + 𝑟)𝑛−1
Amount q deposited at the end of 2nd year becomes
= q (1 + 𝑟)𝑛−2
Amount q deposited at the end of 3rd year becomes
= q (1 + 𝑟)𝑛−3
Similarly amount q deposited at the end of n - 1 year
becomes = q (1 + 𝑟)𝑛−(𝑛−1) = q (1 + r)
• ∴ Total fund after n years = q (1 + 𝑟)𝑛−1 + q
(1 + 𝑟)𝑛−2 + .... + q (1 + r)
= q [(1 + 𝑟)𝑛−1 + (1 + 𝑟)𝑛−2 + .... + (1 + r)] *

q (1 + r)𝑛−1
• Total fund = **
𝑟
q (1 + r)𝑛−1
∴P-S=
𝑟
𝑟
or Sinking fund, q = (p-s )[ ] ***
(1 + r) 𝑛 −1
𝑟
• ∴ Sinking fund factor
(1 + r)𝑛 −1
• Example 1. A transformer costing ETB 90,000 has a
useful life of 20 years. Determine the annual
depreciation charge using straight line method.
Assume the salvage value of the equipment
to be ETB 10,000.
• Solution :
Initial cost of transformer, P = ETB 90,000
Useful life, n = 20 years
Salvage value, S = ETB 10,000
• Using straight line method
P−S
Annual depreciation charge = = (90 000 -10
n
000)/20 = 4000
• Example 4.2. A distribution transformer costs ETB
2,00,000 and has a useful life of 20 years. If the salvage
value is ETB 10,000 and rate of annual compound interest
is 8%, calculate the amount to be saved annually for
replacement of the transformer after the end of 20 years
by sinking fund method.
• Solution :
Initial cost of transformer, P = ETB 200,000
Salvage value of transformer, S = ETB 10,000
Useful life, n = 20 years
Annual interest rate, r = 8% = 0·08
Annual payment for sinking fund,
• Importance of High Load Factor
* (i) Reduces cost per unit generated : A high load
factor reduces the overall cost per unit
generated. **.
(ii) Reduces variable load problems : A high load
factor reduces the variable load problems on the
power station. ***
• Example: A generating station has a maximum
demand of 50,000 kW. Calculate the cost per unit
generated from the following data :
Capital cost = ETB 95 × 106 ;
Annual load factor = 40%
Annual cost of fuel and oil = ETB 9 × 106 ; Taxes,
wages and salaries etc. = ETB 7·5 × 106
Interest and depreciation = 12%
• Solution :
Units generated/annum = Max. demand × L.F. × Hours in a year
= (50,000) × (0·4) × (8760) kWh = 17·52 × 107 kWh
•
Annual fixed charges
Annual interest and depreciation = 12% of capital cost
= ETB 0·12 × 95 × 106 = ETB 11·4 × 106

• Annual Running Charges

• Total annual running charges = Annual cost of fuel and oil + Taxes,
wages etc. = ETB (9 × 106 + 7·5 × 106 ) = ETB 16·5 × 106

• Total annual charges = ETB (11·4 × 106 + 16·5 × 106 ) = ETB 27·9 ×
106
27.9×106
• Cost per unit = ETB 7 = Re 0·16 = 16
17.52×10