ELECTRICAL DISTRIBUTION III

(ELD331T)
 Chapter 4:
Economics of Power Generation
by

Chaise Khumalo

Department of Electrical Engineering

 Overview:

• Economics of Power Generation

• Cost of Electrical Energy

• Expressions for Cost of Electrical Energy

• Methods of Determining Depreciation

• Importance of High Load Factor.

Economics of Power Generation

 Introduction:

• Design and building a power station should

be made as economic as possible.

• Reduction in the per unit cost of production.

• Electrical energy will be sold at a profit.

• The challenge is to determine the cost of

production.

Introduction
 Introduction (Cont.):
• Factors affecting the production cost of
electricity:

Cost of land & equipment,

Depreciation of equipment,

Interest on capital investment, etc.

• Various aspects of economics of power gen.

 Economics of Power
Generation:

• The art of determining the per unit cost (i.e. one kWh) of
production of electrical energy.

• Electric power is used when supplied at reasonable rate.

• Convenient methods to produce electric power as cheap

as possible.
 Economics of Power
Generation:

Terms used in the economics of power generation:

1. Interest = the cost of use of money.

2. Depreciation = a decrease in the value of the power

plant equipment and building due to constant use.
 Economics of Power
Generation:

• P.S has a useful life ranging from 50 – 60 years.

• Equipment deteriorates due to wear & tear.

• There is a gradual reduction in plant value.

• Reduction in the value of the plant every year is known as

annual depreciation.
 Economics of Power
Generation:

• The plant has to be replaced by the new one after its

useful life.

• Money has to be set aside to cover the cost of

replacement (depreciation charge).

• Annual depreciation charges are included in determining

the cost of production.
 Cost of Electrical Energy:

• The total cost of electrical energy generated is

divided into three parts:

a. Fixed cost = independent of max. demand & units gen.

• e.g. annual cost of central organization, interest on capital

cost of land & salaries of high officials

• Capital investment on land & hence the amount of interest

is fixed.
 Cost of Electrical Energy:

b. Semi-fixed cost = depends upon max. demand but is

independent of units generated.

e.g. annual interest & depreciation on capital

investment, taxes, salaries of management & clerical
staff.

• Max. demand on a P.S determines its size & cost of

installation.

• Taxes & clerical staff depend upon max. demand.

 Cost of Electrical Energy:

b. Running or operating cost = depends upon the number

of units generated.

e.g. annual cost of fuel, lubricating oil, maintenance,

repairs & salaries of operating staff.

• It is directly proportional to the number of units generated

by the station.

• More units = higher running cost & vice-versa.

 Expressions for Cost of
Electrical Energy:

• The overall annual cost of electrical energy generated

by a P.S can be expressed in two forms:

1. Three part form:

T.C.O.E = Fixed cost + Semi-fixed cost + Running cost

= Constant + Proportional to max. demand +
Proportional to kWh generated.
 Expressions for Cost of
Electrical Energy:

2. Two part form:

T.C.O.E = Fixed sum per kW of max. demand + Running

charge per unit of energy

• Simplification of three part form.

 Methods of Determining
Depreciation:
• Commonly used methods for determining the annual
depreciation charge:

WHAT TO LEARN?

a. Straight line method

b. Diminishing value method

c. Sinking fund method.

 Methods of Determining
Depreciation:
a. Straight line method:

Annual depreciation charge = Total depreciation

Useful life
=P–S
n
where: P = initial cost of equipment
n = useful life of equipment in years
S = scrap or salvage value after the useful life of the
plant
Methods of Determining
Depreciation:
Methods of Determining
Depreciation:
Methods of Determining
Depreciation:
 Importance of High Load
Factor:

• Load factor plays a vital role in determining the cost of

energy.

• Advantages of high load factor:

a. Reduces cost per unit generated

b. Reduces variable load problems

 Example 1:

• The equipment in a power station costs R156 000 and

has a salvage value of R10 000 at the end of 15 years.
Determine the depreciation value of the equipment at the
end of 10 years on the following methods:

a. Straight line method

b. Diminishing value method

a. Sinking fund method at 5% compound interest annually

 Solution:
Initial cost of equipment, P = R156 000
Salvage value of equipment, S = R10 000
Useful life, n = 15 years

a. Straight line method

Annual depreciation charge = Total depreciation

Useful life
=P–S
n
= R9733
Solution (Cont.):
Solution:
THANK YOU!!!