Economics of Power Generation

Introduction - Economics of Power Generation:

The art of finding out the cost production of electrical energy per unit (1kwh) is known as Economics of Power Generation.

Efforts should be made to achieve over all economy so that the cost of production per unit is as low as possible. So the cost of production must be calculated very carefully to achieve the overall economy.

The total cost of the electrical energy generated is basically divided into 

(i) Capital cost
(ii) Annual cost

(i) Capital cost
The total capital cost is divided into two namely,
(a) The fixed capital cost
(b) The running capital cost

(a) Fixed Capital Cost:
It is the fixed amount to be spent for the purpose of assets like land, plant and equipment. It is the cost which is independent of maximum demand and units generated.
The fixed capital cost for an electrical installation may be sub grouped into the following
(1) The capital cost of generating equipment
(2) The capital cost of transmission system
(3) The capital cost of distribution system
The freight charges, labor charges, erection of equipment are to be taken into the account of the capital cost of the plant.

(b) Running Capital Cost
This is the capital required for purchasing fuel, lubricants etc. and payment for the employees.

(ii) Annual Cost:
This is the cost of generation of electricity after the plant has been commissioned. It is considered for a year. The annual cost is divided into two.
(a) The operating cost or the running cost
(b) Fixed charges

(a) Running Cost
It is the cost which depends upon the units generated only. It comprises of the
Fuel cost
Cost of lubricating oil
The wages of supervising staff
The wages of operating staff
Maintenance and repairing cost of equipments

(b) Fixed charges
These charges depend upon the equipment acquired. They do not depend upon the period of usage of the equipment. These charges are divided into
(1) Insurance charges
(2) Taxes
(3) Depreciation or sinking fund
(4) Interest
(5) The salary for management and clerical staff
Let us discuss about these charges in brief

(1) Insurance charges
The insurance charges have to be paid in order to 
To cover the risk of the fire to the buildings
To cover the accidental breakdown 
For worker's compensation

(2) Taxes
The taxes have to be paid for the following items:
Property tax
Public utility tax
Income tax
Municipal/ Corporation/ panchayat board tax

(3) Depreciation or sinking fund
After a certain period the equipment of the plant may become obsolete due to
Physical worn out of the plant
The growth of load
New technical improvements
Then the equipment have to be replaced. Subscription have to be made annually to prepare the fund for replacement.
This is done in two ways using
(i) The straight line method
(ii) The sinking fund method

Straight line method:
In this method the original cost of the plant less salvage value is set aside in equal annual installments depending upon the life of the equipment.
Sinking Fund Method:
In this method, the annual installments are deposited to earn compound interest. So, the annual installments are naturally lesser than in straight line method.

(4) Interest:
The interest must be paid if the money had been borrowed from banks or insurance companies.

(5) Salary for management and clerical staff
Salaries have to be paid to the management and clerical staff even if the plant is not functioning. So such wages are taken as fixed charges.

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