Cost Analysis of Power Plants

In this article we will discuss about:- 1. Generation Cost of Power Plants 2. Fixed and Operating Costs of Power Plants 3. Interest and Depreciation.

Generation Cost of Power Plants:

The generation cost can, broadly be divided as follows:

1. Fixed Cost:

The annual fixed cost consists of the in­terest on the total investment, all types of taxes and insurance charges, salaries of high officials, management and clerical staff. The annual contribution to the fund to pay off the capital expended after useful life of the plant and yearly compensa­tion paid to the workers is also included in the annual fixed cost. This cost varies approximately in direct proportion with the installed capacity of the plant and it does not depend upon the fact whether the plant supplies any energy or not.

The total investment or capital cost of a plant includes the preliminary cost, cost of land and other real estate, cost of design and planning, cost of building and equipment, cost of transportation, erection and installation of equipment and over­heads etc. In case of hydroelectric power plants, the capital cost of the plant includes the costs of dam, earthwork, exca­vation, railhead, highways and other civil works and compen­sation to land/property owner (whose lands would be submerged in the reservoir) in addition to the costs.

Cost of land and building will depend upon the loca­tion of the plant. If the plant is situated near a city, the land will be costlier than that in case the plant is located far from the city or residential areas.

The cost of steam plant located near a river, where adequate supply of cooling water is available, would be lesser than that of one in which cooling towers or ponds would have to be made available. In general a larger plant costs less per kW of installed capacity than a smaller one. A plant having a smaller number of large sized generating units costs less than a plant of the same total generating capacity but having a large number of small sized units. The capital costs of the plants vary widely, even in case of plants of similar types, and depend to a large extent on the market conditions.

2. Operating or Running Costs:

The operating cost of a plant means the expenses which vary with the extent of operation or the amount of energy generated. This cost is due to annual cost of fuel, lubricating oil, water, mainte­nance and repair cost of equipment and wages and salaries of operational and maintenance staff and salaries of supervi­sory staff engaged on the running of the plant. The operat­ing cost is approximately proportional to units generated. In steam, diesel and gas plants, the operating costs form a major portion of total annual cost whereas in hydro, nuclear and solar plants, the fixed costs overshadow the small oper­ating costs.

3. Investor Profit:

If the power plant is the public property, as is the case in India, then the customers will be taxpayers to share the burden of the Government. For this purpose, there is an item in the rates to cover taxes in place of the investor’s profit. These taxes will be paid by the consumers in the form of electric consumption bill. This amount is collected in twelve installments per annum or six installments per annum.

Fixed and Operating Costs of Power Plants:

Fixed and Operating Costs of Hydropower Plants:

The total capital outlay or the investment on a hydropower station includes the costs of preliminary surveys and inves­tigations of the topography and geology of the proposed plant site, purchase of water rights and the land required for pro­viding sufficient storage and pondage, compensation to the ousters, costs of preparation of detailed designs and specifi­cations, costs of testing of materials of construction, costs of carrying out experimental work and model tests on designs for hydraulic structures, costs of construction and the purchase and installation of equipment, interest on the capital during construction, costs of new roads, railway lines, resi­dential houses and other civil engineering works. The capital cost is very much affected by topographical and geological conditions.

The annual fixed costs include interest on the capital cost, depreciation, all types of taxes and insurance charges and salaries of high officials, management and clerical staff. The total cost of construction of a hydropower plant is in­variably higher than that of a steam power plant of the same capacity. The fixed charges of a hydropower plant are about 60 to 70 per cent of the total cost of power and these are independent of the plant output.

The operating costs of hydropower plants include an­nual costs of lubricating oil, maintenance and repair cost of equipment and wages and salaries of operational and mainte­nance staff and salaries of supervisory staff engaged in the running of the plant. Because of the absence of fuel cost, the operating cost of a hydropower plant is very small.

Fixed and Operating Costs of Steam Power Plants:

The capital cost of a steam power plant includes the costs of land, design and planning specifications, installation, power­house building, equipment, installation, testing, commission­ing, overheads etc.

The range of cost for steam power plants is smaller than that for hydropower plants, the reason being that in case of steam plants, only about 15% of the cost is influenced by topographical and geological conditions, whereas in the case of hydropower plants, around 75% of the cost is affected by these conditions.

The annual fixed costs include interest on the capital, depreciation, all types of taxes and insurance charges and salaries of high officials, management and clerical staff.

The operating costs of a steam power plant include cost of fuel including its handling and ash handling, cost of water for boiler feed, condensers, cooling and house service, costs of oil, waste, stores and other supplies, repairs and mainte­nance cost of equipment, and salaries and wages of opera­tional and maintenance staff and salaries of supervisory staff engaged in the running of the plant.

In the case of a steam power plant, the cost of coal can be split into two components—a small fixed component (re­quired to keep the plant in readiness to meet the demand for power and independent of energy generated) and a large running component (cost of coal equivalent of the heat con­verted into electric power plus the heat rejected in the con­denser). The latter component is directly proportional to the energy generated.

The amount of fuel required per unit gen­erated can be determined by dividing the heat rate by the calorific value of the coal. The total amount of coal con­sumed per unit (kWh) of energy generated and its cost de­pend upon the plant capacity, its efficiency, load factor, trans­portation charges and cost of storage etc. The fuel cost in­fluences the total cost of steam power quite considerably— a change in fuel cost by 20% may cause about 8% variation in the total cost per kWh generated.

A number of environmental prob­lems are created in case of steam power plants, and therefore, the flue gases will need cleaning i.e., removal of particulates, SO₂ and NO₂ etc. so as to keep the pollutants within the safe limits. The fixed and operating costs of these air purification systems are to be included in the cost analy­sis of steam power plants.

Fixed and Operating Costs of Nuclear Power Plants:

The components constituting the capital cost of a nuclear power plant are almost the same as those for steam power plants.

However, the annual fixed cost in case of nuclear power plants is quite high in comparison to that of steam power plants, because of the following reasons:

1. The sophisticated technology is required for the manu­facture of nuclear reactors and, therefore, the capital cost becomes pretty high.

2. The cooling water requirements of a nuclear power plant are very heavy and so the cooling tower cost becomes high as compared to that of a steam power plant of the same capacity.

In case of nuclear power plants though the quantity of fuel required is very small, problems of fuel transportation, fuel handling and ash handling are eliminated (as in case of steam power plants) but the cost of the fuel required is enor­mously high. Consequently the operating cost of a nuclear power plant is lesser than that of a steam power plant but higher than that of a hydropower plant. The operating effi­ciency of a nuclear power plant is high when it is operated at a high load factor. This is the reason that nuclear power plants are always operated as base load plants.

Interest and Depreciation in Power Plants:

Usually money is borrowed from banks or insurance compa­nies or other financial institutions for big projects such as generating plant and at the end of a year, the undertaking is required to pay the interest on the capital cost. Even if equip­ment is purchased out of reserve cash, the normal rate of interest must still be allowed for, since the money might otherwise be earning this interest.

If a capital outlay required for a certain installation is P and the rate of interest per unit is r per annum then an amount of rP per annum must be provided as interest, and this is added to the annual operat­ing cost. Rate of interest to be paid depends upon the money market position and the credit of the borrower and varies between 8 to 10 per cent (0.08 to 0.10 per unit) per annum.

If the installation were to last forever, the interest is the only charge that would have to be made. In practice after a certain time (from ten to forty or fifty years) the plant and machinery have to be replaced, due to its getting old, obsolete and inadequate and it is, therefore, necessary to set aside cer­tain amount annually to produce a sufficient sum at the end of the probable life for replacing the plant and machinery by new ones. The amount is known as depreciation and depends upon the type and make of machines. There are several methods of determining the yearly subscription towards this fund.

The depreciation charge represents the amount which is set aside from income every year and placed in depreciation reserve. For calculating this charge, it is necessary to esti­mate the useful life of the plant.

The expected physical life of conventional steam power plant is 40-45 years or even more. There is, however, the possibility that technological developments will make the plant obsolete before its physical life is over. Financial practice, therefore, is to write it off over 25-30 years.

Conventional steam power plant of this age is quite serviceable, however, and it would not be economical or desirable under present conditions to scrap such plant. This, of course, was not known 30 years before nor do we know for certain what the condi­tions will warrant 30 years ahead. In current planning, eco­nomic appraisal is done on the basis of the capital being amortized over a life of 30 years.

In the event, the plant would not necessarily be taken out of service at the end of 30 years, but in planning for the period 8 to 10 years ahead it is assumed that the old plant would be retained until it has reached 35 years of age. Even at this stage the plant would probably be still capable of further operational life and, before a decision was taken to scrap it, consideration would be given as to whether the old plant should be retained for peak load operation for a year or so longer or whether it would pay to scrap it (and save repairs, renewals, surveys, wages etc.), or to replace it by new capacity involving capital in­vestment but with prospects of considerable saving in run­ning costs, including fuel.

The current practice to assume for nuclear plant is a fi­nancial life of 25 years.

Hydropower plant and pumped storage plant contain a large element of civil works (dams and tunnels, etc.) having a very long physical life, say 80 years or even longer. The mechanical and electrical items (turbines, generators, etc.) have, however, a life comparable to similar items in steam power stations and may be regarded for financial purposes a life of 30 years. Once a hydro scheme has been built its operating costs are so low as to make it unlikely to be displaced by technological developments.