DIRE DAWA UNIVERSITY

Institute of Technology
Electrical Engineering Department
Power system planning and operation

Chapter three cost analysis 1

Engineering economics is the study and comparison
of alternative courses of action with respect to their
costs.
It encompasses the principles, concepts and
techniques required for making economic decisions
about competing alternatives.
The basic engineering economics concepts and tools
applied in a power economy of utilities include:
Time value of money
Interest
 inflation
Present worth and
Depreciation

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Economic Criteria for Evaluation of Projects:

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From an economic point of view, it is desirable to expand a power
generating system by adding plants that are both cheap to build and
that produce electrical power at the lowest possible cost.
Two distinct figures of merit are therefore important when
discussing or comparing the economics of power generating
technologies:
capital investment costs, expressed in $/kW of installed capacity,
that denote the capital outlay necessary to build a power plant; and
power generation costs, expressed in $/kW-h of generation, that
represent the total cost of generating electricity.
• Power generation costs consist of the costs associated with
Fuel costs and
operation and maintenance (O&M) costs.
These costs can be divided into two broad categories: fixed costs
and variable costs.

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O&M costs include all non-fuel costs that are not
included in the fixed cost category.
They include costs of labor, supervisory personnel,
consumable supplies and equipment.
Power plant O&M costs are generally divided into fixed
and variable cost components.
The fixed O&M costs ($/kW/per year) are determined
by the size and type of plant and are independent of the
plant capacity factor.
The variable O&M costs (USD cents/kwh) vary directly
with production with capacity factor
It is the costs of all items except fuel that are consumed
during the operation of the plant.

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The environmental and social costs associated to
generation construction
and operation include:
Compensation cost,
Carbon-tax due to the emission of carbon
element to the environment and
Other expenses of the power utility to reduce the
emission of GHGs
(example, flue gas recovery system of coal plant).

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Quiz(5%)

• Explain what is rate of return?

• What capital recovery period?
• What is meaning of this term
• Inflation
• Present worth
• Interest

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cost analysis 8