Economics of Power Generation

Here in this article, we will discuss the economics of power generation, terminologies used in the economics of power generation, isolated and integrated operations, and their differences , merits of integrated operation, classification of cost of electrical energy, tariff and its types and power generation charges briefly.

What is the Economics of the Power System?

The economics of power generation is the process of calculating the cost of producing electrical energy per unit (i.e. KWH). Customers utilize electric power when it is supplied at reasonable rates. So, power engineers have to find cost-effective methods to provide electricity to customers at affordable prices.

While designing or constructing a power station, engineers will take care of the overall economy so that the per-unit cost of production is as low as possible. So that the electric supply company can sell electrical energy at a profit and ensure reliable service. The main aim of a power engineer is to minimize production costs without sacrificing quality. Power system aims to deliver power to a large number of consumers.

As we know, power demand is not constant. It varies with the usage of different consumers. Due to the variation in usage of consumers, the load on the power system is never constant. It varies from time to time. This variation of load on the power system is called as the variable load on the station.

So, as the demand changes then power supplied by the power system also changes. The power demanded by the consumers is supplied by the power system through transmission and distribution lines.

Terminologies

Several terms are used in connection with power supply to an area . some of them are given below :

• Connected load : A consumer may have different electrical appliances with different wattages. The sum of these ratings is said to be his/her connected load . For example , used in bulbs , tubes , fans, washing machine, refrigerator, air conditioner, electrical motors and power plugs etc. Now sum of the ratings of these all appliances ( W , KW, or MW) is connected load in home.
• Maximum demand : Maximum demand is the maximum load used by a consumer at any time . It can be less than or equal to the connected load. Generally , the maximum demand will be less than the connected load as all appliances are never run at full load at a time . The maximum demand is usually measured in kilowatts (KW) or megawatts (MW) .
• Load factor : Load factor is the ratio of average demand to the maximum demand . It may be daily load factor , monthly load factor or an annual load factor . Load factor is always less than one because average load is smaller than the maximum demand . If load factor is high then cost per unit generated will be less .

Load factor = average demand / maximum demand

• Demand factor : Demand factor is the ratio of maximum demand to the connected load . Here maximum demand and connected load must be expressed in same units.

Demand factor = maximum demand / connected load

• Average load : Average load is the total number of KWH supplied by a station in one day is divided by 24 hours .

Daily average load = KWH in one day / 24

Yearly average load = KWH in one day / (365 * 24)

• Diversity factor : Diversity factor is the ratio of sum of the individual maximum demands to the maximum demand of the system . Maximum demand on the power is always less than the sum of the individual maximum demands . So diversity factor always greater one .

Diversity factor = sum of individual maximum demands / maximum demand on the system

• Cold reserve : Cold reserve is the reserve generating capacity that is not in operation , but available for service.
• Hot reserve : Hot reserve is the reserve generating capacity that is in operation , but not available for service .
• Spinning reserve : Spinning reserve is the reserve generating capacity that is connected to bus bars and ready to take the load .

Isolated and Integrated Operation

The isolated and integrated operations are discussed below:

Isolated Operation

In isolated operation , each power plant retains its unique identity and serves the load demand of its designated area independently , without centralized control . The absence of central control necessitates sufficient reserve capacity in each system to ensure reliable electricity supply .

This requirement for extra capacity elevates the initial cost of establishing the power plants .The need for redundant capacity arises from the lack of of interconnection between systems , mitigating the risk of blackouts or disruptions .The efficiency of isolated operation is less compared to integrated operation.

The stability limit of the isolated operation is less . But the capital cost and overall cost per unit generation are comparatively less .Isolated system cannot provide a continuous power supply .In isolated system , we need to take care of planning and investment to balance reliability with cost effectiveness in supplying electricity to isolated regions or areas without access to a centralized grid network .

Integrated Operation

In integrated operation , entire system is one and the identity of individual plant is lost .This integrated operation overcomes the challenges faced by isolated operation .It features a central office for maintenance enhancing operational oversight .

This system boosts supply reliability and diminishes the need for excessive reserve capacity at each station .Unlike , isolated operation , the integrated system functions collectively , optimizing resource utilization and minimizing redundancies . Through interconnection , power stations benefit from shared resources and coordinated management , ensuring consistent and dependable electricity supply across the network .

This integrated operation not only improves reliability but also streamlines operation offering a more sustainable and cost effective solution for meeting energy demands on a broader scale . It reduces capital cost and overall capital cost and overall cost per unit energy generated .

Differences Between Isolated and Integrated Operation

Some of the differences between isolated operation and integrated operation

Isolated operation	Integrated operation
The individual plants in the system retains identity .	The individual plants identity in the system merges .
The initial cost of the plant is higher due to the reserve capacity.	The initial cost of the plant is low due to the shared resources.
In isolated operation systems operate individually.	In integrated operation systems are interconnected and operate as whole.
It requires significant reserve capacity .	Reserve capacity requirement is low .
There is no central control office .	It requires central control office.
In these systems , reliability is less due to isolated setup .	In these systems , reliability is high due to interconnection .
Each system manages its load independently .	It is having coordinated load management across the network .
Limited maintenance required for each plant.	Centralized maintenance is required .

Advantages of Economics of Power Generation

• Enhanced reliability of the power supply due to the interconnected systems .
• The need for reserve capacity is reduced .
• Optimized resource utilization which reduces waste and maximizes the efficiency.
• Improved grid stability which reduces frequency deviations and voltage fluctuations .
• Increased flexibility in managing demand which allows more flexible response for changing conditions .
• Lower operational costs leads to more cost effective electricity generation .
• It can be expanded more easily to accommodate growing energy demands by adding capacity and integrating new sources of generation.
• Interconnected systems provide redundancy ,ensuring that if one part of the system fails , then other parts continue to supply electricity .

Cost of Electrical Energy

The cost of electrical energy is defined as the amount of money required to generate and produce a unit of electricity . There are three types of cost of electrical energy . They are :

• Fixed cost
• Semi-fixed cost
• Running or operating cost

Fixed Cost : Fixed costs are the expenses that remain constant irrespective of amount of electric produced and consumed . It is independent of maximum demand , capacity of the plant and total energy generated . These costs remain fixed in all conditions . It is due to the salaries of employees i.e. higher officials , annual cost of central organization and interest on capital cost on land .

Semi-fixed cost : Semi-fixed costs are the expenses that are depend upon the maximum demand but it is independent of the energy generated . Semi-fixed costs are directly proportional to the maximum demand .This is due to the capital costs on the land ,construction costs , equipment cost and transmission and distribution costs . This also depends on salaries of the management and also installation costs.

Running or operating cost : Running or operating cost are the expenses that only depend on the energy generated by the plant .This is due to wear and tear of the plant , fuel cost that varies with the type of the plant ,maintenance cost and repairs of the plant , lubricating oil and also salaries of operating staff.

Tariff – Its Types

Tariff is the price that is charged for the energy supplied to the consumers . The energy produced by the power station is supplied to large number of consumers .The consumers utilize electricity when it is supplied at reasonable prices. The tariff includes total cost of producing electrical energy and also earns profit . The main objective of tariff is not only to return the cost but also earns reasonable profits . It recovers the cost on the capital investment in transmission and distribution , cost of producing electrical energy in the power station and cost of operation and maintenance of electrical energy . There are different types of tariffs . Some of them are :

• Simple tariff
• Flat rate tariff
• Block rate tariff
• Two part tariff
• Power factor tariff

Simple tariff : Simple tariff is the rate that is fixed per unit of energy consumed . It is also called as uniform tariff . The rate per unit consumed is constant . It is the simplest tariff and easy to understand . As it is fixed rate then every consumer i.e. both domestic and bulk consumers has to pay equal amount. The cost per unit delivered is high and doesn’t encourage the use of electricity.

Flat rate tariff : Flat rate tariff is the rate in which different consumers will pay different rate per unit energy .In this type , consumers are classified into different types so that each type of consumers is charged at a different uniform rate . It is more fair and it can be understood by different types of consumers . It is difficult to classify different types of consumers . Sometimes separate meters are required if both lighting and power load is present . So , it makes system costly .

Block rate tariff : Block rate tariff is the tariff which involves block of energy is charged at a specified rate and other block of energy charged at a reduced rates. The cost of each block is in decreasing order i.e. cost of first block is high when compared to other and cost of last block is low . So , the consumer who consumes more energy will pay less money . As the tariff increases the load factor , cost of unit generated is decreases . It is difficult to divide each block .

Two part tariff : Two part tariff is the tariff in which energy is charged on the basis of maximum demand and number of units consumed by the consumer .As the name itself tells that total charges are divided into two parts i.e. fixed charges and running charges . The fixed charges depend upon the maximum demand whereas running charges depend on the number of units consumed by the customer .Here total charges is the sum of charge per KW of maximum demand and charge per KWH of energy consumed . It is easy to understand . It is tough to calculate maximum demand of the consumer. The consumer has to pay fixed charges whether he /she utilized electrical energy or not .

Power factor tariff : Power factor tariff is the tariff in which power factor of the consumer load is taken into consideration . Low power factor of the system increases the equipment rating and line losses . So that system must operate at economical power factor .The consumer who’s having low power factor has to pay penalty .

Solved Example

Determine the demand factor and the load factor of a generating station , which has a connected load of 100MW and a maximum demand of 50MW , the units generated being 80 * 10^{^ 6} / annum .

Connected load is 100MW

Maximum demand is 50MW

units generated being 80 * 10^ 6 / annum

Demand factor = Maximum demand / connected load

= 50/100

=0.5

Average demand = units generated per annum / hours in a year

= 80 * 10^ 6 / 8760

=9132.4KW

Load factor = Average demand / maximum demand

= 9132.4 / 50 * 10^3

=18.26 %

Conclusion

The economics of power generation consists of various factors like cost of electrical energy , tariff and different types of tariffs , integrated and isolated operation and some of the terminologies used .The cost of electrical energy is influenced by production , distribution and regulatory expenses , and also factors such as fuel prices etc. Tariff determine the rates at which electricity is supplied to consumers ranging from simple or uniform tariffs to block rate tariffs based on usage tiers . There are several factors which influence the production cost such as cost of land and equipment , depreciation equipment , interest on capital investment etc.

Understanding the terminologies such as isolated and integrated operation sheds light on different approaches to power generation , highlighting the importance of reliability , cost efficiency and resource optimization in meeting energy demands . As the isolated operation maintains the individual identities of plants while integrated operation involves interconnected systems for improved reliability , cost effectiveness and resource utilization .

Frequently Asked Questions

What is base load ?

It is the minimum level of electricity demand over a period of 24 hours . It is needed to provide power to components that keep running at all times .

What is peak load ?

It is the time of high demand .These peaking demands are often only for shorter durations .Peak demand is the difference between high demand and the base demand .

Define variable load on power station ?

The load on a power station varies from time to time due to uncertain demands of the consumers and is known as variable load on power station .