HomePower PlantWhat is Power Plant Economics? It's Cost of Power Generation and Calculation

What is Power Plant Economics? It’s Cost of Power Generation and Calculation

In this post, you’ll learn about power plant economics, terms used in power plant and calculation on the cost of power generation.

The Economics of Power Plant

In all sectors of industry, economics plays an important role. In power plant engineering economics of power system using certain well-established techniques for choosing the most suitable system.

  • Power plant design should be based on the most economical condition and not on the most efficient condition. As the profit is the main basis in the design of the plant and its effectiveness is measured financially.
  • The main purpose of the design and operation of the plant is to bring the cost of energy produced to a minimum.
  • Among many factors, the efficiency of the plant is one of the factors that determine the energy cost.
  • In the majority of cases, unfortunately, the most thermal efficient plant is not an economic one.
  • A power plant should provide a reliable supply of electricity at a minimum cost to the consumer.

Read also: Power Plant: Types, Factors, Choices and Terminology Used in Power Plant

The Cost Per kWh net is Determined By :

  1. Fixed costs (FC), mainly interest, depreciation, insurance, taxes, depending on the capital invested, i.e. on the construction costs of the plant including the cost of the land.
  2. Operation and maintenance (O & M) costs covering salaries and wages, overhauling of equipment, repairs including spare parts, water, lubricating oil, chemicals and miscellaneous expenses.
  3. Fuel costs, dependent on the amount of electricity generated.
  4. kWh net of electricity carried out per year.

The total annual costs (Ct) in a power plant can be determined from


  • I – is the interest, %;
  • D – is depreciation, %;
  • T – is taxes and insurance, %;
  • Cc – the construction costs;
  • W – is wages and salaries;
  • R – is repairing (maintenance);
  • M – is miscellaneous; and
  • Cf – the fuel cost.

The annual amount of electricity sent out by a power plant (kWh net) is given by


  • kW inst – is the rated (installed) output of generators;
  • Laux – the power consumption by the auxiliaries %;
  • n – the plant capacity factor and
  • 8760 = 24 x 365 hour/year.

In order to calculate the electric power cost to a consumer, in addition to the production cost (fixed cost, operation and maintenance, and fuel cost), the transmission cost, distribution cost, administrative expenses, and return or profit on the investment have to be taken into consideration.

A measure for the safety of a power plant is the forced outage rate specified by the annual ratio of

As forced outages raise operation and maintenance costs, the proven safety of equipment and regular preventive maintenance work are necessary, not only to support electric supply but also for the overall economics of power plant.

The costs, however, have a continuous upward trend due to monetary inflation, rising fuel prices and increased demand for measures protecting the environment.

The Cost of Power Generation Can Be Decreased By:

  1. Selecting equipment for longer life and proper capacities.
  2. Running the power station at high load factor.
  3. Increasing the efficiency of the power plant.
  4. Carrying the proper maintenance of power plant equipment to avoid plant breakdowns.
  5. Keeping proper supervision.
  6. Using a plant of simple design that does not need highly skilled personnel

Power Plant Economics [Calculating the Cost of Electric Energy]

Following considerations are made while calculating the cost of electric energy:

1. Fixed costs (FC): It includes mainly:

  • Interest, depreciation, insurance, taxes.
  • Depending on the capital invested; i.e, on the construction costs of the plant including the cost of the land.
  • General management cost
  • The capital cost of a primary distribution system which includes the cost of substations, costs of transmission lines, etc.

2. Operation and maintenance costs or energy costs covering :

  • Salaries and wages.
  • Overhauling of equipment.
  • Repairs including spare parts.
  • Water for feeding boilers, condensers and for general use.
  • Lubricating oils.
  • Water treatment chemicals and miscellaneous expenses.

3. Fuel costs, depending on the amount of electricity generated.

4. Customer charges: It includes:

  • The capital cost of the secondary distribution system and depreciation cost, taxes and interest on this capital cost.
  • Cost of maintenance and inspection of distribution lines.
  • The cost of labour required for meter reading and office work.
  • Cost of publicity.

5. kWh. of electricity sent out per year.

6. Investors profit.

Terminology Used in Power Plant:

1. Connected Load:

It is the sum of ratings in kW of the equipment installed on the consumer’s premises.

2. Maximum Demand:

This is the maximum load the consumer uses at any given time. It is always less than connected load or equal to the connected load.

3. Base Load:

It is a minimum load over a given period of time. The power plants used to supply the base load of the load curve is called baseload power plants. These power plants run throughout the year and these are of larger capacity. These are highly efficient and run at high load factors. Hydropower plants are usually called as baseload power plants.

Requirements of Base Load Power Plants:

  • Low capital cost
  • The load should be supplied continuously.
  • Low maintenance cost.
  • Low operating cost.

4. Peak Load:

It is a maximum load produced or consumed by a unit or group of units in a given period of time. It is the maximum average load over a given period of time. The power plants which supply the load on the top portion of the load curve are called as peak load power plants.

These are smaller in capacity and run for a short period in a year. These plants work at low power factors. Thermal power plants may be regarded as intermediate power stations and diesel power stations are considered as peak load power stations.

Requirements of Peak Load Power Plants:

  • Should be started quickly.
  • Low operating cost.
  • It has a low capital cost.
  • Low maintenance cost.

5. Load Factor:

It is the ratio of average load to the peak or maximum load or maximum demand determined by the consumer.

The power factor is always less than unity. The power plants which are used to take the baseload, run on a high load factor and the plants which are used to take the peak load run on low load factor, higher the load factor the lesser will be the cost of power generation per unit for the same maximum demand. High load factor is a desirable quality of power plant. Higher the load factor greater the average load.

6. Demand Factor:

It is the ratio of maximum demand to the connected load.

7. Diversity Factor:

It is the ratio of the sum of individual maximum demands to the maximum demand of the entire group.

8. Plant Use Factor:

It is the ratio of peak load to the plant capacity.

9. Capacity Factor:

It is the ratio of average load to the plant capacity i.e.,

10. Load Curve and its Importance:

Load curve is a curve showing the variations of power with respect of time. If the time is in hours then the load curve is known as the daily load curve. If the time is in days, then the load curve is known as the monthly load curve and if the time is on months, then the load curve is known as a yearly or annual load curve. The load is represented in Kilo Watt (KW). The load curve shows how the load varies with respect to time, as shown in the figure.

Load Curve: Economic Power Plant

This type of load curve is useful in predicting the annual requirements of energy and capacity of the power plant required to take the peak load. The area under the curve represents the energy generated in the period considered. The area under the curve divided by the number of hours gives the average demand on the station.

The peak load indicated by the load curve represents the maximum demand of the power station. These curves also help to estimate the generating cost and to decide the operating schedule of the power plant ie the sequence in which the different units should be run.

Importance of Load Curve:

  1. The daily load curve gives the information of load on the power station during different running hours of the day.
  2. The number of units generation per day is found from the area under the daily load curve.
  3. Average load is found from the load curve.
  4. The area under daily load curve (kWh)
  5. Average load = [Area under daily load curve (kWh)]/[24 hours]
  6. The maximum demand of the station on that day is found from the highest point of the daily load curve.
  7. The size and the number of generating units can be determined from the load curve.
  8. This load curve helps to determine the operation schedule of the station.

Cost or Tariff of Power

A tariff is the different methods of charging the consumer for the consumption of electricity. The cost of generation of electrical energy consists of fixed cost and running cost. Since the electricity generated is to be supplied to the consumers, the total cost of generation has to be recovered from the consumers.

It is desirable to charge the consumer according to the maximum demand (kW) and the energy consumed (kWh). The tariff should recover the fixed cost, operating cost and profit etc., incurred in generating the electrical energy.

Factors Affecting the Operation of Power Plant:

Following are the factors affecting the operation of the power plant :

  1. Nearness to the fuel source.
  2. Availability of sufficient water.
  3. Type of soil available and land cost.
  4. Availability of skilled labour.
  5. Low operating cost.
  6. It takes the low cost of energy generated.
  7. Low maintenance cost.
  8. Low capital cost.
  9. High efficiency.
  10. The simplicity of design.
  11. Reserve capacity to meet future demand.

1. Nearness to the Fuel Source:

The power plant should be very nearer to the fuel source to reduce the transportation cost of the fuel and uninterrupted supply of fuel.

2. Availability of Sufficient Water:

The sufficient water should be required for cooling, cleaning, as feed water and for general use.

3. Type of Soil Available and Land Cost:

The stability of the plant depends upon the soil conditions and land cost should be very less to reduce the power generation cost.

4. Availability of Skilled Labour:

For the steady operation of plant and to reduce the turnover of the labour, sufficient availability of skilled labours are essential.

5. Low Operating Cost:

Operating cost of the power plant should be as low as possible for its efficient running.

6. Low Cost of Energy Generated:

The cost of generation should also be as possible to reduce the burden on customer due to high charge electricity.

7. Low Maintenance Cost:

For proper and efficient running of the power plant, it should have a low maintenance cost.

8. Low Capital Cost:

To reduce the heavy burden of investment, the plant should have low capital cost.

9. High Efficiency:

To have a good return on investment the power plant should run with high efficiency.

10. Simplicity in Design:

For easy operation, maintenance and easy replacement of parts and equipment the power plant should have simplicity in design.

11. Reserve Capacity to Meet Future Demand:

The power plant should always have reserve capacity to meet any sudden and steady change in future requirement.

That’s it, Thanks for reading. If you have any questions about “Power Plant Economics” ask in the comment I’ll respond to you. If you find this article helpful please share with your friends.

Saif M
Saif M. is a Mechanical Engineer by profession. He completed his engineering studies in 2014 and is currently working in a large firm as Mechanical Engineer. He is also an author and editor at theengineerspost.com