MODULE - 2
Power-System Economics
Introduction:
❖ Capacity addition is a highly capital –intensive
investment.
❖ In every year, the Indian power sector project-
investment needs are equal to about 2.5% of the GDP.
❖ Generation Investments are chosen to maximise profit
and are on competitive basis.
❖ Transmission Investments are required to facilitate
fair and competitive access to all generators across
the network.
❖ Good investment planning processes and coordination
of investment decisions ensure secure and reliable
electricity supply expected by consumers achieved at
the least cost to consumers.
The delivered cost of 1MW of power works out to approximately Rs 120 million
FINANCIAL PLANNING :
❖ Investment requirement of power sector
❖ Mobilise resource to meet this huge requirement by the way of fireign assistance, public
funding, private capital , public borrowing , and internal resource generation.
❖ The Central Government, Ministry of power, provides funding to national schemes for
power projects.
❖ State power utilities and central sector power utilities are expected to generate at least
20% of their total investment as internal resources.
❖ Financial institutions like banks, LIC, PFC (Power Finance Corporation), REC (Rural
Electrification Corporation), market borrowing.
❖ Financial Planning ensures right amount of finances at the right time at lowest rate.
The capital finance equity is required for
fixed capital for land, building , machinery materials, construction
Working capital for raw material such as fuel for two month , it has highest interest rates.
The innovative approach by various financial institutions has made finding a complicated
process.
The broad points are
Techno-Economic Viability
Techno Economic Viability (TEV) Study provides an appraisal of technological
parameters of projects and its impact on the financial viability of projects. ... A TEV
study takes into account an analysis of technological risk, market risk, regulatory risk,
financial risk.
Economic evaluation takes into account of total cost of the system including terminal
equipment.
Power system planning is carried out over long time horizons
Software Package based on linear programming formulation or dynamic
programming techniques are used.
By linear programming techniques extensive sensitivity analysis can be conducted
relatively quickly at low cost.
1. The CEA has purchased the Integrated system planning package (ISPLAN)
Indicative planning tool for analysing the major features of an optimal expansion
plan for generation capacity, transmission, and coal transport.
The optimal capacity expansion plan through a probabilities treatment of outage
will still require models such as the Wien Automatic system planning (WASP)
developed by IAEA.
2. Electric Generation Expansion Analysis System (EGEAS) is a computer software
Package containing five capacity-expansion analysis options
EGEAS package can be used to determine optimal quantum of required capacity
induction from various modes of available generation
ISPLAN package can be used to select the individual new power plants from the
various modes of power generation based on considerations of matching
transmission network requirement.
Private Participation
1. Ownership
2. Debt:Equity ratio
3. Cost of Capital
4. Modes of participation
5. Bidding for private Entrants
6. Power-Purchase Agreement with Co-generators
Private Participation
The parameters for investment as notified by the CERC are given by
The % of interest during construction is = (C * R * N )/ (2*12*100)
Where C= Cost of project in Rs.
R = Rate of interest
N= Commissioning period in months
1.1 Ownership
1.2 Debt:Equity ratio
❖ Government of India has stipulated a Debt:Equity ratio of 4:1
❖ The higher ratio is considered more risky for lenders.
❖ The ratio calculated by dividing long-term debt by the equity.
Debt and equity are defined as follows
Debt
1. Long term loans (repayable after twelve months) including interest
2. Convertible and non-convertible bonds until they are converted irrespective of
the period of maturity.
3. Postpone payments.
Equity:
❖ Ordinary paid-up share capital.
❖ Premium on issue of share.
❖ Amount of state/central subsidy.
Cost of Capital: it is essentially the weighted average of the cost of both the equity
and debt held by a power utility.
Generation: covers 50% of the consumer bill
Transmission ; 20% of the consumer bill
Distribution : 30% of the consumer bill
Modes of Participation
Bidding for private Entrants
Power-Purchase Agreement with Co-generators
Financial Analysis
❖ Evaluation of risk and rate of return are the two objectives of financial analysis.
❖ It is an investigation of financial profitability of investment.
❖ In financial analysis, the average of cost of capital for the proposed project is
calculated on the basis of debt to equity ratio. Loan interest rates, repayment
period, and required return on equity investment.
❖ Credit risk analysis is also a part of financial analysis
Economic Analysis
The primary objective of the economic analysis of a power project is to determine the cost-of-generation,
transmission at their true cost of power economy.
Effort should be made to bring out possible reduction in operating costs for the rest of the system on the
account of addition of the proposed project.
Truly optimised project is one in which the total lifetime cost is minimised.
The lifetime cost of the system consists of the capital cost (Cost of land, building, machinery, installation) +
working capital + the operating cost plus + interest during construction insurance.
An estimation of the specific energy cost per unit of electricity generated, have following additional
parameters to be specified:
1. The rate of discount (in %)
2. The system total lifetime (in year)
3. The annual electricity production (Kwh)
Conversion factor (CF) = ( i(i+1)^n)/ ((i+1)-1)
Where i = rate of discount
n= lifetime of fixed assets or nth year of plant in service.
Economic Appraisal
1. Minimum Revenue Requirement :
❖ It as two items annual fixed charges on new investment and annual expenses for
fuel, O & M.
❖ Year to year charge in revenue requirement is also very important since a large
increases could represent a “Rate Shock” to consumers.
❖ The plan which requires lowest revenue requirement may not be the best
considering other constraints.
2. Levelized Cost of Electricity :
❖ Convert the Life cycle cost (LCC) of each power plant option into a uniform
amount in each year.
❖ The plant real levelised value , A = S*(1-R)/ (1-(Rn))
Where S* = Presents value sum of all LCC
R= 1/(1+real discount rate)
n= number of yearly values summed
3. Lifecycle Costs: LCC = CI+CP+CO+CG+CF+CD
CI = total installation cost
CP= costs of planned corrective maintenance
CO=operating Costs
CG= Outage Cost
CF= cost of modernisation
CD= Cost of decommissioning , disposal
4. Cost benefit analysis:
❖ BC Ratio = benefits to the public and utility/
Cost to the utility
❖ RES are sanctioned in Indian on this basis.
5. Break even point: used to determine the Minimum
Revenue Requirement analysis.
Tariffs in public power utilities are generally fixed
to break even point.
6. Payback Methods: the length of time required to recover the initial investment is
computed.
7. ROR: iyt is the average revenue divided by capital base.
ECONOMIC CHARACTERISTICS- GENERATION UNITS
● Determine the cost at which produces electrical energy
● The cost as 3 components: cost of fuel, cost of O & M, and capital. Or investment cost.
1. Fossil-fuel Inventory Cost
2. Nuclear Plant Capital Cost
3. Nuclear fuel Burnup Cost
4. Operation and Maintenance cost
5. Plant Cost Estimates
6. Economy of Scale
7. Incremental Plant Cost
ECONOMIC CHARACTERISTICS- TRANSMISSION
1. New Connections
2. Improved Efficiency and Security
3. Interconnections
RURAL ELECTRIFICATION INVESTMENT:
It could not be correct to judge rural electrification purely on criteria of financial returns on
the investment made.
Based on the number of indirect socio-economic advantages
It's not limited to the immediate or long term financial returns but go far beyond and can
truly evaluated by a benefit-cost analysis.
TOTAL SYSTEM ANALYSIS
The essence of total system analysis is simulation of system operation with respect to both
reliability and economy of electric power supply.
The production-cost calculation determines how the total generating system should be
operated for adequate reliability and maximum economy, calculating cost of fuel an operation
and maintenance as it proceeds through each year of the study.
Total System Cost = Production cost + Fixed Cost
Cost Simulation:
SYSTEM COST
Underground- Cable Losses
Over Transmission Losses
System Cost:
The major elements of cost in the electric utility industry are the following:
1. Cost of the fuel supply is a critical feature affecting plant reliability.
2. Cost of capital for generation equipment plus for transmission equipment plus for
distribution equipment
3. Cost of operation and maintenance
4. Cost of auxiliary consumption of generation plant, transmission, and distribution
losses.
The contribution of fuel cost to electricity cost is directly proportional to the product of (i)
fuel cost per unit heating value (Rs/million Kcal) and (ii) Heat rate (kcal/kwh).
If the cost of fuel is double, the contribution of fuel to the cost of electricity is doubled.
Underground- cable Losses:
❖ Capital cost plus the capitalisation of the losses to their present value (PV) ‘over the
specified life’ of the installation is used to obtain cost of the cable.
❖ LSF = 0.2LF+0.8 (LF)^2 represents the load characteristics of the system.
❖ The unit cost of transmission per unit length is
= 10^-6 [(C+3D* 10^3 I^2 R) / (T (3)^1/2) IV]
Where C= Capitalised cost of the constant losses
D= Present worth of supplying 1kW of peak (load factor LF)
I = peak load current (kA)
V= system voltage (kV)
T= effective time load supplied over the total period of operation = LF * 8760* Wp
Overhead Transmission Line Losses:
Energy Losses in T.L may result either from the thermal effect (I^2 R) or from corona.
Both types of losses have two cost components: demand and energy.
ADCn = DLD * DC * IDC * AFC
AECn = 8760 * DLE * LSF * EC
Credit Risk Assessment
The sensitivity analysis should be done in order to evaluate the project proposal risk
mitigation in respect of
1. Current capital cost fluctuation (i.e 25%, 30%, 50%)
2. Risk premiums (insurance, exchange)
3. Debt source ration (Local commercial, public)
4. Construction material cost
Construction Stage:
Operational Stage:
5. Fuel
6. Revenue Return
Tariffs
As per the electricity Act 2003, section 3, the government of India has notified the national
Tariff policy on 6 Jan 2006.
1. Cost based Tariffs
2. Market based Tariffs
3. Central Sector Generation Project Tariffs
4. Feed in Tariff
Cost Based Tariffs: Ep = % change in energy consumption in kwh/ % change in price kwh
GENERATION EXPANSION
Generation Capacity and Energy
Type of generation Capacity
1. Generating-plant unit rating
2. Comparison of energy source and electrical-
generating system
3. Planning Options
4. Uncertainties
5. Attributes
Generation Mix
❖ The generation mix is decided on the basis of
load curve duration peak, intermediate, and base
loads.
❖ The base Load is catered by high-inertia
generating Plant
❖ The intermediate load is catered by low-inertia
thermal plants
❖ The peak load load is maintained by the hydro-
generation pumped storage plant, diesel
generators.(Switch off and On easily)
Conventional Generation Resource
1. Hydroelectric Power
2. Thermal Coal
3. Natural Gas
4. Nuclear Energy
5. Clean Coal technologies
6. Distributed Power Generation
Merits of Different generating Plants:
1. Hydroelectric Power
The amount of electricity which can be generated at a hydroelectric plant depends upon two
factors: (i) head of the water (ii) the flow rate.
P = 9.8 * q * h
Where P = Available water power (kW)
q= water rate of flow (m^3/s)
h= head of water (m)
Efficiency of large hydraulic turbines is b/w 90 to 94% and generator efficiency is even
higher, from 97 to 99%.
1. High head - 300m
2. Medium head - in b/w 30m to 300m
3. Low head - below 30m
1. Pumped Storage
2. The hydro Resource
3. Generating- Capacity Evaluation
General Procedure is as follows:
4. Use the discharge curve to determine the tailwater (TW) level as a function of Qreg
5. Use of capacity curve to find the Headwater level (HW) as a function of Vres
6. Calculate the net head as H = HW- TW
7. Compute the available power as P= 8.5 Qreg H
Thermal Coal
Natural Gas
Nuclear Energy
Clean Coal Technologies
Distributed Power Generation