Power Station (EEE- 4903)

Cost of Electrical Energy:

The total cost of electrical energy generated by a power station can be sub-divided as (follows):
(1) Fixed cost; (2) Energy cost; (3) Customer charges; (4) investors profit.

1. Fixed cost: It includes the following cost:

(A) Capital cost of power plant.
(i) cost of land; (ii) cost of building; (iii) cost of equipment; (iv) cost of installation;
(v) cost of designing and planning the station.
(B) Capital cost of primary distribution systems which includes cost of substation, cost of
transmission lines etc.
Fixed cost also consists of the following:
(i) Interest, taxes and insurance on the capital cost: it depends on the location and
condition.
(ii) General management cost: Miscellaneous cost
(iii) Depreciation cost: It will depend on the size and type of equipment and on its estimated
life.

Depreciation amount collected per year helps in replacing and repairing the equipment.
The most commonly used methods for the calculation of the annual depreciation cost are as
follows:
(a) Straight line method.
(b) Sinking fund method
(c) Diminishing value method.

(a) Straight line method:

In this method, a constant depreciation charge is made every year on the basis of total
depreciation and the useful life of the property.

Annual depreciation charge =

Total depreciation P
PA = Total depreciation
Useful life (p-s)
Value (cost)

p-s A
=
n Scrap value (S)
or, salvage value

Useful life (n)

Where,
p = initial cost of equipment A
n = useful life of equipment in years.
s = Scrap of salvage value of the useful life of the plant.
It is clear that the initial value p of the equipment reduces uniformly, through depreciation, to the
scrap value s in the useful life of the equipment. The depreciation curve PA follows a straight-line
path, indicating constant annual depreciation charge.

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(b) Sinking fund method:
In this method, a fixed depreciation change is made every year and interest compounded on it
annually.
Let,
p= Initial value of equipment
n= useful life of equipment in years.
s= scrap or salvage value after useful life.
r= Annual rate of interest
A= Annual depreciation amount.
p-s= cost of replacement
Then the amount A after earning interest for one year
=A+Ar=A(1+r)
The amount A after earring interest for two years.
=A(1+r)+A(1+r)r= A(1+r){1+r} = A(1+r)2
The amount A set aside after one year will earn interest for (n-1) years:
The sum of the amount saved together with interest earnings should be equal to (p-s).
(p-s) = A+A(1+r)+ A(1+r)2………………………….+A(1+r) n-1……………………..(i)

or, (p-s) = A[1+(1+r)+(1+r)2…………….+(1+r) n-1]……………………………………...(ii)

Multiplying both sides by (1+r)

(1+r)(p-s) = A[(1+r)+(1+r)2+(1+r)3…………….+(1+r) n]…………………………….(iii)

subtracting equation (ii) from equation (iii)

(1+r)(p-s) = A[(1+r)+(1+r)2+(1+r)3……………………..(1+r) n-1+(1+r) n………….(iii)

(-) (p-s) = A[1+(1+r)+(1+r)2…………………………..(1+r) n-1 …………………..(ii)

r(p-s)= A[(1+r) n -1]

or, A = (p-s)r/[(1+r) n-1]

the value of A gives the annual depreciation charge.

P
Cost (value)

Total depreciation (P-S)

B
Scrap value(S)

A life(n)
Useful

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(c) Diminishing value method:
In this method, depreciation charge is made every year at a fixed rate on the diminished
value of the equipment.
Let, p = initial value of equipment
n = useful life of equipment in year.
s = crap value after useful life.
Suppose the annual unit depreciation is x. It is desired to find the value of x in terms of p, n and s.
[If annual depreciation is 10%, then we can say that annual unit depreciation is 0.1 ]

Value of equipment after 1 year = Initial value- Annual depreciation

= p – px = p( 1 – x)
Value of equipment after 2 years = Diminished value- Annual depreciation
= (p - px)- (p - px)x
= p( x2 - 2x + 1)
=p(1 - x)2

Value of equipment after n years = p (1 - x) n

But the value of equipment after n years (i.e. useful life) is equal to scrap value S.

s = p( 1-x )n

Or, (1 - x)n = s/p

 (1 –x ) = (s/p)1/n
Or, x = 1 - (s/p)1/n
From this equation the annual depreciation can be easily found.
s)

P
(P-
Total depreciation
Cost (value)

Scrap value(s)

Useful life (n)

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2. Energy cost:
It consists of the following costs:
i) Cost of fuel,
ii) Cost of operating labour,
iii) Cost of maintenance labour and materials,
iv) Cost of supplies such as:
a) Water for feeding boilers, for condensers and for general use.
b) Lubricating oils.
c) Water treatment chemicals etc.
3. Customer charges:
The costs included in these charges depend upon the number of customers. The various
costs to be considered are as follows:
i) Capital cost of secondary distribution system and depreciation cost, taxes and
interest on this capital cost.
ii) Cost of inspection and maintenance of distribution system and the transformers.
iii) Cost of labour required for meter reading and office work.
iv) Cost of publicity.
4. Investor’s profit:
The investor expects a satisfactory return on the capital investment. The rate of profit varies
according to the business condition prevailing in different localities.

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Tariffs (Energy rates):
The rate at which electrical energy is supplied to a consumer is known as tariff. The tariff chosen
should recover the fixed cost, operating cost and profit.
Objectives of tariff:
Electrical energy is sold at such a rate so that it not only returns the cost but also earns
reasonable profit. Therefore, a tariff should include the following items:
i) Recovery of cost of producing electrical energy at the power station.
ii) Recovery of cost on the capital investment in transmission and distribution systems.
iii) Recovery of cost, of operation and maintenance of supply of electrical energy e.g.
metering equipment, billing etc.
iv) A suitable profit on the capital investment.

Types of Tariff:
The various types of tariff are as follows:
1. Simple tariff:
When there is a fixed rate per unit of energy consumed, it is called a simple tariff or
uniform rate tariff. In this type of tariff, the price charged per unit is constant i.e. It does not vary
with increase or decrease in number of units consumed.
Advantage: It is the simplest of all tariffs and is readily understood by the consumers.
Disadvantages: a) There is no discrimination between different types of consumers, since every
consumer has to pay equitably for the fixed charges.
b) The cost per unit delivered is high.

2. Flat rate tariff:

When different types of consumers are charged at different uniform per unit rates, it is called a flat
rate tariff. For example, the flat rate per KWh for lighting load may be 1.60 Tk. Where as it may be
slightly less (say 1.40 Tk.) for power load.

Advantage: The advantage of such a tariff is that it is more fair to different types of consumers
and is quite simple in calculation.
Disadvantage: Since the flat rate tariff varies according to the way the supply is used, separate
meters are required for lighting load, power load etc. (i.e. It is expensive and complicated).

3.Block rate tariff:

When a given block of energy is charged at a specified rate and the succeeding blocks of energy
are charged at progressively reduced rates, it is called a block rate tariff.
The price per unit in the first block is the highest and it is progressively reduced for the succeeding
blocks of energy. As for example, the 1st 30 units at 1.6 Tk ; The next 25 units 1.5 Tk and
remaining additional units at 1.4 Tk.
Advantage: The advantage of such a tariff is that the consumer gets an incentive to consume
more electrical energy.
Disadvantage: It lacks a measure of the consumers’ demand.

4. Two-part tariff:
When the rate of electrical energy is charged on the basis of maximum demand of the consumer
and the units consumed, it is called a two-part tariff.
In two-part tariff, the total charge to be made from the consumer is split into two components viz.
fixed charges and running charges.

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The fixed charges depend upon the maximum demand of the consumer while the running changes
depend upon the number of units consumed by the consumer.

Total charges= Tk [b (KW) + c (KWh)]

Where b= Charge per KW of maximum demand
C= Charge per KWh of energy consumed.
Advantages: i) It is easily understood by the consumers.
ii) It recovers the fixed charges which depend upon the maximum demand of the consumer but are
independent of the units consumed.
Disadvantage: The consumer has to pay the fixed charges irrespective of the fact whether he
has consumed the electrical energy.

5. Maximum demand tariff:

It is similar to two-part tariff with the only difference that the maximum demand is actually
measured by installing maximum demand meter in the premises of the consumer.
6. Power factor tariff:
The tariff in which power factor of the consumer’s load is taken in to consideration is known as
power factor tariff. In an ac system p.f. plays an important role. A low p.f. increases the rating of
station equipment and line losses. Therefore, a consumer having low p.f. must be punished.
7. Three- part tariff:
When the total charge to be made from the consumer is split into three parts viz. fixed charge,
semi-fixed charge and running charge, is known as a three-part tariff.
Total charge= Tk. (a+ b (KW) + c (KWh))
Where,
a= fixed charge made during each billing period. (It includes interest and depreciation on
the cost of secondary distribution and labour cost of collecting revenues)
b= charge per KW of maximum demand
c= charge per KWh of energy consumed

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Example-1:
A transformer costing Tk. 90,000 has a useful life of 20 years. Determine the annual depreciation
charge using straight line method. Assume the salvage value of the equipment to be Tk. 10,000.

Solution:
Initial cost of transformer, P = Tk. 90,000
useful life, n = 20 year
Salvage/scrap value, S = Tk. 10,000

Using straight line method:

P−S 90,000 − 10,000
Annual depreciation charge = = Tk.
n 20
= 4,000 Tk.

Example-2:
A distribution transformer cost Tk. 2,00,000 and has a useful life of 20 years. If the salvage value is
Tk. 10,000 and rate of annual compound interest is 8%, calculate the amount to be saved annually for
replacement of the transformer after the end of 20 years by sinking fund method.

Solution:
Initial cost of X-mer P = Tk. 2,00,000
Salvage value of X-mer S = Tk. 10,000
Useful life n = 20 years
Annual interest rate r = 8% = 0.08

Annual payment for sinking fund,

 r 
A = (P – S)  
n
 (1 + r ) − 1
 0.08 
= (2,00,000 – 10,000)  
 (1 + 0.08) − 1
20

 0.08 
= 1,90,000   = Tk. 4,153 (Ans)
 4.66 − 1 

Example-3:
A consumer has a maximum demand of 100 KW at 60% load factor. If the tariff is Tk. 20 per KW of
maximum demand plus 1 paisa per KWh, find the overall cost per KWh.
Solution:
Units consumed/year = Maximum demand  L.F  Hours in a year
= 100  0.6  8760 KWh
= 525600 KWh.
Annual charges = Annual Maximum demand charges + Annual energy charges
= Tk. (20  100 + 0.01  525600)
= 7256 Tk.
7256
 Overall cost / KWh = Tk. = 0.0138 Tk.
525600
= 1.38 paisa. (Ans.)

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Example-4:
The maximum demand of a consumer is 25 A at 220 V and his total energy consumption is 9750
KWh. If energy is charged at the rate of 20 paisa per KWh for 500 hours use of maximum demand
plus 5 paisa per unit for all additional units, estimate his annual bill and the equivalent flat rate.
Solution:
Assume the load factor and power factor to be unity.
220  25  1
 Maximum demand = = 5.5 KW
1000

(i) Units consumed in 500 hrs:

= 5.5  500 = 2750 KWh
Charges for 2750 KWh = Tk. 0.2  2750 = 550 Tk.
Remaining units 9750 – 2750 = 7000 KWh
Charges for 7000 KWh = Tk. 0.05  7000 = 350 Tk.
 Total annual bill = (550 + 350) Tk. = 900 Tk. (Ans)

(ii) Equivalent flat rate (1/KWh):

900
= Tk. = 0.092 Tk. = 9.2 paisa. (Ans)
9750

Example-5:
An industrial consumer has a maximum demand of 120 KW and maintains a load factor of 80%. The
tariff in force is Tk. 60 per KVA of maximum demand plus 8 paisa per unit. If the average p.f. is 0.8
lagging, calculate the total energy consumed per annum and the annual bill.
Solution:
Units consumed/year:
= Max. demand  L.F.  Hours in a year
= 120  0.8  8760 KWh
= 840960 KWh. (Ans)
120 120
Max. demand in KVA = = = 150
p. f . 0 .8
Annual bill = Max. demand charges + Annual energy charges
= Tk. (60  150 + 0.08  840960)
= Tk. (9000 + 67276.8)
= Tk. 76276.8 (Ans)

See related problems and examples.

(chapter 2, chapter 3, chapter 4, chapter 5, chapter 6

Reference: Principles of Power System - V.K. Mehta