NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY

COLLEGE OF ENGINEERING
MECHANICAL ENGINEERING DEPARTMENT

ME 414 POWER PLANT ENGINEERING WITH RENEWABLE ENERGY

MODULE 10 POWER PLANT ECONOMICS

10.1 Learning Objectives

Upon completion of this chapter, the students are able to:

1. Define what is Economic Analysis
2. Discuss the factors to be considered for, ‘plant selection’
3. Define ‘depreciation’ and explain its significance.
4. Solve problems related to Power Plant Economics
10.2 Economics of Power Generation

Economy is the main principle of design of a power plant. Power plant economics is important in controlling
the total power costs to the consumer. Power should be supplied to the consumer at the lowest possible cost per
kWh. The total cost of power generation is made up of fixed cost and operating cost. Fixed cost consists of
interest on capital, taxes, insurance and management cost. Operating cost consists of cost of fuel labor, repairs,
stores and supervision.
The cost of power generation can be reduced by;
1. Selecting equipment of longer life and proper capacities.
2. Running the power station at high load factor.
3. Increasing the efficiency of the power plant.
4. Carrying out proper maintenance of power plant equipment to avoid plant breakdowns.
5. Keeping proper supervision as a good supervision is reflected in lesser breakdowns and extended plant life.
6. Using a plant of simple design that does not need highly skilled personnel.
Economic Analysis
1. An economic analysis can provide a calculation of total cost of a project over its lifetime and it allows a cost
comparison of competing projects and technologies.
2. Another useful application of economic analysis is the determination of payback period for a project.
3. A decision whether to implement a project is made based on the results of an economic analysis
complementing a technical analysis.

Prepared by:
Engr. Anthony Vic C. Agulan
 NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY
COLLEGE OF ENGINEERING
MECHANICAL ENGINEERING DEPARTMENT

ME 414 POWER PLANT ENGINEERING WITH RENEWABLE ENERGY

MODULE 10 POWER PLANT ECONOMICS

Factor Affecting Power Plant Design

The following are the factors affecting while designing a power plant.
1. Location of power plant
2. Availability of water in power plant
3. Availability of labor nearer to power plant
4. Land cost of power plant
5. Low operating cost
6. Low maintenance cost
7. Low cost of energy generation
8. Low capital cost
Effect of Power Plant Type on Cost
The cost of a power plant depends upon, when a new power plant is to set up or an existing plant is to be
replaced or plant to be extended. The cost analysis includes:
A. Fixed Cost - includes Initial cost of the plant, Rate of interest, Depreciation cost, Taxes, and Insurance.
a. Initial Cost
The initial cost of a power station includes the following:
1. Land Cost
2. Building Cost
3. Equipment Cost
4. Installation Cost
5. Overhead charges, which will include the transportation cost, stores and storekeeping charges, interest during
construction etc.
b. Rate of Interest
All enterprises need investment of money and this money may be obtained as loan, through bonds and shares
or from owners of personal funds.
Interest is the difference between money borrowed and money returned. It may be charged at a simple rate
expressed as % per annum or may be compounded, in which case the interest is reinvested and adds to the
principal, thereby earning more interest in subsequent years.
Even if the owner invests his own capital the charge of interest is necessary to cover the income that he would
have derived from it through an alternative investment or fixed deposit with a bank. Amortization in the periodic
repayment of the principal as a uniform annual expense.
c. Depreciation
Depreciation accounts for the deterioration of the equipment and decrease in its value due to corrosion,
weathering and wear and tear with use. It also covers the decrease in value of equipment due to obsolescence.
With rapid improvements in design and construction of plants, obsolescence factor is of enormous importance.
Availability of better models with lesser overall cost of generation makes it imperative to replace the old
equipment earlier than its useful life is spent. The actual life span of the plant has, therefore, to be taken as shorter
than what would be normally expected out of it.

Prepared by:
Engr. Anthony Vic C. Agulan
 NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY
COLLEGE OF ENGINEERING
MECHANICAL ENGINEERING DEPARTMENT

ME 414 POWER PLANT ENGINEERING WITH RENEWABLE ENERGY

MODULE 10 POWER PLANT ECONOMICS

The following methods are used to calculate the depreciation cost:

1. Straight Line Method - is the simplest and commonly used 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. Obviously,
annual depreciation charge will be equal to the total depreciation divided by the useful life of the property.
𝑃−𝑆
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐶ℎ𝑎𝑟𝑔𝑒 =
𝑛
Where,
𝑃 = initial cost of equipment
𝑛 = useful life of equipment in years
𝑆 = scrap or savage value after the useful life of the plant
2. Diminishing Value Method - In this method, depreciation charge is made every year at a fixed rate on the
diminished value of the equipment. In other words, depreciation charge is first applied to the initial cost of
equipment and then to its diminished value.
1⁄
𝑆 𝑛
𝑥 = [1 − ( ) ]
𝑃
𝑣𝑎𝑙𝑢𝑒 𝑎𝑓𝑡𝑒𝑟 𝑛 𝑦𝑒𝑎𝑟𝑠 = 𝑃(1 − 𝑥)𝑛
Where,
𝑃 = capital cost of equipment
𝑛 = useful life of equipment in years
𝑥 = annual depreciation
3. Sinking Fund Method - In this method, a fixed depreciation charge is made every year and interest
compounded on it annually. The constant depreciation charge is such that total of annual instalments plus the
interest accumulations equal to the cost of replacement of equipment after its useful life.
(𝑃 − 𝑆)𝑟
𝐴=[ ]
(1 + 𝑟)𝑛 − 1
(1 + 𝑟)𝑛 − 1
𝑥 = 𝑃 −𝑆 = 𝐴[ ]
𝑟
Where,
𝑃 = initial value of equipment
𝑛 = useful life of equipment in years
𝑆 = scrap value after useful life
𝑟 = annual rate of interest

Prepared by:
Engr. Anthony Vic C. Agulan
 NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY
COLLEGE OF ENGINEERING
MECHANICAL ENGINEERING DEPARTMENT

ME 414 POWER PLANT ENGINEERING WITH RENEWABLE ENERGY

MODULE 10 POWER PLANT ECONOMICS

B. Operational Cost - includes Fuel cost, Operating labor cost, Maintenance cost, Supplies, Supervision,
Operating taxes.
a. Cost of Fuels
In a thermal station fuel is the heaviest item of operating cost. The selection of the fuel and the maximum
economy in its use are, therefore, very important considerations in thermal plant design. It is desirable to achieve
the highest thermal efficiency for the plant so that fuel charges are reduced.
The cost of fuel includes not only its price at the site of purchase but its transportation and handling costs
also. In the hydro plants the absence of fuel factor in cost is responsible for lowering the operating cost.
The cost of fuel varies with the following:
1. Unit price of the fuel.
2. Amount of energy produced.
3. Efficiency of the plant.
b. Labor Cost
Maximum labor is needed in a thermal power plant using coal as a fuel. A hydroelectric power plant or a diesel
power plant of equal capacity requires a lesser number of persons.
c. Supervision
The salary of supervising staff is included. A good supervision is reflected in lesser breakdowns and extended
plant life. The supervising staff includes the station superintendent, chief engineer, chemist, engineers,
supervisors, stores-in-charges, purchase officer and other establishment.
d. Operating Taxes
It includes the following:
1. Income Tax
2. Sales Tax
3. Social security and employee’s security etc.

Time Value of Money

The value of money changes with time due to interest and inflation among other factors. This is also due to the
fact that money is always in shortage with respect to what people want to buy with money.

Notation Equation
𝑃 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝐹 = 𝑃(1 + 𝑟)𝑛
𝐹
𝐹 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑉𝑎𝑙𝑢𝑒 𝑃=
(1 + 𝑟)𝑛
𝑟
𝑈 = 𝑈𝑛𝑖𝑓𝑜𝑟𝑚 𝑆𝑒𝑟𝑖𝑒𝑠 𝐴𝑚𝑜𝑢𝑛𝑡 𝑈 = 𝑃[ ]
1 − + 𝑟)−𝑛
(1
1 − (1 + 𝑟)−𝑛
𝑟 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 𝑃 = 𝑈[ ]
𝑟
𝑟
𝑛 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑇𝑖𝑚𝑒 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑈 = 𝐹[ ]
(1 + 𝑟)𝑛 − 1
(1 + 𝑟)𝑛 − 1
𝐹 = 𝑈[ ]
𝑟

Prepared by:
Engr. Anthony Vic C. Agulan
 NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY
COLLEGE OF ENGINEERING
MECHANICAL ENGINEERING DEPARTMENT

ME 414 POWER PLANT ENGINEERING WITH RENEWABLE ENERGY

MODULE 10 POWER PLANT ECONOMICS

10.3 SAMPLE PROBLEMS

1) A utility system has 1,000,000 kW of installed capacity. Because the plants were erected over a period of
many years, the average cost is less than the current erection process and maybe taken as $108 per kW. The
plants burn coal that cost of $0.33 per 106 BTU and there is a maintenance cost of $0.04 per 10 6 BTU. The
average heat rate is 16,200 BTU per gross kW-hr at a capacity factor of 46%; the investment charges are
12.5%. Auxiliary power amounts to 6.1% and there is one plant employee per 1800 kW of capacity with an
average salary of $3900 per year. Calculate the cost of electrical energy in $ per kW-hrs.
2) Make a comparative analysis of the production cost per kW-hr of the two plants for which data are given.
Annual production is 1x106 kW-hr.

Diesel Power Plant Steam Power Plant

Engine and Generator $53,000 Turbogen and Condenser $24,000
Switchboard and wiring $5,600 Boiler and Stoker $20,000
Miscellaneous $8,000 Switchboard and wiring $5,600
Building $10,500 Miscellaneous $10,000
Labor per month $350 Building $12,000
Fixed charges 11% Labor per month $450
Oil per liter(0.621 g/ml) 4.1 ¢ Fixed charges 12%
Fuel economy 0.49 lb/kWhr Coal per ton $3.5
Fuel economy 1.72 lb/kWhr

3) A 30 hp condensate pump motor has been burned beyond repair. The plant superintendent has two replacement
alternatives. Manufacturer "A" offers to replace the original (which was an "A" motor) for $510. Manufacturer
"B" offers a cheaper motor at $400 but can only guarantee 87% efficiency whereas the "A" motor is
guaranteed for 89%. The installation operates 25% of the time at full load, and 75% of the time at half load
where the two efficiencies become 85% and 84% respectively. Assume a motor comparison period of 5 years,
interest rate 8%, equal maintenance costs. Electric energy is charged for at the rate of 1 1/2₵ per kW-hr
a. Which motor is the more economical to buy?
b. At what energy cost do they become equal alternatives?
4) The equipment in a power station costs Php 10,619,544.00 and has a salvage value of Php 40,844.40 at the end
of 25 years. Determine the depreciated value of the equipment at the end of 20 years on the following
methods:
a. Straight line method;
b. Diminishing value method;
c. Sinking fund method at 5% compound interest annually.
5) Company A installs a wind turbine that costs $15,000. Calculations indicate that this wind turbine will save
$3000 per year from the electricity it saves for a period of 10 years. The salvage value of the turbine at the end
of 10 years period is $1500. Company B takes a different route, and invests $15,000 in a savings account.
Taking the inflation-taxation-adjusted interest rate for both applications to be 5 percent, determine which
company will have more money after 10 years.

Prepared by:
Engr. Anthony Vic C. Agulan
 NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY
COLLEGE OF ENGINEERING
MECHANICAL ENGINEERING DEPARTMENT

ME 414 POWER PLANT ENGINEERING WITH RENEWABLE ENERGY

MODULE 10 POWER PLANT ECONOMICS

6) An electric motor is to be purchased for use in a renewable energy application, and there are three options.
Compare the total costs of standard motor, high-efficiency motor, and premium-efficiency motor. Use the net
present value method for comparison and consider the following data:
• All three motors provide the same mechanical output of 45 kW.
• The efficiencies of the standard, high-efficiency, and premium-efficiency motors are 88, 91, and 94 percent,
respectively. The efficiency is defined as the actual mechanical power output over the electricity input.
• The initial costs of the standard, high-efficiency, and premium-efficiency motors are $11,000, $13,000, and
$14,500, respectively.
• The lifetime is 10 years for each motor.
• The motor operates 4000 hours a year at an average load factor of 65%.
• The price of electricity is $0.10/kWh.
• The operating and maintenance expenses are $500 per year.
• The interest rate is 8 percent.
• The motors have no salvage value at the end of 10 years period.

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Prepared by:
Engr. Anthony Vic C. Agulan