VIC LibraryTECHNICAL REPORTS SERIES No.241Expansion Planning forElectrical Generating SystemsA GuidebookjWtiINTERNATIONAL ATOMIC ENERGY AGENCY, VIENNA, 1984TECHNICAL REPORTS SERIES No. 241EXPANSION PLANNINGFOR ELECTRICALGENERATING SYSTEMSA GuidebookINTERNATIONAL ATOMIC ENERGY AGENCYVIENNA, 1984Chapter 6GENERATING SYSTEM COSTSThis chapter presents techniques that are helpful in determining thecomponents of the costs of a generating system. Some methods for simplifiedcomparisons between alternative generating units, such as lifetime levelized cost,are developed from the economic principles presented in Chapter 5. Key factorsin determining generating system costs, such as forced outage rates and incrementalheat rates, are reviewed in some detail in preparation for the example calculationof production cost that follows. The advantages and limitations of a less rigorousmethod, known as screening curves, which is sometimes used to estimate outputfrom generating units and least-cost capacity mixes, are presented in the finalsection.The examples in this chapter are related primarily to greatly simplifiedthermal generating systems. The additional considerations and complicationsencountered in analysing mixed thermal-hydro systems are briefly noted here andare presented more fully in Chapter 8.6.1. DEFINITION OF COSTSThis section defines and briefly discusses the types of costs associated withelectric power generating plants and systems. Appendix H discusses some of thesebasic concepts in greater detail together with illustrative economic data foralternative power plants. Cost accounting practices and terminology vary fromcountry to country and, in many instances, within countries. Furthermore, specialterminology and conventions are often used in conjunction with specific types ofgenerating unit, such as coal and nuclear power plants. Therefore, while theterminology and conventions presented in this section are typical, they are notuniversal and are intended only to illustrate the basic concepts and categories ofcosts for power plants and electric generating systems. Some of the terms definedhere may be defined differently elsewhere depending on the cost accountingsystem used or the type of analysis being performed.6.1.1. Basic cost conceptsFrom an economic point of view, it is desirable (but seldom possible) toexpand a power generating system by adding plants that are both cheap to buildand that produce electrical power at the lowest possible cost. Two distinct figuresof merit are therefore important when discussing or comparing the economics of151152Costs ofPowerGeneratingTechnologiesi-PowerGenerationCostsCapita!InvestmentCostsCHAPTER6i—VariableCostsFixedCosts-F—1Jr— Fariable Fuel Costs•riable O&M Costsxed Fuel CostsFixed O&M CostsFixedInvestmentChargesjxes and Insurance— Depreciation_ Return OnInvestment|_ Other FixedChargesFIG. 6.1. Categories of costs for power generating technologies.power generating technologies: (1) capital investment costs, expressed in S/kW1 ofinstalled capacity, that denote the capital outlay necessary to build a power plant;and {2) power generation costs, expressed in mills/kW-h of generation2, thatrepresent the total cost of generating electricity. Power generation costs consistof the costs associated with the initial capital investment in a power plant (fixedinvestment charges), fuel costs, and operation and maintenance (O&M) costs.For discussion, these costs can be divided into two broad categories: fixed costsand variable costs. A breakdown of the general categories of costs for powergenerating technologies is presented in Fig.6.1. As illustrated, fuel and O&Mcosts have both fixed cost and variable cost components. The dashed lineindicates that the fixed investment charges are a function of the capital investmentcosts. The levels of costs for the cost categories identified in Fig.6.1 will varyconsiderably depending on the technology examined. For example, nuclear powerplants are characterized by high capital investment costs and low fuel costs, whileno fuel costs are usually associated with a hydroelectric power plant.Fixed costs are related to the expenditures for items used over an extendedperiod of time, such as a boiler or reactor, and are independent of the amountof electricity generated by the plant. Fixed investment charges, which includedepreciation (i.e. the annual charge for recovering the initial capital investmentin a power plant), return on investment (for private utilities in the USA, for example,As in Chapter 5, for convenience, all examples in this chapter are in US dollars.A mill is defined as 1/1000 of a monetary amount.GENERATING SYSTEM COSTS 153this includes interest paid to bondholders (debt) and return to stockholders(equity)) in addition to (where applicable) interim replacement and fundsfor decommissioning, all of which may be treated as proportional to theinitial capital investment in plant and facilities, are classified as a fixed cost. Theannual fixed investment charges for a plant can be calculated as the product ofthe fixed charge rate and the plant capital investment costs. In the absence of taxand insurance complications, which are very important considerations in somecountries, the annual fixed charge rate is equal to the sum of the charges fordepreciation and for the annual return on investment. Typical fixed O&M costsinclude wages and salaries, while fixed fuel costs could include, for example, thecosts associated with stockpiling fuel (e.g. coal).In contrast, variable costs, often called expenses, represent expenditures forgoods and services consumed within a relatively short period of time (usually oneyear or less). Variable costs generally depend directly on the amount of electricitygenerated (i.e. they are expressed in terms of a monetary amount per kW-hproduction). Variable fuel costs and variable O&M costs are the two primarycategories of variable costs.From a utility point of view, the money received from customers, calledrevenue, must in the long run be sufficient to cover all costs of providing service,(this may not be the case in countries where electricity production is subsidized).Therefore, the annual revenue requirement is simply defined as the sum of theannual fixed and variable costs associated with all plants in the utility system.Variable costs are usually paid from annual revenues, while total investment costsmust normally be recovered over an extended period of time because annualrevenues