Chapter 3

Cost analysis and optimal system analysis

Contents
• Generation cost
• Unit commitment
• Economic load dispatch
• Optimal system analysis
 Generation cost
• Generation Costs means the costs incurred in the supply, operation,
maintenance and/or repair of the stand-by electricity (generators) and such
other costs arising from or associated therewith.

Or
• The generation cost of each unit is equal to its variable cost of generation
(US$/KWh) times the energy generated during a period of time.
 …cont’d
• A power station is required to deliver power to a large number of consumers
to meet their requirements.
• While designing and building a power station, efforts should be made to
achieve overall economy so that the per unit cost of production is as low as
possible.
• This will enable the electric supply company to sell electrical energy at a
profit and ensure reliable service.
•
 …cont’d
• The problem of determining the cost of production of electrical energy is
highly complex and poses a challenge to power engineers.
• There are several factors which influence the production cost such as cost
of land and equipment, depreciation of equipment, interest on capital
investment etc.
• Therefore, a careful study has to be made to calculate the cost of
production.
• In this chapter, we shall focus our attention on the various aspects of
economics of power generation.
 Economics of Power Generation
• The art of determining the per unit (i.e., one kWh) cost of production
of electrical energy is known as economics of power generation.
• The economics of power generation has assumed a great importance in this
fast developing power plant engineering.
• A consumer will use electric power only if it is supplied at reasonable rate.
• Therefore, power engineers have to find convenient methods to produce
electric power as cheap as possible so that consumers are tempted to use
electrical methods.
• The following terms are much used in the economics of power generation:
 …cont’d
• (i) Interest. The cost of use of money is known as interest.
• (ii) Depreciation. The decrease in the value of the power plant equipment
and building due to constant use is known as depreciation.
• If the power station equipment were to last for ever, then interest on the
capital investment would have been the only charge to be made.
• However, in actual practice, every power station has a useful life ranging
from fifty to sixty years.
• From the time the power station is installed, its equipment steadily
deteriorates due to wear and tear so that there is a gradual reduction in the
value of the plant.
 …cont’d
• This reduction in the value of plant every year is known as annual
depreciation.
• Due to depreciation, the plant has to be replaced by the new one after its
useful life.
• Therefore, suitable amount must be set aside every year so that by the time
the plant retires, the collected amount by way of depreciation equals the cost
of replacement.
• It becomes obvious that while determining the cost of production, annual
depreciation charges must be included.
• There are several methods of finding the annual depreciation charges and
are discussed as follows.
 Cost of Electrical Energy
• The total cost of electrical energy generated can be divided into three parts, namely
;
• (i) Fixed cost ; (ii) Semi-fixed cost ; (iii) Running or operating cost.
• Fixed cost. It is the cost which is independent of maximum demand and units
generated.
• The fixed cost is due to the annual cost of central organisation, interest on capital
cost of land and salaries of high officials.
• The annual expenditure on the central organisation and salaries of high officials is
fixed since it has to be met whether the plant has high or low maximum demand or
it generates less or more units.
• Further, the capital investment on the land is fixed and hence the amount of
interest is also fixed.
 …cont’d
• (ii) Semi-fixed cost. It is the cost which depends upon maximum demand
but is independent of units generated.
• The semi-fixed cost is directly proportional to the maximum demand on
power station and is on account of annual interest and depreciation on
capital investment of building and equipment, taxes,salaries of management
and clerical staff.
• The maximum demand on the power station determines its size and cost of
installation.
• The greater the maximum demand on a power station, the greater is its size
and cost of installation.
• Further, the taxes and clerical staff depend upon the size of the plant and
hence upon maximum demand.
 …cont’d
• (iii) Running cost. It is the cost which depends only upon the number of
units generated.
• The running cost is on account of annual cost of fuel, lubricating oil,
maintenance, repairs and salaries of operating staff.
• Since these charges depend upon the energy output, the running cost is
directly proportional to the number of units generated by the station.
• In other words, if the power station generates more units, it will have higher
running cost and vice-versa.
 Expressions for Cost of Electrical Energy
• The overall annual cost of electrical energy generated by a power station can
be expressed in two forms viz three part form and two part form.
(i) Three part form. In this method, the overall annual cost of electrical
energy generated is divided into three parts viz fixed cost, semi-fixed cost
and running cost i.e.

Total annual cost of energy = Fixed cost + Semi-fixed cost + Running cost

= Constant + Proportional to max. demand + Proportional to kWh generated.

= Rs (a + b kW + c kWh)
 …cont’d
where
a = annual fixed cost independent of maximum demand and energy
output.
b = constant which when multiplied by maximum kW demand on the
station gives the annual semi-fixed cost.
c = a constant which when multiplied by kWh output per annum gives
the annual running cost.
 …cont’d
• (ii) Two part form. It is sometimes convenient to give the annual cost of energy
in two part form.
• In this case, the annual cost of energy is divided into two parts viz., a fixed sum per
kW of maximum demand plus a running charge per unit of energy.
• The expression for the annual cost of energy then becomes :

Total annual cost of energy = Rs. (A kW + B kWh)

where
A = a constant which when multiplied by maximum kW demand on the station gives
the annual cost of the first part.

B = a constant which when multiplied by the annual kWh generated gives the
annual running cost.
 …cont’d
• It is interesting to see here that two-part form is a simplification of three-
part form.
• A little reflection shows that constant “a” of the three part form has been
merged in fixed sum per kW maximum demand (i.e. constant A) in the two-
part form.
 Methods of Determining Depreciation
• There is reduction in the value of the equipment and other property of the
plant every year due to depreciation.
• Therefore, a suitable amount (known as depreciation charge) must be set
aside annually so that by the time the life span of the plant is over, the
collected amount equals the cost of replacement of the plant
• The following are the commonly used methods for determining the annual
depreciation charge :

Straight line method ;

Diminishing value method ;
Sinking fund method.(reading assignment)
 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.
• Obviously, annual depreciation charge will be equal to the total depreciation
divided by the useful life of the property.
• Thus, if the initial cost of equipment is Rs 1,00,000 and its scrap value is Rs
10,000 after a useful life of 20 years, then,
 …cont’d

Salvage value is the amount that an asset is estimated to be worth at the end of
its useful life. It is also known as scrap value or residual value, and is used when
determining the annual depreciation expense of an asset.
 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.
• As an example, suppose the initial cost of equipment is Rs 10,000 and its
scrap value after the useful life is zero.
•
 …cont’d
• If the annual rate of depreciation is 10%, then depreciation charge for the
first year will be
0·1 ×10,000 = Rs 1,000.
• The value of the equipment is diminished by Rs 1,000 and becomes Rs
9,000.
• For the second year, the depreciation charge will be made on the diminished
value (i.e. Rs 9,000) and becomes 0·1 × 9,000 = Rs 900.
• The value of the equipment now becomes 9000 - 900 = Rs 8100.
• For the third year, the depreciation charge will be 0·1 × 8100 = Rs 810 and
so on.
Examples
…cont’d
…cont’d
 Load factor
• Simply stated, load factor is the ratio of highest actual kilowatt (kW)
demand during the billing period to the maximum theoretical kilowatt hour
(kWh) use, if demand remained constant for the entire billing period.
• The actual electricity use in kWh is what you see on your bill.
• The electricity demand (in kW) is your “peak load.”
The load factor formula is:
• Monthly kWh/(monthly peak KW Demand * days in billing period * 24
hours).
 …cont’d
• For example, imagine that you receive an electric bill that indicates 40,000
kilowatt hours of use, with a peak demand reading of 100 kilowatts.
• To determine load factor, you would divide the actual use (40,000) by the
theoretical maximum use, which is the product of kW demand (100), days in
the billing period (30), and 24 hours in the day.
• This formula reduces to 40,000/72,000 or .555.
• Expressed as a percentage, that’s a load factor of about 56 percent.
• Looking at the entire month, the average load was about 56 percent of the
maximum load at any given time.
 Importance of high load factor
• The load factor plays a vital role in determining the cost of energy. Some
important advantages of high load factor are listed below :
(i) Reduces cost per unit generated : A high load factor reduces the
overall cost per unit generated.
• The higher the load factor, the lower is the generation cost.
• It is because higher load factor means that for a given maximum demand,
the number of units generated is more. This reduces the cost of generation.
(ii) Reduces variable load problems : A high load factor reduces the
variable load problems on the power station.
• A higher load factor means comparatively less variations in the load
demands at various times.
• This avoids the frequent use of regulating devices installed to meet the
variable load on the station.
 Exercises
1. A distribution transformer costing Rs 50,000 has a useful life of 15 years.
Determine the annual depreciation charge using straight line method.
Assume the salvage value of the equipment to be Rs 5,000. Ans.Rs 3000
2. The power generation equipment of a power station cost Rs 15,75,000 and
has a useful life of 25 years. If the salvage value of the equipment is Rs
75,000 and annual interest rate is 5%, determine annual amount to be
saved by sinking fund method. [Rs 31,400]
3. A 500 kVA distribution transformer costs Rs 50,000 and has a useful life
of 20 years. If the salvage value is Rs 5,000 and annual compound interest
rate is 8%, determine the value of the transformer at the end of 10 years
using sinking fund method. [Rs 35,700]
 …cont’d
4. A generating station has a maximum demand of 10 MW. Calculate the cost
per unit generated from the following data :
Annual load factor = 35%
Capital cost = Rs 12,50,000
Annual cost of fuel and oil = Rs 8,00,000
Taxes, wages and salaries = Rs 7,00,000
Interest and depreciation = 10%
 …cont’d
5. From the following data, estimate the cost per kWh for the generating station :
Plant capacity = 50 MW
Annual load factor = 40%
Capital cost = Rs 12 × 106
Annual cost of wages, taxes etc = Rs 4,00,000 ; cost of fuel, lubrication, maintenance = Rs
17,52,000 ; Annual interest and depreciation = 10% of initial value. [1·913 paise per
kWh]
6. In a particular area both steam and hydro stations are equally possible. It has been
estimated that capital costs and running costs of these two types will be as under :
Plant Capital cost/k W Running cost/kWh Interest
Hydro Rs 3000 3 paise 5%
Steam Rs 2000 10 paise 5%
If the expected average load factor is 40%, which is economical to operate, steam or hydro
? [Hydro]
7. The energy cost of a 100 MW steam station working at 40% load factor comes out to be 12
paise/kWh of energy generated. What will be the cost of energy generated if the load factor
is improved to 60% ? The fuel cost of the power station due to increased generation
increase the annual generation cost by 5%.[8·4 paise]
 Economic load dispatch
• The economic load dispatch problem involves the solution of two
different problems.
• The first of these is the Unit Commitment or predispatch problem wherein
it is required to select optimally out of the available generating sources to
operate, to meet the expected load and provide a specified margin of
operating reserve over a specified period of time.
• The second aspect of economic dispatch is the on-line economic dispatch
wherein it is required to distribute the load among the generating units
actually paralleled with the system in such manner as to minimize the total
cost of supplying the minute-to-minute requirements of the system
 …cont’d
• Large interconnection of the electric networks, results the energy crisis in
the world and continuous rise in prices.
• So it is very essential to reduce the running charges of the electric energy
i.e., reduce the fuel consumption for meeting a particular load demand.
• In the case of load flow for a particular load demand the generation at all
the generator buses are fixed except at one generator bus known as slack,
reference or swing bus where we allow the generation to take value within
certain limits.
• In case of economic load dispatch the generations are not fixed but they are
allowed to take values again within certain limits so as to meet a particular
load demand with minimum fuel consumption.
 …cont’d
• This means economic load dispatch problem is really the solution of a large
number of load flow problems and choosing the one which is optimal in the
sense that it needs minimum cost of generation.
 Unit commitment
• The energy requirements on power system keeps on changing not only over the
years, but it keeps on changing even over a day.
• Generally the energy requirement is higher during the day time and during early
evenings when industrial loads are high, lights in the commercial establishments,
historical monuments, national highways consume large amount of electric energy.
• However during late in the evenings and early mornings when most of the
establishments are closed the energy requirement is low.
• Similarly the energy requirement during week days is higher as compared to
weekend days.
• Also in a country like India the energy requirement during summer is much more
as compared to rest of the seasons.
 …cont’d
• One option would be to connect all the available generating units on to the
bus bar all the time so that any amount of energy requirement can be met.
• But this is highly uneconomical as during off-peak periods some of the units
may not be contributing much, yet we are spending lot of fuel to keep them
synchronized with the grid.
• A lot of saving in fuel cost can be made by switching off some of the units
(generators) when these are not required.
• Unit commitment is, therefore, one way to suggest just sufficient number of
generating units with sufficient generating capacity to meet a given load
economically with sufficient reserve capacity to meet any abnormal,
operating condition e.g., failure of one of the generators i.e., to commit
generating capacity to obtain reliable and economical supply for a given
load.
 …cont’d
• To obtain a ‘‘shut down rule’’ we use brute-force technique wherein all
combination of units will be tried for each load value taken in steps of 100
MW from 1300 to 500 MW.
 Optimal system analysis
• The main objective of optimization is to minimize undesirable things (e.g.
cost, energy loss, errors, etc.) or maximize desirable things (e.g. profit,
quality, efficiency, etc.) since its mathematical model, subject to some
constraints.
• Optimization is a commonly encountered mathematical problem in all
engineering disciplines.
• It literally means finding the best possible/desirable solution.
• Optimization problems are wide ranging and numerous,hence methods for
solving these problems.
• From the view of optimization, the various techniques including traditional
and modern optimization methods, which have been developed to solve
power system operation , control and planning problems.
 …cont’d
• Basically optimization techniques are classified into three groups.
• Traditional method,
• Artificial intelligent method and
• Hybrid artificial intelligent techniques.
 Traditional method
• Unconstrained &constrained
• Linear & non linear Programming
• Quadratic Programming
• Newton Method
• Interior Programming
• Weighting objectives
• Generalized Reduced Gradient Method
 Artificial Intelligent Method
• Genetic Algorithm
• Particle Swarm Optimization
• Simulated Annealing
• Tabu Search
• Ant Colony
• Neural Network
• Fuzzy Set
• Pareto Multi Objective
 Hybrid Artificial Intelligent
• Heuristic
• Fuzzy Expert/Genetic
• Particle Swarm/PSO
• Fuzzy/PSO/GA
• Neural/expert/genetic systems
• Simulated annealing with,fuzzy/genetic/expert systems