low initial cost, but the cost of fuel is high, due to the additional cost of trucking and barging it to the site and storing it there for a full year. But do not forget that the usage of waste heat from the diesel engines can lift the plant efficiencies and reduce the cost of fuel usage.
An evaluation of a power plant also depends on the daily/weekly operating cycle. For hydro, the idea is to maximize the water usage, in particular during the rainy seasons to avoid spilling. Not many power hydro plants are built with a 100% operating capacity factor. A hydro project operating at 50% capacity factor is common, while I have seen hydro plants built for a projected 12% annual capacity factor. In other words, a plant of 100 MW installed capacity with a projected 12% capacity factor can produce, based on the estimated water availability, only 12 MW on a daily average for the whole year. It produces power when it has enough water drawing it down to the minimum operating level (MOL). Producing power below the MOL would be highly inefficient use of water resources and may make it difficult to recover back to the higher more efficient operating levels. Such plants with low capacity factors may be operating as base load generation during the rainy seasons and also as peaking plants because of their quick start capability when the marginal energy cost is the highest.
On the other hand, a fossil‐fuel operating plant costs a lot more to operate and is likely to be used for peaking duties in a daily cycle only. Therefore, the overall economics of building a fossil‐fuel operating plant in an area, which includes a mixture of different types of generation, must be estimated on the basis of its low operating hours.
While the power plant projects are built with the highest quality of equipment and redundancy, intended for 40 years of operation, an industrial plant may be built for a shorter duration of, say 10 years.
Levelized Cost Of Electricity (LCOE) is one of the yardsticks the owner's accountants use to compare the energy options for power plants. The formulae of totalizing the lifetime cost of production against the lifetime revenue are quite complex summations, using discount rates, inflation, and present worth accounting. Let the accountant work his figures. You as an engineer should understand the math behind it and offer technical options that may reduce the operating and initial costs to make the project more feasible.
1.4.2 Levelized Cost of Energy (LCOE)
Figure 1.8 [1] shows the relative costs in $/kWh for a number of generating options over the plant lifetime.
For instance, everything including a large hydro generation costs $0.04/kWh compared to an offshore wind farm priced at $0.19/kWh during the lifetime of the plant. The graph also shows the range of the cost for other alternatives. Clearly, the utility may have a hard time selling the wind power in this situation.
(1.1)
The units of LCOE are money/energy (usually $/MWh or c/kWh1).
Figure 1.8 Typical LCOE cost ranges and weighted averages for electricity generation.
Source: Courtesy of IRENA Publications (2014).
As the name suggests, the “money” part of this equation consists of costs: specifically a summing up of all the costs spent over the whole lifetime (from year 1 to year n) of the project. So this is the money spent building a power plant – at the start, capital expenditure (capex), and a long list of operational expenditure (opex), for example fuel, maintenance and repairs, land lease, insurance, tax, and interest on bank loans. If you can sell your system for something at the end of the project lifetime, you can knock this residual value off your list of costs.
Some projects, such as solar PV and hydro, will involve considerable up‐front capex, but followed by years of very low operating cost. Others, such as a gas‐fired power plant, will see the majority of spending over the project lifetime during the operating years of burning fuel.
Indeed, levelized cost analysis is all about comparing different energy systems with very different cost structures on a “fairer,” long‐term basis. Comparing the two examples mentioned earlier, the revenue of the solar PV will depend on how sunny it is and by how much the output of the solar panels degrades over time. On the other hand, the revenue for the gas plant will depend on the capacity factor and how often it runs. The later will be more difficult to predict though, as it will depend on the interplay between electricity sale and gas purchase prices.
1.4.3 Marginal Cost of Energy
The LCOE cost can be considered the average cost of a particular type of generating source. Utilities are interested in the marginal energy cost also. It is the cost experienced by the utilities for the last (peaking) kWh of electricity produced and sold. The marginal cost is highly variable and could vary throughout the day between negative pricing when there is over generation and could increase to hundreds of $/MWh when the demand is high and supply is low. The marginal cost determines the ranking of the type of generating source that will be dispatched. Those with the lowest marginal costs are the first ones to be energized to meet the demand, while the plants with the highest marginal costs are the last to be brought on line.
For example, a wind or solar power plant has no fuel cost and relatively low O&M costs. It yields the lowest marginal energy provided when the sun is shining and the wind is blowing. There is a big difference in production cost whether the plant is generating 1 or 100 MW. Similarly, a gas turbine plant also has low marginal cost if the gas price is low, which it is right now (2017).
1.4.4 Profitability of an Industrial Plant
What is the profitability of an industrial plant? The investor is typically interested in the initial capex and a quick construction schedule to insure a quick loan repayment from the plant operating cost. The investors like to use a simple formula called a “payback time.” The investor is typically looking at a maximum of five‐year payback plan to repay the cost of the initial plant (capex) with the sale of the product, ore, or other merchandize and enjoy a loan and cost‐free life thereafter. Naturally, the economics are highly dependent on the commodity prices of the materials produced. Once the project is initiated, the cost estimate follows a more detailed approach.
Reference
1 1 IRENA: International Renewable Energy Agency (2014). LCOE, Levelized Cost of Energy.
Note
1 1 If you want to convert between the two, it is handy to remember that 1c/kWh = 10$/MWh.
2 Plant Key One‐Line Diagram
CHAPTER MENU
