CHAPTER FOUR
ECONOMICS
OF
ELECTRICITY SUPPLY
4.1. Basic concepts of Electricity Systems
The electricity industry has undergone significant
changes in many countries since 1990s
the industry operation and decision-making has
changed from the state-dominated, planned style to
the private-oriented decisions.
structural changes made the decision-making more
complex.
Here we focuses on grid-based electricity supply,
although off-grid electricity supply is gaining
relevance in some areas, especially in remote areas of
developing countries.
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4.1.1 Electric energy is difficult to store
Electric energy is difficult to store in any economically viable
manner, is used by consumers at the time it is produced.
Whenever a consumer who is connected to an electricity
network switches an appliance, the demand is felt in the grid.
The demand for an electric system at any time is the total of all
consumer demand.
Although consumers can use different appliances,
luckily most consumers do not use all appliances at the
same time.
Similarly, all consumers connected to the grid do not
impose all their demand for electricity at the same time
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For example, if there are 10 consumers of 1 kW load and if
all of them use electricity simultaneously, the maximum
demand would be 10 kW, which is the sum of individual
peak demand.
As the load coincides, the demand is not diversified (i.e.
diversity factor is 10/10 = 1).
If each consumer can be made to use sequentially, the peak
demand would be 1 kW only although the sum of
individual maximum load is 10 kW. In this case, the
load is highly diversified (i.e. 10/1 = 10).
Diversity factor= sum of maximum customer demands /
maximum system load.
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The diversified the load is, the lower the peak capacity
requirement is, and it reduces the investment need.
Inverse of the diversity factor is called coincidence factor.
The demand imposed by the consumers connected to the
grid varies quite significantly within a day, within a week,
by season and from one year to another.
The daily demand varies as the need for electricity use
shows strong time dependence.
The plot of demand for 24 h in a chronological order is
called the daily load curve (Refer Figure 10.1, 10.2 and 10.3)
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Normally it is noticed
the week-day load varies from the week-end load patterns.
the demand varies by season:
in cold countries demand increases in winter
in tropical countries demand is more pronounced in summer.
If the information of daily load curves is collected over a
year, the frequency of occurrence of different loads can be
determined.
A plot of such a cumulative frequency distribution by load is
called the load duration curve (see Fig. 10.3).
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A load duration curve has typically three segments.
1. Base load period
faces relatively small load for most of the time.
It exists all the time.
2. Peak period
faces the highest level of demand for a shorter period.
this occurs typically for <20% of the time in a year.
3. Intermediate load
It between the base and peak load,
the demand gradually increases to reach the peak.
this period of increasing demand
The load duration curve has significance for plant
operation, cost of service and system efficiency.
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As electricity cannot be stored in significant quantities at low
cost, the demand has to be met by modulating the supply to
match the demand.
For smooth system operation, three types of plants (or
technologies) are required:
a. Those which would be running around the year all the
time they are available to meet the base demand;
b. Another set of plant is required having the capability to
follow the demand and vary output frequently during
their operation;
c. Finally, a third set of plant is required which are suitable
for running only during the peak period.
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Stages of Energy Demand Decisions
First, the household has to decide whether to switch or not
(i.e. switching decision).
Second, it decides about the types of appliances to be used
(i.e. appliance selection decision).
Third stage, consumption decision is made by deciding the
usage pattern of each appliance (i.e. consumption decision)
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For energy demand, information related to appliance
holding pattern is important for two reasons:
1. to understand consumption behavior
2. to understand growth potential
Different types of plants have different capacity utilization
rates, called capacity factors (CF).
CF= kWh produced in a year/(capacity in kW*8760)
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If the load did not vary so widely during the year, power plants
could have been used more uniformly.
Depending on the shape and size of the three elements of the
load-duration curve, the overall capacity utilization is
determined (called system load factor (LF))
LF= Wh consumed in a year/(peak load*8760)
If the system load was at the peak load all the time, the load factor
would be 100%.
However, it is not possible to achieve such a system load factor.
The closer the load factor is to 100%, the better the load profile of
the system is.
The objective of any utility is to improve the load profile so that
the plants could be better utilized.
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4.1.2 Alternative Electricity Generation Options
1. Conventional:
It can be further grouped into: thermal and hydro.
a. The thermal variety
uses the chemical properties of fuel to generate electricity either by
passing steam or in gas turbines or in combined cycle plants where both
gas turbines and steam turbines are used.
In the case of nuclear, the chemical properties of the fuel are used to
heat another fluid (often water), then used to generate electricity.
b. Hydro electricity utilizes the energy stored in water (i.e. the
potential energy) to generate electricity.
2. Non-conventional:
include solar, wind, geothermal, and the like.
These employ the flow of energy to generate electricity either
mechanically or otherwise.
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Generating technologies have to be operated respecting
certain conditions:
a. They can only be loaded up to their maximum capacity;
b. Can be brought into operation following the
manufacturer’s guidelines;
c. Loads can be changed in steps that cause minimum harm
to the machine;
d. Loads cannot be reduced beyond a certain minimum level
and for any load beyond this threshold, the plant has to be
shut down;
e. If a plant is shut down, it has to be allowed a minimum
cooling off period before re-starting as prescribed by the
manufacturer.
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4.1.3 Generation Capacity Reserve
It is the extra capacity that is required to be maintained in
addition to the demand at any time
It allows the system to tide over any generating plant
outages, errors in demand forecasting and any other faults .
This reserve comes in two forms:
a. Spinning reserve:
This reserve comes from the plants already connected to the grid
which are operating below their peak load.
It offers a quick response to the changes in demand and is the most
reliable option.
b. Quick-start reserves:
These are plants which could be started up quickly to
deliver the load and meet the demand.
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4.1.4 Economic Dispatch
The objective of dispatching is to decide how much each
plant should generate power so that minimum operating
cost commitment results for the system.
Any electricity system with many generating units has two
options:
a. It can use all the plants to supply the load (kW) and the
energy (kWh) all the time.
Here many plants will run at low-loads and due to poor
thermal efficiency, the operating cost would increase; or
b. Choose plants which would be able to meet the need.
This allows all the plants to run in high efficiency region
and keeps the operating cost low.
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Consequently, for economic reasons only the required
number of plants are normally brought on line at anytime.
In order to select list of preferred plants, merit order,
incremental cost method or other techniques can be used.
a. Merit Order Dispatch
is the simplest one and relies on a priority list that ranks the
generating units in some order of preference.
the commonly used criterion is the hourly fuel cost per
megawatt.
thus a list would be generated to rank all units from lowest to
highest $/MWh and
units required to meet the demand would be selected.
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b. Incremental Cost Method
implies cost of producing an additional unit of electricity.
This is composed of incremental fuel cost and other cost
items such as labor, materials and supplies.
It is often more difficult to determine and express the non-
fuel incremental costs but fuel-related costs can be better
determined by relating to the fuel input required for a plant
at different levels of plant output.
In the incremental cost approach, the objective is to decide
plant loading to achieve minimum production costs.
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4.1.5 Unit Commitment
It is the decision-making about economic
scheduling of generating units.
This needs to consider and respect constraints system
and unit constraints.
a. System constraints
It has to meet the load demand at all times.
It has to maintain a healthy reserve to face any emergency
arising out of unforeseen loss of generating plant capacity.
scheduling has to consider environmental conditions
no system should violate transmission line capacity
constraint.
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b. Unit constraints
impose restrictions on how a plant can be used.
a plant cannot be loaded beyond its maximum capacity and
below its minimum load.
loading pattern of plants varies depending on ramp rate.
there are costs for starting up a plant from cold.
plants incur costs for shutting down as well.
All these constraints have to be respected.
The purpose of unit commitment is to decide
how the plants should be chosen to produce their outputs,
at what point of time and
to what extent so that the overall production cost is
minimized satisfying all constraints.
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4.1.6 Investment Decisions in the Power Sector
Given the relatively long gestation period of power sector
projects, decisions regarding capacity addition are
required well in advance.
As a number of technologies to produce electricity exist, it
is important to decide which type of technology should be
chosen for meeting future demand.
Here we discuss two simple methods:
levelised bus-bar cost and
screening curve analysis.
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a. Levelised Bus–Bar Cost
Here the cost per kWh of electricity or the annual cost of
owning and operating a generating plant is calculated to
compare different technologies.
As is usual in any project analysis, the present value of
investment and recurring costs is first determined.
The amount is then spread into a uniform equivalent series
(concept of levelisation)
Cost levelisation process does this by expressing a series of
escalating annual costs into a single constant value (Fig. 10.4).
We considered the following in levelised cost calculation:
fuel and non-fuel operation and
maintenance costs and
investment (or fixed costs) ,
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b. Screening Curve Method
It is an extension of the concept used in the earlier method.
This is a graphical approach where the annual levelised owning
cost is shown along the vertical axis and the capacity factor is
plotted along the horizontal axis.
The screening curve is a plot of the levelised cost for different
capacity factors (see Fig. 10.5).
Two technologies have different cost characteristics:
coal has a high capital cost but relatively low operating cost.
the combined cycle plant has a low capital cost but the operating
cost is higher (given by the slope of the curve).
if the new capacity is required to be operated for <30%, the
combined cycle would be the preferred technology.
For any higher level of capacity (>30%) utilisation, the coal plant
would be economical.
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4.2 Challenges associated with energy efficiency
4.3 Energy saving opportunities
Refer what we have seen in chapter two
