# What are the costs involved in generating electricity? (Cost of Electrical Energy)

## Cost of Electrical Energy

The cost of electrical energy generated can be divided into three parts, viz −

• Fixed Cost

• Semi-Fixed Cost

• Operating or Running Cost

## Fixed Cost of Electrical Energy

The cost of electrical energy generated which is independent of the units generated and the maximum demand, is known as fixed cost.

The fixed cost of electrical energy is mainly due to the annual cost of central organisation, interest on capital cost of land and the salaries of high officials. The annual cost of the central organisation and the salaries of high officials is fixed, it is because, it has to be met whether the power plant has high or low maximum demand or it generates less or more units. Also, the capital cost of the land is fixed and hence, the amount of the interest is also fixed.

## Semi-Fixed Cost of Electrical Energy

The cost of electrical energy generated which depends upon the maximum demand but is independent of the units generated, is known as the semi-fixed cost.

The semi-fixed cost is directly proportional to the maximum demand on the power plant and it is due to the annual interest and depreciation on capital investment of building and equipment, salaries of management and clerical staff and taxes. The maximum demand on the power station determines its size and cost of installation. If the greater is the maximum demand on the power station, the greater is its size and cost of installation. The taxes and clerical staff also depend upon the size of the power plant and thus upon the maximum demand.

## Operating Cost of Electrical Energy

The cost of electrical energy generated which depends only upon the number of units generated is called the operating cost or running cost.

The operating cost of electrical energy is due to the annual cost of fuel, lubricating oil, maintenance and repair charges and the salaries of operating staff. As all these charges depend upon the energy output of the plant, hence the running cost is directly proportional to the number of units generated by the plant. Therefore, if the power station generates more units, it will have higher running cost and vice-versa.

## Expressions for Cost of Electrical Energy

There are following two forms for expressing the overall annual cost of electrical energy generated by a power station −

• Three-Part Form

• Two-Part Form

## Three-Part Form

In the three-part form, the overall annual cost of electrical energy generated is divided into three parts, viz.

• Fixed Cost

• Semi-Fixed Cost

• Running or Operating Cost

Therefore, the total annual cost of electrical energy is given by,

$$\mathrm{Total \:annual\: cost\: =\: Fixed\: cost\: +\: Semi \:fixed \:cost\: + \:Running \:cost \:=\: Constant\: + \:Proportional\: to\: max.demand \:+\: Proportional\: to \:units\: generated}$$

$$\mathrm{\therefore Total\: annual\: cost\:=\:Rs.(a \:+\:b\:\times \:kW\:+\:c\:\times \:kWh)}$$

Where,

• 'a' is the annual fixed cost which is independent of maximum demand and units generated.

• 'b' is a constant which when multiplied by the maximum demand (in kW) on the power station gives the annual semi-fixed cost.

• 'c' is also a constant which when multiplied by kWh generated per annum gives the annual operating cost of the plant.

## Two-Part Form

Sometimes, it is convenient to express the annual cost of electrical energy generated in two-part form. In this method, the annual cost of electrical energy is divided into two parts viz −

• A fixed cost per kW of maximum demand

• A running charge per unit of energy.

Therefore, the total annual cost of electrical energy in two-part form is given by,

$$\mathrm{Total\: annual\: cost\:=\:Rs.(A\:\times \:kW\:+\:B\:☓\:kWh)}$$

Where,

• 'A' is a constant which when multiplied by kW of maximum demand on the power station gives the annual cost of the first part.

• 'B' is also a constant which when multiplied by the annual kWh generated gives the annual running cost.

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