MODULE-2

Power-System Economics: Financial Planning,

Techno – Economic Viability, Private
Participation, Financial Analysis, Economic
Analysis, Economic Characteristics – Generation
Units, Transmission, Rural Electrification
Investment, Total System Analysis, Credit - Risk
Assessment, Optimum Investment, Tariffs.
Generation Expansion: Generation Capacity
and Energy, Generation Mix, Conventional
Generation Resources, Nuclear Energy, Clean
Coal Technologies.
 Financial Planning
The broad options available are
Issue of bonds by the central
corporations, electricity boards
Internal resources generation by
utilities
Subscription of shares/debentures
from public
Loans from power finance
corporation (PFC)
 Financial Planning (Cont..)
Promotor(s) money
State plan resources for state
electricity boards
New budgetary support from the
Governments
Joint ventures between public and
private sectors
Bilateral assistance on selective basis
in terms of grant, equity and loans
 Financial Planning (Cont..)
Multilateral assistance from World
Bank/ADB etc., in terms of grant, equity
and loans
Loans or Equity from Financial
institutions such as LIC, UTI,
commercial banks, NABARD, IDBI etc.
Loans from specialized financial
corporations such as IFC, ICICI, pension
funds etc.
 Pattern of Investment
The Rajyadyksha Committee on Power
appointed by the Government of India had
recommended that the investment ratios in
the power sector between generation,
transmission, distribution and rural
electrification should be 4:2:1:1
More than 50% system losses are estimated
to occur in the lower voltage system below 132
kV which are the subtranmission and
distribution system.
These need to be strengthened through
increasing investment.
 Plan Outlay
The percentage investment in various
activities
Generation-62%
Renovation and Modernization-2%
Transmission and Distribution-28%
Rural Electrfication-5%
Miscellaneous-3%
 Techno-Economic Viability
It has the following broad capabilities.
It contains a modular, flexible
database, specially designed to be
shared by a number of analysis
options and can be easily updated for
uncertainty analysis.
It offers a number of analysis options
varying in complexity, scope and
modelling accuracy to fit particular
Techno-Economic Viability(Cont..)
It includes uncertainty and sensitivity
analysis capabilities.
It handles non-dispatchable such as solar,
wind, run-of-river hydro or captive
generation or cogeneration and some types
of load management.
It models reliability of electricity supply
using probabilistic techniques.
It analyses storage, system
interconnection, reliability levelling, and
 Private Participation
Private power projects are important
as a part of the country’s investment
resources raising and least cost
expansion plan for the supply of
electricity.
Under the Indian Electricity Act, the
private sector generating companies,
transmission or distribution
companies are encouraged to
participate in power sector.
 Private Participation(Cont..)
Another advantage of private of
private sector participation is that
it opens up new work and
management skills for timely
execution of the project and
delivery of quality in work and
service.
Incentives for private sector.
 Debt equity ratio
The level of equity required is an
amount sufficient to allow the
project debt to be amortized
within the constraints.
The government of India has
stipulated a debt-equity ratio 4:1.
Debt-equity ratio is calculated by
dividing long-term debt by the
equity.
 Debt
Long-tern loans/deposits(repayable
after twelve months) including
interest bearing unsecured loans from
government agencies, promoters etc.
Convertible and non-convertible
debentures and bonds until the are
converted irrespective of the period of
maturity.
Deferred payments.
 Equity
Ordinary paid-up share capital
Premium on issue of shares
Amount of central/state subsidy
Non-refundable deposits in the case of
cooperatives
Long-term interest free unsecured loans
from state government or government
agencies as also promoters where these
are subordinate in all respects to the loans
from financial institutions
 Modes of Participation
1.Purchase contract where the state
electricity board would be responsible for
transmission and distribution of power
while private entrants could own
generating companies and sell energy to
SEB’s on basis of contractual agreement.
2.Franchis monopoly where private
entrants would be granted monopoly rights
to supply a specific area either through
self-generation or by purchasing the
required power.
 Modes of Participation(Cont..)
3.By passing: It is wheeling of power where
the private sector generating company
could sell directly to any consumer and
could have access to the T&D network by
paying for it.
4.The transmission lines could be set up on
the basis of norms laid by the central
government in respect to transmission
tariff, line availability, service agreement,
depreciation and return on investment.
 Bidding for private entrants
Memorandum of understanding (MOU)
route
Competitive bidding route
Power purchase agreement
Fuel supply agreement
Implementation agreement
Operation & Maintenance agreement
Energy purchase agreement with
cogenerators.
 Financial Analysis
Financial Analysis is investigation of
financial profitability of investment.
It determines whether financial costs are
properly estimated and whether the
project funding is ensured and whether
the project is financially viable.
The electricity authority needs to carry
out the appropriate analysis for a project
developed by a private company which is
a financial analysis.
 Economic Analysis
Initial investment costs
Direct capital costs
•Land and site preparation
•Civil works
•Building, yard and auxiliary
structures
• Turbine, generator and power
house requirement
 Economic Analysis(Cont..)
Indirect Capital costs
•Engineering and project
•Management Expanses
•Administration Expanses
•Contingencies, Interest during
construction
Running Costs
Operation and maintenance costs
 Benefits-Cost Analysis
The method for determining the
economic justification of a power
project is, computing the benefit-
cost ratio (B.C. Ratio)
B.C. Ratio= Benefits to the public,
Consumers and utility/Cost to the
utility
 Life-Cycle Costs
The life-cycle costs (LCC) can be expressed
as follows
LCC=CI+CP+CO+CG+CF+CD
Where CI= Total installation cost
CP=Costs of planned corrective
maintenance
CO=Operation costs
CG=Outage costs
CF=Costs of Modernization/Extension
 Cash Flow Statements
The basic principle of the cash flow is
that revenue receipts (inflow) and
revenue expenditure (outflow) are
counted for the financial year.
The gross operating surplus/deficit is
calculated as a difference between these
and are compared.
Annual balance sheets are made as per
the Electricity (Supply) Annual Accounts
Rules,1985.
 Break-Even Point
Break-even analysis is a technique widely used by
production management and management
accountants.
It is based on categorizing production costs
between those which are "variable" (costs that
change when the production output changes) and
those that are "fixed" (costs not directly related to
the volume of production).
Total variable and fixed costs are compared with
sales revenue in order to determine the level of sales
volume, sales value or production at which the
business makes neither a profit nor a loss (the
"break-even point").
 Break-Even Chart
In its simplest form, the break-even chart
is a graphical representation of costs at
various levels of activity shown on the
same chart as the variation of income (or
sales, revenue) with the same variation in
activity.
The point at which neither profit nor loss
is made is known as the "break-even
point" and is represented on the chart
below by the intersection of the two lines.
Break-Even Chart
 Fixed Costs
Fixed costs are those business costs that are
not directly related to the level of production
or output.
In other words, even if the business has a zero
output or high output, the level of fixed costs
will remain broadly the same.
In the long term fixed costs can alter - perhaps
as a result of investment in production capacity
(e.g. adding a new factory unit) or through the
growth in overheads required to support a
larger, more complex business.
 Examples of Fixed Costs
Rent and rates Depreciation
Research and development
Marketing costs (non- revenue
related)
Administration costs
 Variable Costs
Variable costs are those costs which
vary directly with the level of output.
 They represent payment output-
related inputs such as raw materials,
direct labour, fuel and revenue-related
costs such as commission.
 Economic Characteristics
The economic characteristics of a
generating unit are those which
determine the cost at which it
produces electrical energy.
The cost has the three components
•Cost of fuel
•Cost of operation and maintenance
•Capital or investment cost
 Fossil fuel inventory cost
In order to ensure continuous supply, it is
common practice to maintain a stock of fuel
sufficient for 7 to 30 days full load operation of
the units in a plant.
The Value of inventory is given by
V=hxcx24xNxF
Where V=value of inventory,(Rs)
h=Heat rate. Kilo calories/kwh
C=Unit rating, MW
N=Number of operating days of inventory
F=Price of fuel, Rs/G. Calories
 Nuclear plant capital cost/kwh
Capitalcost/kwh=(DCC/kw +IDC/kw +DC/kw)AC/
8760x plant load factor
Where
DCC= Direct construction cost
IDC=Interest during construction
DC=Decommissioning costs
AC=Percentage annual charge(depreciation,
insurance, interest etc)
 Other costs
Nuclear fuel burnup cost
Operation and maintenance
cost
Steam unit O&M Cost
Assets Value
 Transmission
It is widely accepted that the separation
of generation, transmission and
distribution is key step to improve the
overall efficiency and effectiveness of the
power sector in a country.
It will encourage private investment in
the three separate components of power
system.
There are three main areas for
transmission investment.
1. New connections: The commissioning of
new power stations requires investment in
the transmission system.
2.Improved efficiency and security:
Investment may be required to improve
the efficiency and security of a existing
transmission system so as to reduce the
losses.
3.Interconnections: The interconnection of
separate grid systems is beneficial because
it allows generation and demand to be
pooled.
Rural Electrification Investment
Rural electrification is the process of
bringing electrical power to rural and remote areas.
REC Limited, formerly Rural Electrification
Corporation Limited, is a public Infrastructure
Finance Company in India’s power sector.
The company is a Public Sector Undertaking and
finances and promotes rural electrification projects
across India.
The company provides loans to Central/ State
Sector Power Utilities in the country, State Electricity
Boards, Rural Electric Cooperatives, NGOs and
Private Power Developers.
 Total System Analysis
Total System Engineering is a measurable
engineering systems valuation toolset that
incorporates multinomial, non-recombining
decision tree analysis and economic valuation
with physics-based models, multi-objective
optimization, real options and stakeholder
analysis.
Through the use of these methods, program
sponsors, program managers and critical decision
makers can make the necessary performance
trades for effective acquisitions and/or successful
deployment of a specific capability.
 Total System Analysis
Cost of Simulation
System Costs
Underground cables losses-cost of
transmission
Overhead transmission line losses
 Credit Risk Assessment
There are numerous financial,
contractual, and regulatory risks
which must be allocated to
assure that someone will be
responsible to pay off the debt
if the power project is not built
or does not operate properly.
Credit Risk Assessment(Cont..)
The sensitivity analysis should be done in
order to evaluate the project’s proposal
risk mitigation.
Current capital fluctuations(i.e.,+20%,
+50%, 100%)
Interest rate fluctuations
Risk premiums (insurance, exchange)
Debt source ratio
Construction time overrun
Operational assumptions
 Optimum investment models
It is a mathematical approach to
minimize the costs and develop a
mathematical relation of various
variables.
There are many mathematical forms
of the solutions such as linear
programming, dynamic programming,
quadratic programming etc.
 Calculus Method
• These types of methods are the traditional way of
seeking optimum points.
• These are applicable to continuous and differentiable
functions of both objective and constraints terms. They
make use of differential calculus in locating the optimum
points.
• Based on the basic differential calculus developed for
finding the optimum points of C(x) , the method of
Lagrange Multipliers has been developed in finding the
optimum points; where equality constraints may also
apply.
• If inequality constraints (2.4) are also applicable, still the
basic method may be used. The solution is not so
straightforward in that case.
 Linear Programming (LP)
Method
•As already noted, LP is an optimization
method in which both the objective
function and the constraints are linear
functions of the decision variables.
•This type of problem was first
recognized in the 1930s by the
economists in developing methods for
the optimal allocation of resources
 Linear Programming (LP)
Method(Cont..)
Any LP problem can be stated as a
minimization problem; due to the fact that, as
already described, maximizing C(x) is
equivalent to minimizing (-C(x)).
The problem can be stated in a form known as
canonical. Then, a solution known as the
simplex method, first devised in 1940s, may be
used to solve the problem. Using the simplex
method normally requires a large amount of
computer storage and time.
 Linear Programming (LP)
Method(Cont..)
The so called revised simplex method is a revised
method in which less computational time and storage
space are required.
Still another topic of interest in LP problems is the
duality theory. In fact, associated with every LP
problem, a so called dual problem may be formulated.
In many cases, the solution of an LP problem may be
more easily obtained from the dual problem. If the LP
problem has a special structure, a so called
decomposition principle may be employed to solve the
problem in which less computer storage is required.
Non-Linear Programming (NLP)
Method
•We noted earlier that if the objective
function and/or the constraints are
nonlinear functions of the decision
variables, the resulting optimization
problem is called NLP.
•Before proceeding further on NLP
problems, we should note that most
practical problems are of constrained type
in which some constraint functions should
Non-Linear Programming (NLP)
Method(Cont..)
The gradient methods have received
more attention in power system
literature. For instance, in the so called
steepest descent method; widely used
in power system literature, the
gradient vector is used to calculate the
optimum step length along the search
direction so that the algorithm
efficiency is maximized.
 Dynamic Programming (DP)
Method
• Dynamic Programming is a widely used
technique in power system studies. It is,
infact, a mathematical technique used
for multistage decision problems;
originally developed in 1950s.
• A multistage decision problem is a
problem in which optimal decisions
have to be made over some stages.
 Dynamic Programming (DP)
Method (Cont..)
• The stages may be different times,
different spaces, different levels, etc.
The important point is that the output
of each stage is the input to the next
serial stage.
•The overall objective function is to be
optimized over all stages.
 Integer Programming (IP)
Method
• In the algorithms discussed so far, each of the
decision variables may take any real value.
•What happens if a decision variable is limited
to take only an integer value.
•For instance, if the decision variable is the
number of generation units, taking a real value
is meaningless.
•The optimization algorithms developed for this
class of problems are classified as IP methods.
 Integer Programming (IP)
Method(Cont..)
• If all decision variables are of integer type, the
problem is addressed as IP problem.
• If some decision variables are of integer type
while some others are of non-integer type, the
problem is known as mixed integer
programming problem.
•More over, based on the nature of the original
problem, both integer linear programming and
integer nonlinear programming methods have
been developed.
 Rational Tariffs
• There are three main objectives of a
sound pricing structure/consumer tariff.
•Financial-ensuring that the revenue yield
from the application of tariff to the
consumer is sufficient.
•Economic-ensuring that tariff charged to
consumers enable them to make rational
and optimal choices in the use of energy,
discourage waste and promote efficient
allocation of resources.
 Rational Tariffs(Cont..)
• Social-ensuring that the price
structure takes into account fair
distribution of costs among various
classes of consumers, subsidization of
target class etc.
There are two basic tariff-making
philosophies recognized-
i. Cost based and
ii. Market based
 Rational Tariffs
• Social-ensuring that the price
structure takes into account fair
distribution of costs among various
classes of consumers, subsidization of
target class etc.
There are two basic tariff-making
philosophies recognized-
i. Cost based and
ii. Market based
 Cost-based Tariff
 The tariff should have sufficient rates to
raise adequate revenue to meet the
financial requirements of the utility.
The tariff should be based on supply cost
for each category of the consumer.
However , urban consumers will subsidize
the rural consumers some extent.
Peak consumers should pay both
capacity and energy costs where as
offpeak consumers such as agriculture
should pay only the energy costs.
 Cost-based Tariff(Cont..)
 lower the service voltage , the greater
the costs consumers impose on the
system. Therefore, higher tariff for low
voltage consumers is desirable.
Tariffs must be based on marginal costs
of serving demand which varies.
1. For different consumer categories
2. For different seasonal industries such
as rice mill, ice industry etc.
3. For different geographical area
 Cost-based Tariff(Cont..)
4. for different voltage levels, i.e., HT or LT
supply consumers
5. For different hours of the day, i.e., higher
rate of peak hours, medium rate for the
day time and lower rate for highest hours.
 Market-based Tariff
 Certain industrial rate classes may be
subsidized to attract new industry to
an idea.
Residential rates may be subsidized
by other classes or social/political
purposes.
Agricultural tubewell services may be
subsidized to encourage increased
food production
 Generation Expansion
• Generation Capacity and Energy
• Generation Mix
• Conventional Generation Resources
• Nuclear Energy
• Clean Coal Technologies
 Generation Capacity and Energy
• India now generates around 1,160.1
billion units of electricity in financial
year 2017, up 4.72% from the
previous year.
•The country is behind only China
which produced 6,015 terrawatt hours
(TWh. 1 TW = 1,000,000 megawatts)
and the US (4,327 TWh), and is ahead
of Russia, Japan, Germany, and
Canada.
Generation Capacity and Energy
 Generation Capacity and Energy
• Total electricity production stood at
1,003.52 billion units in India between
April 2017 and January 2018.
•“Multiple drivers (like industrial expansion
and rising per capita income) are leading
to growth in power demand; this is set to
continue in the coming years,” said a
report by the India Brand Equity
Foundation (IBEF), an arm of the Indian
government’s ministry of commerce.
Generation Capacity and Energy
Generation Capacity and Energy
 Generation Capacity and Energy
• India also intends to add around 100 GW of power
capacity between 2017 and 2022, focusing more on
hydro, renewable, and gas–based power, besides
looking at the adoption of clean coal technology.
• For instance, India plans to have around 60 GW of
wind capacity and around 100 GW of solar by 2022.
The government aims to quadruple its nuclear
capacity to 20 GW by 2020, the report said.
•Over the last five years, renewable energy has been
the fastest-growing segment, but still contributes
only around 14% to the total power capacity in
India.
Generation Mix
Conventional Generation
Resources
•
 Conventional Generation
Resources(Cont..)
•There are three main sources of power
generation
1. Thermal Power:It is generated in India at various
power stations with the help of coal and oil. It has
been a major source of electric power. In 2004-05,
its share in total installed capacity was 70 percent.
2. Hydro electric Power:It is produced by
constructing dams over overflowing rivers. For
example Bhakra Nangal Project, Damodor Valley
Project and Hirakund Project etc. In 1950-51,
installed capacity of hydro-electricity was 587.4
MW and in 2004-05, it was 19600 MW.
 Conventional Generation
Resources(Cont..)
3. Nuclear Power:
•India has also developed nuclear power.
Nuclear Power plants use uranium as fuel.
This fuel is cheaper than coal.
•India has nuclear power plants at Tarapur,
Kota (Rajasthan) Kalapakam (Chennai)
Naroura (UP). Its supply accounts for only
3 percent of the total installed capacity.
 Nuclear Energy
•Nuclear power is the use of nuclear reactions that
release nuclear energy to generate heat, which most
frequently is then used in steam turbines to produce
electricity in a nuclear power plant.
•Nuclear power can be obtained from nuclear
fission, nuclear decay and nuclear fusion reactions.
•Presently, the vast majority of electricity from
nuclear power is produced by nuclear fission
of uranium and plutonium.
•Nuclear decay processes are used in niche
applications such as radioisotope thermoelectric
generators. Generating electricity from fusion
power remains at the focus of international research.
 Clean Coal Technologies
Clean coal technology is a
collection of technologies being
developed in attempts to reduce
the negative environmental impact
of coal energy generation and to
mitigate worldwide climate change.
 Clean Coal Technologies
•When coal is used as a fuel source, the
gaseous emissions generated by the thermal
decomposition of the coal include sulfur
dioxide (SO2), nitrogen oxides(NOx), mercury,
and other chemical byproducts that vary
depending on the type of the coal being
used.
•These emissions have been established to
have a negative impact on the environment
and human health, contributing to acid rain,
lung cancer and cardiovascular disease.
 Clean Coal Technologies
•As a result, clean coal technologies are being
developed to remove or reduce pollutant emissions
to the atmosphere.
•Some of the techniques that would be used to
accomplish this include chemically
washing minerals and impurities from the
coal, gasification, improved technology for
treating flue gases to remove pollutants to
increasingly stringent levels and at higher
efficiency, carbon capture and storage technologies
to capture the carbon dioxide from the flue gas and
dewatering lower rank coals (brown coals) to
improve the calorific value, and thus the efficiency of
 Clean Coal Technologies
• In its original usage, the term "Clean Coal" was used to refer
to technologies that were designed to reduce emission of
pollutants associated with burning coal, such as washing
coal at the mine.
• This step removes some of the sulfur and other
contaminants, including rocks and soil.
• This makes coal cleaner and cheaper to transport.
• More recently, the definition of clean coal has been
expanded to include carbon capture and storage.
• Clean coal technology usually addresses atmospheric
problems resulting from burning coal. Historically, the
primary focus was on SO2 and NOx, the most important
gases in causation of acid rain, and particulates which cause
visible air pollution and effects on human health.